CHAPTER 1

INTRODUCTION AND THE PRESENT STATUS OF

INDIAN BANKS
Introduction
Financial Sector Reforms set in motion in 1991 have greatly changed the face of
Indian Banking. The banking industry has moved gradually from a regulated
environment to a deregulated market economy. The market developments kindled
by liberalization and globalization have resulted in changes in the intermediation
role of banks. The pace of transformation has been more significant in recent
times with technology acting as a catalyst.

While the banking system has done

fairly well in adjusting to the new market dynamics, greater challenges lie ahead.
Financial sector would be opened up for greater international competition under
WTO. Banks will have to gear up to meet stringent prudential capital adequacy
norms under Basel II.

In addition to WTO and Basel II, the Free Trade

Agreements (FTAs) such as with Singapore, may have an impact on the shape of
the banking industry. Banks will also have to cope with challenges posed by
technological innovations in banking. Banks need to prepare for the changes.
The need for an efficient financial sector for the overall development of an
economy has long been recognized. Joseph Schumpeter, in his book Theory of
Economic Development (1912), argued that scarcity of finance is a severe
problem for economic development. Cross country experience suggests that
development of the economy necessarily requires the existence of healthy,
efficient and competitive financial sector. This is because, in an economy with an
underdeveloped financial market, the opportunity cost of capital is more. As a
consequence, financing of projects in such an economy is more expensive.
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Therefore, an efficient and enduring financial sector is an important factor for

overall economic development.
The Indian banking sector is the largest in South Asia with its various financial
instruments. It is distinguished by the coexistence of different ownership groups,
such as public, private, domestic and foreign. Prior to 1969, all the banks, except
the state bank of India (SBI) and its seven associates were privately owned.
However, as India increasingly became a planned economy, there was a
perception among the policy makers that it would be difficult to undertake credit
planning unless the industry and banks are linked. Keeping in view its financial
linkage with the rest of the economy, the government of India nationalized 14
largest privately owned domestic banks in 1969 and six more in 1980, in order to
meet the socioeconomic objectives of economic development.
Several regulatory measures on banks were adopted by Reserve bank of India
after nationalization. Apart from changing the sectoral composition of credit, The
RBI stipulated lending targets to priority sectors. Set up credit guarantee schemes
and asked banks to open branches in rural and semi urban areas. The RBI also
fixed minimum deposit rates on both savings and time deposits of all maturities.
Having identified the rising aliments in the Indian banking sector, RBI launched
major banking reforms based on the recommendation of Narasimhan Committee
on financial sector reforms in 1992 aiming at creating a more profitable efficient
and sound banking system. The reforms sought to improve bank efficiency by
opening banking industry to foreign ownership, by de-licensing, deregulation of
interest rates and by promoting strong public sector banks to go to the capital
market to raise funds. Additionally, new norms like income recognition, asset
classification and provisioning were introduced to reflect the quality of the loan

portfolios more accurately and to obtain a true picture of the financial situation of
each bank. These measures are expected to enable and encourage banks to
enhance their efficiency i.e their ability to transform inputs into output, which in
turn, is expected to enhance` economic growth by increasing the volume of funds
intermediated in the economy.
The ability of the financial system in its present structure to make available
investible resources to the potential investors in the forms and tenors that will be
required by them in the coming years, that is, as equity, long term debt and
medium and short-term debt would be critical to the achievement of plan
objectives. The gap in demand and supply of resources in different segments of
the financial markets has to be met and for this, smooth flow of funds between
various types of financial institutions and instruments would need to be facilitated.
Review of Literature
Considerable work of research has taken place on efficiency and marketing of
Indian banks as well as other related fields like banking sector reforms etc by the
academicians, researchers and institutions individually as well as outside banking
system and also by institutions within the fold of Indian banking system viz, RBI,
NIBM, various committees set up by RBI etc. A brief review of major studies is
given here.
MCGregor (1987) in his study argued that management of spread, which is a
potent tool for improving profit margins, could be achieved by maximizing net
interest margin. The technique of spread management as shown in this analysis
indicates the relationship between asset liability and costs.
Devatia and Venkatachalam ( 1991) in their study proposed a composite index
which they believe would be able to investigate the efficiency of bank operations
3

and profitability. The main elements of this composite index are operational
efficiency in terms of productivity, social objectives and profitability.
Shah (1992) in his study argues that bank profitability is linked with bank
management, customer service and financial performance. He recommended that
in order to improve profitability in a bank, emphasis should be laid on reducing
costs, creating team spirit, improving the management and making the user pay
for the cost involved in a service.
Shrivastva ( 1993) tries to build a relationship between the productivity and
profitability of commercial banks. He argues that an important reason of low
profitability is productivity could be the result of ineffective time that occurs due
to defects in the form design, inefficient methods of operations, bad layouts,
excessive product variety, bad working conditions, power breakdown, power
breakdown and poor maintenance of records.
Mr. Abhram Hawkes (2001) in Relationship Marketing in Financial Services
Industry opines that through frustration with traditional marketing approaches,
financial service providers to continue to look for new marketing approaches, new
marketing models to enhance their competitive position. In his study, he has
analyzed forty financial services to identify the extent to which such companies
recognize the term relationship marketing and the perceived benefits. The findings
do not undermine the inherent value of the relationship marketing concept, but
they do suggest that the theory is much better understood than practice.
Thomos Hellmann and Kevin Murdock (2006) has worked on liberalization of
the Indian banking. The experts have expressed their opinion that using capital
requirement in an economy with freely determined deposit rates yields Pareto
efficient outcomes. They have also written that binding deposit rate ceiling
4

generates inefficient non price competition; a regulation still may use a non
binding deposit rate ceiling.
www.researchmarkets.com/reports/c 47610 (2007) opines that the Indian retain
banking continues to redefine the credit growth in the country. The report analysis
the retail banking market and its segment in India and presents the key trends
along with issues and challenges. The report also points a future outlook for the
market. Besides it profiles twenty one major players in the retail banking space
and their strategies.
Sandeep Dhiya and Manju Puri 2007 in their research on Bank borrowers and
loan sales found significant negative stock returns for the borrower on the loan
sale announcement, particularly for sub par loan sales. The evidence supports the
hypothesis that news of a bank loan sale conveys negative certification.
Itmar Simonson 2008 in his determinants of customers responses to customized
offers has written the following. Over the past decade, marketers have been
challenged by proponents of individual marketing to shift from a focus on market
segments to making individually customized offers. He opines that marketers
should develop learning relationships with their customers be able to predict the
customers wants and tailor their offerings to those preferences. A conceptual
framework and a series of research propositions are presented in their work
regarding key determinants of customer responses to customized offers.
Mr. V. Shrinivasan and James Lattin (2009) in Customer relation Dynamics ,
opines that in order to implement CRM, a company must have an integrate data
base at every customer touch point and analyze the data well. CRM allows the
companies to automate the way they interact with their customers and to
communicate with relevant timely messages.
5

Mr. Gokaran and Lindblom in their study on pricing of banking services

compares the paper based banking with electronic banking in terms of cost
efficiency and pricing. The paper presents principles of efficient pricing in terms
of production fees and capacity fees. It also demonstrates that current pricing of
payment services is away from the principles as production fees are set below
marginal costs.
Mr.Calomiris Charles in Journal of financial services research investigates the
pricing effects of the joint production of loans and security undertakings. When
banks combine lending and underwriting within the same customer relationship
they charge premiums for both loans and underwriting services. He opines that
one advantage that borrowers enjoy from bundling products within a banking
relationship is a form of liquidity risk insurance which is manifested in reduced
demand lines of credit.
The author has proved that relationship effects are only visible when lending and
underwriting both occur and are stronger for equity relationship than for debt
relationship.
Berger Allen and Lawrence in their work Do customers pay for one stop
banking? have written the following. In providing financial services jointly,
banks may reduce costs due to complementarities in production ( cost of
economies of scale) and raise revenue from complementarities in consumption (
revenue economies of scale). The lack of complementarities between

deposits

and loans where benefits are most likely to occur suggests that claims of
important synergies from an expansion of banking powers be taken with caution.
Mr. Bolton and Joel in their work on competition in the financial service
industry have opined the following. In some markets sellers have better
6

information than buyers over which products best serve a buyers needs.
Depending on the market structure, this may lead to conflicts of interest in the
provision of information by sellers. This paper studies the issue in the market for
financial services. This analysis presents a module of competition between banks,
where price competition influences the ensuing incentive for truthful information
revelation.
Narasimhan Committee Report
The committee on Financial system (CFS), popularly known as Narasimhan
committee was set up in 1991, to recommend for bringing about necessary
reforms in financial sector. Narasimhan Committee appraised and acknowledged
the success and progress of Indian banks since the major banks were nationalized
on 19th July 1969. Unfortunately, the developments were witnessed only in the
field of expansion and spread of bank branches, generation of huge employment
and mobilization of savings rather than improvement in efficiency. Besides
corruption, fraud, improper utilization of public money, outdated technology were
found to be major drawbacks in the real progress of the banks.

Background of the Study

As the banking sector plays an important role in the economic development and
they make profit only by using public money, there was a need for bank to satisfy
the customers. Banking was no way accepted as a service. There was a need to
change the mindset of the bankers to accept banking as the service. As a result of
competition bankers are recently accepting the challenges for marketing their
banks. They have to be very innovative in designing their product and need to be
service oriented. Banks can make profit only by satisfying the capital
requirements, enhanced customer service, improved technology, establishing
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competitive interest rates, effective manpower planning, introduction of asset

liability management, better productivity, launching new products and becoming
more competent to face the upcoming challenges and competition from foreign
banks.
The banking sector is in a transition mode towards a vibrant global market and
sophisticated information technology. Due to this changing scenario, banks are
paying more attention to expanding their activities from just lending to borrowing
to other ends like insurance, merchant banking, leasing, electronic banking etc.
Marketing of banking services is the area attracted quite late attention of policy
makers of financial world. Large numbers of financial institutions have entered in
the financial world with varieties of financial products after the initiation of
economic reforms. Traditionally the functions of banking services, very
specifically banking confined to accepting the deposits and granting the loans.
Today banks are entering such diverse fields such as credit cards, factoring, life
insurance, investment in international ventures, urban development, travel agency,
assets management, investment banking etc. It made necessary for adoption of
appropriate marketing strategy for financial products.
The focus of the customer is to get all services from one bank so that he can
minimize his transaction cost. As banks attempt to provide more integrated
services, corporations are facing some unexpected challenges. For some it leads to
better service, for others a liquidity crunch. In the last few years, the companies
have developed the relationships with such commercial banks, which provide all
services to the company with everything from revolving credit facilities to
lockbox management services to advice on acquisitions.

It is against the above background that the present study has been conducted. Here
is the time to make enough marketing efforts for the survival of the business study
such as is vital as enhancing the marketing activities of banks has been the key
goal of banking sector reforms in many countries, and India is not an exception. In
a world of competition, which is in the grip of liberalization, privatization,
globalization Indian banks have to continuously innovate and readapt themselves
in changing atmosphere.

Conceptual Background of Banking

Evolution of banking
Banking in India has its origin as early as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu,
the great Hindu Jurist, who has devoted a section of his work to deposits and
advances and laid down rules relating to rates of interest. During the Mogul
period, the indigenous bankers played a very important role in lending money and
financing foreign trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to carry on the banking business.
The General Bank of India was the first Joint Stock Bank to be established in the
year 1786. The others which followed were the Bank of Hindustan and the Bengal
Bank. The Bank of Hindustan is reported to have continued till 1906 while the
other two failed in the meantime. In the first half of the 19th century the East
India Company established three banks; the Bank of Bengal in 1809, the Bank of
Bombay in 1840 and the Bank of Madras in 1843. These three banks also known
as Presidency Banks were independent units and functioned well. These three
banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was
established on 27th January 1921. With the passing of the State Bank of India Act

in 1955 the undertaking of the Imperial Bank of India was taken over by the
newly constituted State Bank of India. The Reserve Bank which is the Central
Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the
wake of the Swadeshi Movement, a number of banks with Indian management
were established in the country namely, Punjab National Bank Ltd, Bank of India
Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank
of India Ltd.
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 characteristics
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 four decades after
independence till the government initiated the economic reforms through the
policy of liberalization. The banking structure in India is therefore a reflection of
the countries 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
economic growth and removing private sector monopolies in trade and industry.
The government nationalized the banks in two 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
government. As a consequence the banking system in India concentrated on the
domestic sector; very few banks in India had a presence internationally. The
nationalized banks had a social obligation of taking the banking sector to the
people by expanding the branches and by getting more people to open an account.
10

It also had to play a supportive role to other sectors of the economy like
agriculture, small scale industries and exports.
The Indian Financial system consists of :
1 Commercial Banks

Public Sector

Private sector

Foreign banks

Cooperative Banks

Development Banks

Public Sector Banks

State Bank of India and its associate banks called the State Bank group.

20 nationalized banks.

Regional Rural Banks mainly sponsored by Public Sector Banks.

Private sector

Old generation private banks

New generation private banks

Foreign banks in India

Scheduled Co-operative Banks

Non-scheduled Banks

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Cooperative Banks

State Co-operative Banks

Central Co-operative Banks

Primary Agriculture Credit Societies

Land Development Banks

Urban Co-operative Banks

Primary Agricultural Development Banks

Primary Land Development Banks

State Land Development Banks

Development Banks

Industrial Finance Corporation of India (IFCI).

Industrial Development Bank of India (IDBI).

Industrial Credit and Investment Corporation of India (ICICI).

Industrial Investment Bank of India (IIBI).

Small Industries Development Bank of India (SIDBI).

SCICI Ltd.

National Bank for Agriculture and Rural Development (NABARD).

Export Import Bank of India.

National Housing Bank.

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Banking in its crude form, is an age old phenomenon. Banking is as old as

authentic history and traceable in ancient times. However the development of
banking on modern times started only with passing of banking Act 1833 which
provided for the establishment of joint stock banks. In India banking seems to be
of ancient origin. There is ample of evidence to establish that banking business
was sufficiently developed during Buddist period as well as Mohamadan era.
With advent of Brtishers on their own establishing joint stock banks on the
euperoean lives. In 1860 the act was passed permitting for the first time the
starting of joint stock banks. Indian banks started to be established primarily in the
wake of swadeshi movement and a number of banks mere established during 1906
1913. Again there was rapid expanding of commercial banks during 1918
1946.
The social control which came in to force in 1969 marks another phase of
consolidation of the Indian banking. It was soon followed by the nationalization
of 14 major scheduled commercial banks in 19th July 1969, since more banks were
nationalized in the year 1980. Thus major banks were fully owned by Government
of India. During these years, the banking landscape changed dramatically. In
1969, India had 89 commercial banks. By March 2004, this number has climbed
to 290. In 1969, there were 73 scheduled commercial banks, where now there are
more than 90 commercial banks.
India has a long history of both public and private banking. Modern banking in
India began in the 18th century, with the founding of the English Agency House
in Calcutta and Bombay. In the first half of the 19th century, three Presidency
banks were founded. After the 1860 introduction of limited liability, private banks
began to appear, and foreign banks entered the market. The beginning of the 20th

13

century saw the introduction of joint stock banks. In 1935, the presidency banks
were merged together to form the Imperial Bank of India, which was subsequently
renamed the State Bank of India. Also that year, Indias central bank, the Reserve
Bank of India (RBI), began operation. Following independence, the RBI was
given broad regulatory authority over commercial banks in India. In 1959, the
State Bank of India acquired the state-owned banks of eight former princely
states. Thus, by July 1969, approximately 31 percent of scheduled bank branches
throughout India were government controlled, as part of the State Bank of India.
The post-war development strategy was in many ways a socialist one, and the
Indian government felt that banks in private hands did not lend enough to those
who needed it most. In July 1969, the government nationalized all banks whose
nationwide deposits were greater than Rs. 500 million, resulting in the
nationalization of 54 percent more of the branches in India, and bringing the total
number of branches under government control to 84 percent. Prakesh Tandon, a
former chairman of the Punjab National Bank (nationalized in 1969) describes the
rationale for nationalization as follows:
Many bank failures and crises over two centuries, and the damage they did under
laissez faire conditions; the needs of planned growth and equitable distribution
of credit, which in privately owned banks was concentrated mainly on the
controlling industrial houses and influential borrowers; the needs of growing
small scale industry and farming regarding finance, equipment and inputs; from
all these there emerged an inexorable demand for banking legislation, some
government control and a central banking authority, adding up, in the final
analysis, to social control and nationalization.

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After nationalization, the breadth and scope of the Indian banking sector expanded
at a rate perhaps unmatched by any other country. Indian banking has been
remarkably successful at achieving mass participation. Between the time of the
1969 nationalizations and the present, over 58,000 bank branches were opened in
India; these new branches, as of March 2003, had mobilized over 9 trillion Rupees
in deposits, which represent the overwhelming majority of deposits in Indian
banks. This rapid expansion is attributable to a policy which required banks to
open four branches in unbanked locations for every branch opened in banked
locations.
Between 1969 and 1980, the number of private branches grew more quickly than
public banks, and on April 1, 1980, they accounted for approximately 17.5 percent
of bank branches in India.
In April of 1980, the government undertook a second round of nationalization,
placing under government control the six private banks whose nationwide
deposits were above Rs. 2 billion, or a further 8 percent of bank branches, leaving
approximately 10 percent of bank branches in private hands. The share of private
bank branches stayed fairly constant between 1980 to 2000. Nationalized banks
remained corporate entities, retaining most of their staff, with the exception of the
board of directors, who were replaced by appointees of the central government.
The political appointments included representatives from the government,
industry, agriculture, as well as the public. (Equity holders in the national bank
were reimbursed at approximately par).
Since 1980, has been no further nationalization, and indeed the trend appears to be
reversing itself, as nationalized banks are issuing shares to the public, in what
amounts to a step towards privatization. The considerable accomplishments of the
15

Indian banking sector notwithstanding, advocates for privatization argue that

privatization will lead to several substantial improvements. Accordingly, the
Indian banking sector has witnessed the introduction of several new private
banks, either newly founded, or created by financial institutions. The new private
banks have grown quickly in the past few years, and one has grown to be the
second largest bank in India. India has also seen the entry of over two dozen
foreign banks since the commencement of financial reforms. While we believe all
these types of banks deserve study, focus here is on the new private sector, and
nationalized banks, since they represent the overwhelming majority of banking
activity in India.
The Indian banking sector has historically suffered from high intermediation
costs, due in no small part to the staffing at public sector banks: as of March 2002,
there were 1.17 crores of deposits per employee in nationalized banks, compared
to 2.05 crores per employee in private sector banks. As with other government-run
enterprises, corruption is a problem for public sector banks in 1999, there were
1,916 cases which attracted attention from the Central Vigilance Commission.
While not all of these represent crimes, the investigations themselves may have a
harmful effect, if bank officers fear that approving any risky loan will inevitably
lead to scrutiny.
Advocates for privatization also criticize public sector banking as unresponsive to
credit needs. We see recent evidence on banking in India to shed light on the
relative costs and benefits of nationalized banks. It is also important to bear in
mind that the Indian banking sector is going through something like a
transformation.

16

Banking as an Industry
Emerging Economic Scene
The financial system is the lifeline of the economy. The changes in the economy
get mirrored in the performance of the financial system, more so of the banking
industry. The Committee, therefore felt, it would be desirable to look at the
direction of growth of the economy while drawing the emerging contours of the
financial system. The Committee has taken into consideration the economic
profile drawn in India Vision 2020 document while attempting to visualize the
future landscape of banking Industry.
India envisages improving the ranking of India from the present 11th to 4th among
207 countries given in the World Development Report in terms of the Gross
Domestic Product (GDP). It also envisages moving the country from a lowincome nation to an upper middle-income country. To achieve this objective, the
India should have an annual growth in the GDP of 8.5 per cent to 9 per cent over
the next 20 years. Economic development of this magnitude would see
quadrupling of real per capita income. When compared with the average growth
in GDP of 4-6% in the recent past, this is an ambitious target. This would call for
considerable investments in the infrastructure and meeting the funding
requirements of a high magnitude would be a challenge to the banking and
financial system.
India sees a nation of 1.3 billion people who are better educated, healthier, and
more prosperous. Urban India would encompass 40% of the population as against
28 % now. With more urban conglomerations coming up, only 40% of population
would be engaged in agricultural sector as against nearly two thirds of people

17

depending on this sector for livelihood. Share of agriculture in the GDP will come
down to 6% (down from 28%). Services sector would assume greater prominence
in our economy. The shift in demographic profile and composition of GDP are
significant for strategy planners in the banking sector. The demographics of India
indicate that by 2010 more than 30 % of Indian population are in the category of
children, and will enter the bankable population by 2015. This young population
will demand for different services of banks including wealth management. It is the
larger interests of banks that they have to create their brand name of putting
enough marketing efforts.
Small and Medium Enterprises (SME) sector would emerge as a major contributor
to employment generation in the country. Small Scale sector had received policy
support from the Government in the past considering the employment generation
and favorable capital-output ratio. This segment had, however, remained
vulnerable in many ways. Globalization and opening up of the economy to
international competition has added to the woes of this sector making bankers
vary of supporting the sector. It is expected that the SME sector will emerge as a
vibrant sector, contributing significantly to the GDP growth and exports.
India being not an export led economy (exports remaining below 15% of the
GDP), India has remained rather insulated from global economic shocks. This
profile will undergo a change, as we plan for 8-9% growth in GDP. Planning
Commission report visualizes a more globalised economy. Our international trade
is expected to constitute 35% of the GDP.
The Vision of India in 2020 is of a nation bustling with energy, entrepreneurship
and innovation. In other words, we hope to see a market-driven, productive and
highly competitive economy. To realize the above objective, we need a financial
system, which is inherently strong, functionally diverse and displays efficiency
18

and flexibility. The banking system is, the most dominant segment of the financial
sector, accounting for as it does, over 80% of the funds flowing through the
financial sector. It should, therefore, be our endeavor to develop a more resilient,
competitive and dynamic financial system with best practices that supports and
contributes positively to the growth of the economy.
The ability of the financial system in its present structure to make available
investible resources to the potential investors in the forms and tenors that will be
required by them in the coming years, that is, as equity, long term debt and
medium and short-term debt would be critical to the achievement of plan
objectives. The gap in demand and supply of resources in different segments of
the financial markets has to be met and for this, smooth flow of funds between
various types of financial institutions and instruments would need to be facilitated.
Governments policy documents list investment in infrastructure as a major area
which needs to be focused. Financing the infrastructure projects is a specialized
activity and would continue to be of critical importance in the future. After all, a
sound and efficient infrastructure is very important for sustainable economic
development.
Infrastructure services have generally been provided by the public sector all over
the world in the past as these services have an element of public good in them. In
the recent past, this picture has changed and private financing of infrastructure has
made substantial progress. This shift towards greater role of commercial funding
in infrastructure projects is expected to become more prominent in coming years.
The role of the Government would become more and more of that of a facilitator
and the development of infrastructure would really become an exercise in publicprivate partnership. India Infrastructure Report placed financing of infrastructure

19

as a major responsibility of banks and financial institutions in the years to come.

The report estimated the funding requirements of various sectors in the
infrastructure area at Rs 12,00,000 crore by the year 2005-06. Since the estimated
availability of financing from Indian financial institutions and banks was expected
at only Rs 1,20,000 crore, a large gap is left which needs to be filled through
bilateral/multilateral/government funding.
It has been observed globally that project finance to developing economies flows
in where there is relatively stable macro-economic environment. These include
regulatory reforms and opening of market to competition and private investment.
Liberalized financial markets, promoting and deepening of domestic markets,
wider use of risk management tools and other financial derivative products,
improved legal framework, accounting and disclosure standards etc are some of
the other aspects which would impact commercial funding of infrastructure
projects.
The Planning Commission envisages Foreign Direct Investments (FDI) to
contribute 35% (21% now) to gross capital formation of the country by 2020.
Government has announced a policy to encourage greater flow of FDI into the
banking sector. The recent amendment bill introduced in Parliament to remove the
10% ceiling on the voting rights of shareholders of banking companies is a move
in this direction. The working group expects this to have an impact on the capital
structure of the banks in India in the coming years.
Consequent to opening up of the economy for greater trade and investment
relations with the outside world, which is imperative if the growth projections of
India Vision 2020 were to materialize, we expect the banking Industrys business
also to be driven by forces of globalization. This may be further accentuated with

20

the realization of full convertibility of the rupee on capital account and consequent
free flow of capital across the borders. An increase in the income levels of the
people would naturally lead to changes in the spending pattern also. This could
result in larger investments in the areas like entertainment and leisure, education,
healthcare etc and naturally, these would attract greater participation of the
banking system.
On the basis of the projection made by the 10th Five Year Plan on relevant macro
indicators such as GDP and extending the trend for a further period of three years,
it is estimated that GDP at current market prices during 2009-10 would be
Rs.61,40,000 crore.

Taking

into account the on-going reform measures,

expected Basel II needs, and financial dis-intermediation, the pace of expansion in

the balance sheets of banks is likely to decelerate.

Thus total assets of all

scheduled commercial banks by end March 2010 is around as Rs.40,90,000 crore

as a working estimate. At that level, the annual composite rate of growth in total
assets of Scheduled Commercial Banks would be about 13.4 per cent to be over
2002-03 as compared to 16.7 per cent between 1994-95 and 2002-03. It will form
about 65 per cent of GDP at current market prices as compared to 67 per cent in
2002-03.
On the liability side, there may be large augmentation to capital base. Reserves
are likely to increase substantially. Banks will rely more on borrowed funds.
Hence, the pace of accretion to deposits may slow down. On the asset side, the
pace of growth in both advances and investment may slacken. However, under
advances, the share of bills may increase. Similarly, under investment, the share
of others may increase.
Need for reforms in the banking sector

21

A sound financial system is indispensable for a healthy and vibrant economy. The
banking sector constitutes a predominant component of the financial service
industry and the performance of any economy, to a large extent, is dependent on
the performance of the banks. Banking institutions in our country have been
assigned a significant role in financing the process of planned economic growth.
In 1969, 14 banks were nationalized with the objective of extending credit
facilities to all segments of the economy and also to mitigate seasonal imbalance
in their availability. Since nationalization banking system in India has witnessed
structural and dimensional changes. The second step in the process of
nationalization the banks were taken in 1980, when six major banks were
nationalized. Directed interest rates on deposits and lending, exchange controls,
directed credit became the hall mark of the tightly regulated structure.
Following the balance of payments crisis in 1991-92, wide ranging reforms were
initiated in almost all the spheres of the economy including real sector, external
sector, agricultural and industrial sectors, macroeconomic policy, public sector
disinvestment etc. The objectives of the financial sector reforms were to bring
greater efficiency and competitiveness in all the spheres of the economy.
A decade and a half has elapsed since the initiation of banking sector reforms in
India. Over a period, the banking sector has experienced a paradigm shift. With
the rapid economic development of the country, the role of banks has become
increasingly crucial. On the one hand we can find the death of so many
cooperative banks and on the other hand we find the success stories of ICICI, SBI
Bank, Centurion bank of Punjab etc. The main reason for the success of few banks
is because they have accepted banking as a service. To survive, bankers will have
to develop entirely new revenues, driven by radically different products and

22

services offered to totally new markets and customers. The banking business has
therefore become complex and requires specialized skills.
Increasing customer sophistication, de regulation, new technology and continuing
competition from non bank financial corporations have forced banks worldwide to
reconsider their approach to the market place. The old ways of doing things have
been challenged and the new products, presented in new ways and available
through new types of outlets have become available. Generally speaking there has
been a move towards more of a market orientation. However this process of
innovation and the acceptance of marketing concept by banks have met with many
classic problems associated with the innovative process. It is a very competitive
condition and true that marketing has established a firm foothold in the banking
industry. It is also clear that it still has a long way to go before it is accepted as an
integral part of a good modern banking practice.
After the introduction of banking reforms, commercial banks have been facing a
growing degree of competition, not only within the industry, but also from non
banking financial intermediaries like insurance companies, chit funds, mutual
funds, term lending financial institution, investment companies and capital
markets. Besides, new banking services like Automated Teller Machines (ATM),
credit cards, internet banking, personal banking, mobile banking etc, emerged due
to the advancement of information technology.
A view of the greater changes taking place in the Indian banking sector over a
period provides us with an opportunity to undertake an experiment that is well
suited for studying the efficiency of commercial banks during the deregulation
period. In addition, the Indian banking system, which consists of both public and

23

private sectors, is predominately well suited for investigating the long run
sustainability in terms of marketing efforts taken by each banks.
Risk Management is inevitable in the banking business. Poor asset quality and
low levels of liquidity are the major causes of bank failure. Most of the studies
have found that well capitalized banks are more efficient i.e consistent with moral
hazard theory, which suggests that managers of institutions closer to bankruptcy
might be inclined to pursue their own interests. However, causation could run the
other way less efficient institutions have lower profits leading to lower capital
ratios.
A sound financial system is indispensable for a healthy and vibrant economy. The
banking sector constitutes a predominant component of the financial service
industry and the performance of any economy, to a large extent, is dependent on
the performance of the banks. Banking institutions in our country have been
assigned a significant role in financing the process of planned economic growth.
In 1969, 14 banks were nationalized with the objective of extending credit
facilities to all segments of the economy and also to mitigate seasonal imbalance
in their availability. Since nationalization banking system in India has witnessed
structural and dimensional changes. The second step in the process of
nationalization the banks were taken in 1980, when six major banks were
nationalized. Directed interest rates on deposits and lending, exchange controls,
directed credit became the hall mark of the tightly regulated structure.
Following the balance of payments crisis in 1991-92, wide ranging reforms were
initiated in almost all the spheres of the economy including real sector, external
sector, agricultural and industrial sectors, macroeconomic policy, public sector

24

disinvestment etc. The objectives of the financial sector reforms were to bring
greater efficiency and competitiveness in all the spheres of the economy.
While Indias financial system is multi-faceted, with some world class segments
such as its equity market, other segmentsnotably, the corporate bond market
remain less developed. Because of the limited size of Indias debt capital markets,
banks are the main source of loans to both firms and households. Moreover, India
has enormous infrastructure needs, but infrastructure financing remains largely
dependent on bank financing, with all its attendant inadequacies and risks. There
are also still important issues of access to credit and financial services both for
Indian corporations, especially SMEs, and households.
A decade and a half has elapsed since the initiation of banking sector reforms in
India. Over a period, the banking sector has experienced a paradigm shift. With
the rapid economic development of the country, the role of banks has become
increasingly crucial. On the one hand we can find the death of so many
cooperative banks and on the other hand we find the success stories of ICICI, SBI
Bank, Centurion bank of Punjab etc. The main reason for the success of few banks
is because they have accepted banking as a service. To survive, bankers will have
to develop entirely new revenues, driven by radically different products and
services offered to totally new markets and customers. The banking business has
therefore become complex and requires specialized skills.
Increasing customer sophistication, de regulation, new technology and continuing
competition from non bank financial corporations have forced banks worldwide to
reconsider their approach to the market place. The old ways of doing things have

25

been challenged and the new products, presented in new ways and available
through new types of outlets have become available. Generally speaking there has
been a move towards more of a market orientation. However this process of
innovation and the acceptance of marketing concept by banks have met with many
classic problems associated with the innovative process. It is undoubtedly true that
marketing has established a firm foothold in the banking industry. It is also clear
that it still has a long way to go before it is accepted as an integral part of a good
modern banking practice.
Globalization and its Impact
Globalization is both challenge and an opportunity for Indian banks to gain
strength in the domestic market and increase presence in the global market.
Globalization refers to extensive and liberal movement of goods, capital and
people across nations.
The objectives of reforms:
Improving the macroeconomic policy framework for banks.
Introduction of prudential norms.
Improvements in the financial health and competitive position of banks.
Building the financial infrastructure relating to supervision, audit,
technology and legal framework.
Improving the level of managerial competence and quality of human
resources.

26

Some of the reforms introduced and their impact on banks are furnished in the
table below.
Reform Initiatives

Impact on Banks

De regulation of deposit interest rate

Helped banks to gain control over cost of

deposits and flexibility to manage assets
and liabilities.

Increase in capital Adequacy Ratio.

More stability to banking system.

Deregulation of lending rate.

Flexibility to price loan products and

competitive pricing.

Lower cash and statutory Liquidity ratio.

Availability of more funds for lending and

discretion for allocation of funds. This also
strengthened the need for efficient risk
management system in banks.

Asset

classification

and

provisioning Encourages banks to strengthen their credit

norms

and market risk management system and

thus bring down NPA generation rate and
improve ALM

Increased Competition

Pressure to retain customers, enhance

service quality and efficiency.

Entry to new business lines.

Emerge as

financial supermarkets and

build the top and the bottom line.

Increased thrust on banking supervision Help banks in proper allocation of funds
and risk management.

across various business lines and adopt

global best practices of risk management to
enhance their competitiveness.

Indian Banks and Global Banks

The total assets size of Indian banking industry has increased more than five times
between March 2000 and March 2010, from US $ 250 billion to more than $ 1.3
27

trillion, registering a CAGR growth of 18% compared to average GDP growth of

7.2% during the same period. Consequently, the ratio of commercial banking
assets to GDP increased to nearly 100 per cent. The business of banks to GDP
ratio has almost doubled from 68% to 135%. The growth has been profitable
with improvement in efficiency and productivity.
The return on assets of scheduled commercial banks (SCBs) was 0.6% in 2000-01
and increased to 1.1% by 2009-10. Gross non-performing assets to gross advances
declined to 2.5% from 11.4%, reflecting improved asset quality. The capital
strength, as measured by the capital adequacy ratio, has also improved from
11.4% in 2000-01 to 14.6% in 2009-10. Banks have added more than 14000
branches and 41000 ATMs to their network in the last decade, besides broadening
the scope of delivery channels to internet banking, mobile banking and call centre.
Banks have rolled out technology to the advantage of the customers. The growth
of Indian banks in the last decade was much higher than its preceding decade and
there is no doubt that the present decade would offer even more exciting
opportunities.
The biggest bank by asset size in the world is the Mizuho Financial Corporation,
Japan which is almost three times the size of the entire Indian banking industry.
The next biggest bank is citigroup. Even the 25th largest bank in the world by asset
size is bigger than the entire Indian banking Industry. This depicts the fact that
India is the 4th largest in the world in terms of GDP.
Indias largest bank, State Bank of India ranks 83 by asset size globally. The net
profit from foreign assets constituted around 5 % of the banks net profit.
Experiences are no different for other Indian banks. Contrast this with HSBC
the worlds local bank. HSBC commenced its operations in 1865 , and with a

28

series of mergers and acquisitions has more than 70 % of its net profit from
foreign operation. We can inferences on the available data.
Indian banks are essentially in the Indian market and have marginal
presence in the global market.
Indian banking has a long way to go before they reach the global size and
scale. The performance of Indian banks in so far as tier I capital, assets and
profitability are concerned is nowhere near to foreign banks in other parts
of the world.
The asset distribution among the 90 banks in India is greatly skewed.
The observations made above point to the need for Indian banks to look for
global opportunities and to build their competitive strength to face the challenges
accordingly.
Consolidation and globalization
Globalization will gain greater speed in coming years with opening up of the
financial sectors under WTO. Four trends that churn the banking industry the
world over, which affect the Indian banking industry as well, are
Consolidation of players through mergers and acquisitions.
Globalization of operations. This leads to greater efficiencies,
increased availability of capital, better technology and management and
management skills.
Development of new technology and innovation in products/services.
Universalisation of Banking. Reverse merger of ICICI, formation of
subsidiaries for insurance, credit cards and mutual funds, merger of
IDBI and IDBI bank are instances of shift towards universal banking.
Global benchmarking Status of Indian banks

29

Global aspirations require global standards of operations and efficiency and

hence, it is important for Indian banks to attain global benchmarks. Following the
suggestion given in Bank Economists (BECON) 2008, the Indian banks
association commissioned the services of investment information and credit
Rating Agency of India ( ICRA) to study Indian banks on three factors
Structural, Operational and efficiency in order to benchmark against those of
select international banks. ICRA selected 21 Indian banks and analyzed on 15
parameters, Some of the findings of the study are as follows.
Return on equity (ROE) and Return on assets (ROA) of Indian banks
were higher than that of global benchmark in FY 2008. However ,
after adjusting the trading income, the median ROE and ROA of
Indian banks was lower than that of global benchmarks.
Net interest margin of Indian banks compared favorably with those
of the global benchmark banks.
The fee based income ratio ( to total assets) was lower than global
benchmark of banks.
The median net NAP percentage of Indian banks was marginally
higher than that for the global benchmark banks
Business per employee , business per branch, profitability per branch
for the global benchmark banks was higher than that of Indian banks.
Capital adequacy norms in India are in line with the best practices as
suggested by the Bank for International Settlement. ( BIS)
Treatment of income, assets, and liabilities and provisioning norms
in India differ from international practices.
Overall, we may fairly conclude that vis vis global banks Indian banks need to
increase productivity, increase lending fee based income, enhance quality of
30

lending and assets, bring in International practices in accounting and introduce

robust risk management systems.
Globalization Imperatives for Indian Banks
Globalization impacts the banking industry in one or more of the following ways.
Greater and intensive competition.
Focus on efficiency, productivity and cost structure.
Superior risk management systems and practices.
Strengthening service quality and delivery and cross selling of product /
services.
Product innovation as an integral part of the retail banking revolution.
Up gradation of technological infrastructure.
Competency building and investment in human capital as a catalyst for
transformation.
Consolidation within the financial system.
Opportunity to increase size and scale to gain dominance in the local
market and penetrate in to global market.
Transparency, disclosure and market discipline.
It is therefore, imperative for Indian banks to address all the above issues, if they
desire to play a role in the global arena.
Infosys Banking Domain group, in one of its document dated march 7 2007, and
titled, Top five imperatives for banks in 2007 has articulated the following.
Basel II compliance: Continued engagement with regulators, managing
program complexity, risk data management, focus on pillar II requirements
and finalizing and rolling out strategy.
Resource Optimization: Asset optimization, which includes unlocking
money from real estate investment to strengthening capital, human
31

resources optimization and value sourcing with focus on risk and

associated benefits besides cost arbitrage.
Information security: To analyze and strengthen bank level, industry level
and regulatory level security features.

Driving Shareholders value: The Chinese market has opened for foreign
banks. The Indian market due to its robust growth attracts foreign
investors. There is so much opportunity for banks to capitalize on in India
and abroad, both in terms of markets and product lines.

Customer Experience: Creating uniform transaction experience, developing

appropriate delivery strategies and strengthening CRM are some of the key
requirements for banks.
Strategies for globalization of Indian banks
The people aspect is the most important strategic requirements.
A cadre of experts needs to be built up, these personnel should have
exposure to function in a truly global environment.
Indian banks must build their expertise in rolling out technology and in
Basel II. It is important that they effectively learn from the experience in
these areas, which places them in an advantageous position when entering
other markets.
Banks should be active in international capital markets, approaching them
off and on for tranches of capital subscription, so that the name is in the
market frequently and markets can be tapped at lower cost. Also no
tranche is large as to create undue pricing risk in unfavorable markets.
Indian banks have linkages with rest of the finance infrastructure in Indian
such as terms lenders, investment banks, insurance ventures and credit
rating agencies. Often these non banking entities belong to the same
corporate group as these banks. A multi pronged approach in which such

32

agencies are escorted to the emerging markets, where they may be first
movers may help create demand for banking products.
Strategic alliances with national banks in oil rich countries can be very
valuable, especially as India and China are becoming large oil consumers
and there is an expectation of large India related and Asia related
investments in this sector and these countries.
Acquisition should be of retail banks in selected markets. The selection
will depend on the ability to implement technology, improve customer
service and upgrade to Basel III.
Experiences and Lessons from the Banks which went Global
Going global is the way forward for banks to gain size and scale. It is progression
for any organization. However, there are mixed experiences. For example, in
India, Grindlays bank sold its Indian operation to Stanchart and exited. BNP
paribus though, present in India for more than 100 years decided to shut its Indian
operations. SBI, had to close its Panama branch for external reasons. Though
there are 33 foreign banks operating in India, barring the top four, others only
have marginal presence. SBI has presently planned to increase its presence in the
global market share 75 branches. Banks gain presence in the global market in
varying forms from representative office to full fledged branch based on market
potential and regulatory framework. In general, Indian banks have chased the
Indian diaspora in the international market. This trend is changing now.
a) A major lesson that management processes in the cross border initiative
should be aligned with the culture. There are two aspects, differing national
cultures and differing corporate cultures. The merger of Deutshe bank (DB)
and bankers trust co, (BTCO) succeeded, this was partly because DB
already had US nationals employed in its investment banking arm and that
was the arm to work with BTCO. The corporate cultures were also similar.
In contrast, the failures of Japanese banks in the US partly related to
33

cultural mismatch. It is necessary to announce at the time of acquisition

itself as to what the approach / goals of the acquired entity will be post
acquisition. Once the goals are clearly spelt out, it is easier for the people
in the acquired entity to align their behavior with the new strategy.
b) A second lesson is to effectively manage the transition in an acquisition. A
famous example of Midland bank, which acquired 57% of Croker National
bank in 1991. The US fed took 14 months to complete the formalities of
acquisition and I the meanwhile Crocker National Bank went on a lending
spree, these loans ran in to quality problems.
c) Risk management needs focused attention when expanding internationally.
In the mid 1990s, commercial banks in Korea through affiliated Korean
merchant banks invested overseas. These merchant banks in turn had lent
money and took on exposure in new projects across the world. There was a
maturity mismatch as Korean banks had raised short term funds from
international banks. This led to the Korean and Asian financial crisis.
d) While entering new areas, especially internationally, there is a need for the
top management to be aware of the emerging areas in finance. The board of
baring was completely misled by the elusive profits at Singapore. Like
wise Daiwa bank of Japan suffered due to deviant securities trades in their
New York office.
Banking Life Cycle
Continuous changes in the economic scenario and intense global competition as
causing business today to undergo radical changes in the approach to business. A
number of new technologies are being incorporated in the infrastructure to yield
profitable status. Today everything begins and ends with customer his profile,
his preferences, his likes/ dislikes, his wants and desires customers orientation has
become mandatory.

34

The banking system is undergoing a sea change. It has to begin functioning

increasingly under greater competitive condition and face competition from
private sector banks, foreign banks, capital market institutions and other non
banking financial institutions and adjust their programs, policies and operations to
the changing and marketing is the key to meet these needs. Bank marketing is the
creation and delivery of financial services suitable to meet customers needs at a
profit to the bank. A way of thinking along marketing lines is essential in all areas
of banking to enable the banks to match the banks resources with customers needs
in the most profitable manner.
Until the 1990s the Indian financial system was characterized by limited
competition. Both the products and players were circumscribed by heavy
regulation in interest rates in credit, government securities and capital markets.
The Indian banking scenario was characterized by an administered structure with
a highly segmented market with limited competition and few distinct alternative
products. Today the paradigm of Universal banking is fast catching up. Banks
are striving to be universal service provider for wholesale and retail customers.
Several Indian financial institutions are emulating international players like
citigroup, bank of America, HSBC etc, in being a universal bank. Adapting to the
new paradigm are the newly charted private sector banks like HDFC bank, ICICI
bank, UTI Bank etc. Even though the shares of these banks are lesser in domestic
market than state owned banks, their impact is tremendous. These banks occupy a
niche between the state owned banks (that lack technology and customer focus)
and foreign banks (that possess focus and products but not distribution).
In 2000, Standard Charted of London bought the Grindlays unit of ANZ banking
group. The combined entity, called Standard Charted Grindlays, became the top
bank among foreign banks operating in India. (Second in 2005 is Citi bank) It is
also the first foreign bank to take its place among the top banks operating in India.

35

Recent time has witnessed the world economy develop serious difficulties in
terms of lapse of banking & financial institutions and plunging demand. Prospects
became very uncertain causing recession in major economies. However, amidst all
this chaos Indias banking sector has been amongst the few to maintain resilience.
A progressively growing balance sheet, higher pace of credit expansion,
expanding profitability and productivity akin to banks in developed markets,
lower incidence of nonperforming assets and focus on financial inclusion have
contributed to making Indian banking vibrant and strong. Indian banks have
begun to revise their growth approach and re-evaluate the prospects on hand to
keep the economy rolling. The way forward for the Indian banks is to innovate to
take advantage of the new business opportunities and at the same time ensure
continuous assessment of risks.
A rigorous evaluation of the health of commercial banks, recently undertaken by
the Committee on Financial Sector Assessment (CFSA) also shows that the
commercial banks are robust and versatile. The single-factor stress tests
undertaken by the CFSA divulge that the banking system can endure considerable
shocks arising from large possible changes in credit quality, interest rate and
liquidity conditions. These stress tests for credit, market and liquidity risk show
that Indian banks are by and large resilient. Thus, it has become far more
imperative to contemplate the role of the Banking Industry in fostering the long
term growth of the economy. With the purview of economic stability and growth,
greater attention is required on both political and regulatory commitment to long
term development programme. FICCI conducted a survey on the Indian Banking
Industry to assess the competitive advantage offered by the banking sector, as
well as the policies and structures that are required to further the pace of growth.
All these well known survey indicates the growth of banking in a positive
direction.
Information on Present Banking Scenario

36

The predicament of the banks in the developed countries owing to excessive

leverage and lax regulatory system has time and again been compared with
somewhat unscathed Indian Banking Sector. An attempt has been made to
understand the general sentiment with regards to the performance, the challenges
and the opportunities ahead for the Indian Banking Sector.
A majority of the respondents, almost 69% of them, felt that the Indian banking
Industry was in a very good to excellent shape, with a further 25% feeling it was
in good shape and only 6% of the respondents feeling that the performance of the
industry was just average. In fact, an overwhelming majority (93.33%) of the
respondents felt that the banking industry compared with the best of the sectors of
the economy, including pharmaceuticals, infrastructure, etc.
Most of the respondents were positive with regard to the growth rate attainable by
the Indian banking industry for the year 2009-10 and 2014-15, with 53.33% of the
view that growth would be between 15-20% for the year 2009-10 and greater than
20% for 2014-15.

Fig 1 : Projected Growth rate for Banks

37

The major strength of the Indian banking industry, which makes it resilient in the
current economic climate; 93.75% respondents feel the regulatory system to be
the major strength, 75% economic growth, 68.75% relative insulation from
external market, 56.25% credit quality, 25% technological advancement and
43.75% our risk assessment systems.
Change is the only constant feature in this dynamic world and banking is not an
exception. The changes staring in the face of bankers relates to the fundamental
way of banking-which is going through rapid transformation in the world of
today. Adjust, adapt and change should be the key mantra. The major challenge
faced by banks today (Fig. 2) is the ever rising customer expectation as well as
risk management and maintaining growth rate. Following are the results of the
biggest challenge faced by the banking industry.

Fig. 2: Challenges faced by the Indian industry

38

Comparison of Indian Banking with other Countries:

The following is the score of India on certain essential banking parameters like
Regulatory Systems, Risk Assessment Systems, Technological System and Credit
Quality in comparison with other countries i.e. China, Japan, Brazil, Russia, Hong
Kong, Singapore, UK and USA.

Fig 3 : Comparison across Regulatory Systems

The recent financial crisis has drawn attention to under-regulation of banks

(mainly investment banks) in the US. Though, the Indian story is quite different.
Regulatory systems of Indian banks (Fig. 3) were rated better than China, Brazil,
Russia, and UK; at par with Japan, Singapore and Hong Kong where as all our
respondents feel that we are above par or at par with USA. On comparing the
results with our previous survey where the respondents had rated Indian
Regulatory system below par the US and UK system, we see that post the
financial crisis Indian Banks are more confident on the Indian Regulatory
Framework.
39

Risk management framework is a key strength for sustainable growth of banks.

Indias Risk management systems (Fig. 4) more advanced than China, Brazil and
Russia; 75% of the respondents feel that we are above or at par with Japan, 55.55
% with Hong Kong, Singapore & UK and 62.5% with USA. The perception of
Indias Risk management systems being below par than Singapore, US and UK as
had been highlighted from our previous surveys no longer exists.

Fig 4 : Comparison of Credit Quality

The global meltdown started as a banking crisis triggered by the credit quality.
Indian banks seem to have paced up in terms of Credit Quality (Fig. 5). Credit
quality of banks has been rated above par than China, Brazil, Russia, UK and
USA but at par with Hong Kong and Singapore and 85.72% of the respondents
feel that we are at least at par with Japan. Thus, we see that the resilience the
Indian Banks showed at the time of financial crisis has led to an attitudinal shift of
our respondents with the past survey indicating Credit quality of Indian banks
being below par than that of US and UK.
40

As technology ingrains itself in all aspects of a banks functioning, the challenge

lies in exploiting the potential for profiting from investments made in technology.
A lot needs to be done on the technological front to keep in pace with the global
economies, as is evident from the survey results (Fig. 6). Technology systems of
Indian banks have been rated more advanced than Brazil and Russia but below par
with China, Japan, Hong Kong, Singapore, UK and USA. There is no change on
introspection of our past surveys which also highlighted the need for Indian banks
to pace up in adoption of advanced technology.

Fig 5 : Comparison across Technological Systems

Global Expansion of Indian Banking

The idea of creating bigger banks to take on competition sounds attractive but one
must realize even the biggest among Indian banks are small by global standards.
The lack of global scale for Indian banks came into sharp focus during the recent
financial crisis which saw several international banks reneging on their funding
commitments to Indian companies, but local banks could not step into the breach
because of balance sheet limitations. In a survey conducted by FICCI 93.75% of
all respondents to our survey are considering expanding their operations in the
41

future. Customers divide the growth into organic means of growth that comes out
of an increase in the banks own business activity, and inorganic means that
includes mergers or takeovers.

Fig. 6 : Organic Vs. Inorganic Means of Growth

We see from the above graph that amongst organic means of expansion, branch
expansion finds favour with banks while strategic alliances is the most popular
inorganic method for banks considering scaling up their operations. On the other
hand, new ventures and buyout portfolios are the least popular methods for bank
expansion.
42

Scope for New Entrants

81.25% also felt that there was further scope for new entrants in the market, in
spite of capital management and human resource constraints, as there continue to
remain opportunities in unbanked areas. With only 30-35% of the population
financially included, and the Indian banking industry unsaturated with CAGR of
well above 20%, participants in our survey felt that the market definitely has
scope to accommodate new players. While there has been prior debate, we
questioned banks on NBFCs and Industrial houses being established as banking
institutions and find opinion to be marginally against the notion, with 35.71% in
favour while 42.86% were against them being established as banks.
However, on further questioning, 57.14% of respondents feel that the above may
be allowed but only if it is along with specific regulatory limitations. Banks felt
that limitations regarding track record, ensuring adequate capitalization levels, a
tiered license that enables new entrants to enter into specific areas of the business
only after satisfactorily achieving set milestones for the prior stages, cap on
promoter's holdings and wider public holding in addition to a common banking
regulator on a level playing field are essential before they may set themselves up
as banks.
Banking Activities
Over the last three decades, there has been a remarkable increase in the size,
spread and scope of activities of banks in India. The business profile of banks has
transformed dramatically to include non-traditional activities like merchant
banking, mutual funds, new financial services and products and the human
resource development.
Within retail operations, banks rate product development and differentiation;
innovation and customization; cost reduction; cross selling and technological
upgradation as equally important to the growth of their retail operations.
Additionally a few respondents also find pro-active financial inclusion, credit
43

discipline and income growth of individuals and customer orientation to be

significant factors for their retail growth.
There is, at the same time, an urgent need for Indian banks to move beyond retail
banking, and further grow and expand their fee- based operations, which has
globally remained one of the key drivers of growth and profitability. In fact, over
80% of banks in our survey have only up to 15% of their total incomes constituted
by fee- based income; and barely 13% have 20-30% of their total income
constituted by fee-based income.
Human Resources
PSU banks which are a dominating force in the Indian banking system have
lacked a proactive HR environment. However, much has changed with the
opening of other sectors and increased competition from newer banks in the
system.
Banks are increasingly beginning to recognize Human resources as a possible area
of core competence, and seek to pursue and retain the best talent in the industry.
There is a realization that skill development that is extremely important for staff
retention as well as the quality of manpower, and all respondents to our survey
had in places a system of continuous professional learning. A few respondents
were in the process of revamping their training processes and emphasis is being
laid on hard as well as soft skills. Banks are keen to tie up with external training
agencies for in-house training. Some have even roped in top universities and
business schools to help them in their initiative, while others have their own staff
colleges for training employees.
A survey conducted by IBA shows that 81.25% feel that the current economic
situation is in fact advantageous for them, as it provides them with access to
quality manpower. 62.50% of banks in our survey also feel that they have
sufficient autonomy to offer attractive incentive packages to employees to ensure
their commitment levels.
The major HR threats faced by their organization are as follows.
44

Fig 7: HR Threats for Banks

Thus, on the whole, we see that Public Sector Banks, Private Sector Banks as well
as Foreign Banks view difficulty in hiring highly qualified youngsters as their
biggest HR threat ahead of high staff cost overheads, poaching of skilled quality
staff and high attrition rates.
Credit Flow and Industry
India Inc is completely dependent on the Banking System for meeting its funding
requirement. One of the major complaints from the industry has in fact been high
lending rates in spite of massive cuts in policy rates by the RBI. We asked the
banks what they felt were major factors responsible for rigid prime lending rates.
None of the banks in our survey considered the cap on bank deposit rates to be
one of the causes of inflexible lending rates. Due to long-term maturity, the trend
seems to be changing. However, there are other factors which have led to the
stickiness of lending rates such as wariness of corporate credit risk (33.33%),
competition from government small savings schemes (26.67%). Benchmarking of
SME and export loans against PLR (20.00%) on the other hand, do not seem to
have as significant an influence over lending rates according to banks.
45

The great Indian industrial engine has nevertheless continued to hum its way
through most of the year long crisis. We asked banks about the sectors that they
consider to be most profitable in the coming years. All respondents were
confident in the infrastructure sector leading the profitability for the industry,
followed by retail loans (73.33%) and others SMEs, Cement, and the IT and
Telecom sector were viewed as equally profitable in the near future by banks. Not
surprisingly, the Real estate and housing sector were ranked the lowest in terms
of future profitability.

Source : Report FICCI

Fig 8 : Sectors profitable in the coming years

Loan Disbursement and Lending Practices

We further went on to question prevalent lending practices in the industry.
Around 60% of respondents felt that there is an umbrella effect for credit
disbursements for individual companies, wherein companies are graded on the
basis of the overall performance of the group as a whole, and further 60% of the
opinion that there a need to revise the group exposure limits imposed by the
regulator.

46

When quizzed on farm lending practices, 87.50% disagreed with the notion that
banks view lending to SMEs and farm sector as an avenue for forced lending
rather than a profitable avenue. However, 75% of them agreed that a lack of
sufficient support systems to farmers such as inputs, irrigation, marketing
facilities, etc is a hindering factor for the farm sector lending, followed by 50%
stressing on the cost of reaching end user as a deterrent. A poor legal system for
recovery was another barrier to farm sector lending.
With regards to loan disbursement, 71.43% felt that there was no need for
standardized credit appraisal across the industry. But at the same time, 73.33% of
respondents felt that there is scope for a further reduction in turnaround times for
loan sanctioning. Steps undertaken by participant banks to this effect include
effectively implementing the concept of single level appraisal and mechanizing
the entire loans sanction process, Establishing Central Processing Units for Retail
and SMEs, as well as increased discretionary powers across all levels.
Credit Quality
The global financial meltdown which has its origins in the sub-prime mortgage
crisis originating in the United States has led banks to be more conservative in
their lending practices, and consequently a rise in capital costs for corporates. The
Reserve Bank of India has however played a key role is assisting the banking
sector in managing its liquidity and despite recent events, the medium-to-longterm India growth story remains intact.
Capital adequacy is seen as important to the stability of the banking system. The
minimum Capital to Risk-weighted Asset Ratio (CRAR) in India as required by
the RBI is placed at 9%, one percentage point above the Basel II requirement.
Public sector banks are further required to maintain a CRAR of 12% by the
Government of India.
In fact, over 92% of the participants firmly concur with recent stress test results
that Indian banks have the ability to absorb twice the amount of their current NPA

47

levels. However, the current crisis has exposed certain vulnerabilities and
weaknesses within the system that banks continue to remain wary of.
NBFCs
Non-banking financial companies (NBFCs) are fast emerging as an important
segment of Indian financial system. Gradually, they are being recognized as
complementary to the banking sector due to their customer-oriented services;
simplified procedures; attractive rates of return on deposits; flexibility and
timeliness in meeting the credit needs of specified sectors; etc. Nevertheless,
opinion of our respondents was strictly divided over whether NBFCs have led the
way for banks into unchartered territory.
Nevertheless, an overwhelming 80% of respondents (Fig. 15) admitted that the
primary strength of NBFCs over banks lies in their ability to provide reach to the
last mile.

Fig 9 : Strengths of NBFCS over Banks

Need for the Study

After studying the literature and the present banking, scenario, the researcher has
felt the need of studying the issues related to bank marketing in public and private

48

sector banks in Pune. Pune is hub of all type of business where there is a
requirement of huge mobilization of capital. The banking business here has come
a long way from traditional commercial banking functions. Today, many banks
have an extensive strong network, which is more and more involved in
strengthening the economic self dependence effort by mobilizing financial
resources and affording the need based employment of these funds with national
priorities and regional expediencies.
Different types of banks existing in Pune are Public sector banks, Private sector
banks, foreign banks and cooperative banks with strong presence from 80 to 90
years, small urban cooperative banks and money lenders. All of the banks are
catering for the same market with similar products/services. The way banking is a
customized business, the strategies for each of the bank shall be a customized one.
The researcher has found the need for studying the impact of reforms in the
marketing strategies which has happened in this region and the strategies for
improving the market share for public, private banks.
The review of research and literature presented in the above paragraphs indicated
that no comprehensive research had been undertaken on the marketing efforts of
banks in Pune. The sporadic research conducted earlier has limitations regarding
their coverage and methodology. A majority of them were general in their
approach. The lapses and gaps in the literature strongly supported the idea to
undertake a comprehensive study with a sound methodological base.
Statement of the Problem:
Marketing is the management function which organizes and directs all those
activities involved in assessing and converting customers purchasing power in to
effective demand for a specific product or service on moving the product or
service to the final customer or user so as to achieve the profit target or other
objectives set by the company. The purpose of any business is to create customer

49

and the company aims at creating and maintaining the relation with the same
customer for a long period of time enabling the bank to achieve the sustainable
growth of the business.
With rapid economic development of the country, the role of banks has become
increasingly crucial. A commercial bank is like any other business enterprise. The
inability of the commercial bank to meet the claims of the depositors on demand
or on due date will result in loss of credibility of the bank and ultimately pave way
for its failure. Commercial banks now a days provide variety of services. The
customers are from all walks of life from a small business to a multinational
corporation having its business activities all around the world. The banks have to
satisfy the requirement of different customers belonging to different social groups.
The banking business has therefore become complex and requires specialized
skills.
Marketing of banking services is the area attracted quite late attention of policy
makers of financial world. Large numbers of financial institutions have entered in
the financial world with varieties of financial products after the initiation of
economic reforms. Traditionally the functions of banking services, very
specifically banking confined to accepting the deposits and granting the loans.
Today banks are entering such diverse fields such as credit cards, factoring, life
insurance, investment in international ventures, urban development, travel agency,
assets management, investment banking etc. It made necessary for adoption of
appropriate marketing strategy for financial products.
Indian banking is highly regulated by Reserve bank of India and opens to the
competition from large number of banks, other financial intermediaries and
foreign banks. The only way of capturing the market in the competitive era is by
providing the customized service for the sophisticated customers today. The focus
of the customer is to get all services from one bank so that he can minimize his
transaction cost. As banks attempt to provide more integrated services,
50

corporations are facing some unexpected challenges. For some it leads to better
service, for others a liquidity crunch. In the last few years, the companies have
developed the relationships with such commercial banks, which provide all
services to the company with everything from revolving credit facilities to
lockbox management services to advice on acquisitions. It made necessary for
adoption of appropriate marketing strategy for financial products.
One stop banking with customized services is the need of the day because the
banks have to find a customized solution for all types of customers and to
generate cross selling points for different businesses also. The sustainable
development for the banks is possible if and only if they mould their business to
the local business requirements. Therefore, the need for making the strategy for
each business location is an important part of bank business. The researcher has
studied the business conditions of Pune and recommended the best marketing
practices for banks in Pune. Keeping in view these aspects, the present study is a
modest attempt to analyze the banking business in selected banks of Pune.
Research Design:
The researcher has selected Pune region for the study. Pune being a business hub
requires large capital mobilization on a daily basis. The region also face stiff
competition from all other banks and financial corporations for the capital
mobilization. Banks in this region has to strive to create new business and to
retain the existing customers.
Primary data is collected with the help of discussions with the customers, banking
officials and the top management of banks, with specially designed questionnaire,
personal interview etc.

A different set of questionnaire is used to find out

customers satisfaction, and their problems, the perceptions of the banking officials
etc.

51

Objectives of the study:

1.

To study an insight of the current practices with regards to marketing

strategies in the selected banks.

2.

To make a comparative analysis of selected public and private sector banks

in Pune to judge the marketing practices, innovation strategy and
performance.

3.

To find the impact of change in the business model of banks on employees,

customers and branch managers.

4.

To find the inter linkage of the marketing departmental activities with

Human resource department.

5.

To find out how efficiently marketing strategies are managed in these banks.
If not, to study the symptoms and drawbacks and therefore, to suggest
measures for ensuring effective strategies for marketing.

The subject matter of the study is supported by latest policy data. To reach an
appropriate conclusion for formulating appropriate marketing strategy, detailed
survey of customers and the bank employees, interviews of branch managers and
AGM is carried out in 2008-2010. The subject matter will be quite valuable to the
academicians and the policy makers.
HYPOTHESIS
Hypothesis 1 (H0): Consumers prefer to have one stop banking rather than
depending on more banks for different services.
This provides a framework for thinking about the various avenues through which
banks can pursue growth. This includes the discussion of market penetration,
market development, product development and diversification together with
evaluation of such growth strategies.
The researcher has studied the trends of marketing after the liberalization, with
respect to the micro and macro economic variables affecting the growth of the

52

banks. The analysis has been dine from the consumers point of view, which will
be a useful analysis for all banks to forecast their growth.
Market segmentation has helped the bankers to increase their profit
cost.

with less

The correct identification of market segment is the key to marketing

success. This examines the way in which banks could segment both their
corporate and consumer market. According to Philip Kotler good market
segmentation

strategy

must

have

measurability,

accessibility

and

cost

effectiveness. This helps in finding out the ways of developing marketing strategy
to pursue the organizational objectives in the context of viable segment identified.
Hypothesis 2 (H0): Innovative products have helped to meet the expectations of
improving the market share of the business.
One has to realize the importance of innovation as a central task of bank
management, which helps in maximizing economic opportunities. The banker
must also recognize managements responsibility for systematically planned
innovation on a continuing basis. The growth of a particular bank is the end result
of purposeful, responsible, risk taking action on the part of the management.
Electronic funds transfer, pre arranged transfers etc are few inventions which
has the positive benefits in saving time, avoiding late payment charges,
connivance in terms of loan payment etc. This helps in finding out the speed and
the ways with which the banks are introducing the new products, and the level of
consumer acceptance to purchase the product. The researcher has studied the
process and product innovation in public and private sector banks.
Hypothesis 3 (H0): Business model of banks has changed the banks approach
towards customer centered.
Changing market conditions have forced the banks to re asses the role of the
branch bank manager. This helps to analyze the role of bank manager in the
communication process between himself and his customers. This also helps in
finding out managers attitude to marketing, their perceptions of their new role

53

particularly in regard to good customer relationship and their attitudes to and

knowledge of bank services.
The researcher has studied this aspect from all angles of service providing. The
change in the attitude can be seen in the small changes in the banking services like
time consumed for marketing activities, care of employees by branch managers,
marinating the customer relationship with the bank etc.
Market or customer oriented approach by a banking company can yield possible
benefits to the organization and to the customer in generating the satisfaction.
Service is a vital ingredient, a multi dimensional one, of the relationship which
exists between a customer and his bank or more especially in his branch. Word of
mouth recommendation is a valuable source of new business and is often based
upon an evaluation of the quality of service offered and the range of service
available. It is therefore, an important function of branch management to monitor
on a day to day basis the quality of service given to the customers. More
important for Head office is to check and control level of service available at
individual branches. This helps to analyze the consumers and their perception
about the banks and the service they offer.
Hypothesis 4 (H0): Pricing decisions plays an important role in retaining the
market share.
Since the primary data on pricing is not available to the researcher, she has done a
comparative analysis of pricing in India and abroad with focus on price
discrimination as a strategy of cross selling. The researcher has also studies the
steps involved and the problems faced while pricing.
The pricing of banking services affects the banking competition because of the
differences in the cost of banking services. The banks which enjoy the economies
of scale attempts to provide free service which leads to variations in the prices. It
is very important to pay more attention to the pricing of banking services, and the
use of that pricing for competitiveness. Conclusions are drawn about different

54

benefits consumers receive from using banks facilities and suggestions are given
about the ways of fixing consumer oriented pricing policy.
Sources of Data:
As mentioned above this research requires both primary and secondary data.
Primary data is collected through survey and the discussions etc. The sources of
the secondary data are banks balance sheet, RBI publications, published data of
banks, news paper clippings, economic survey and other reports of government of
India, published and unpublished research works of various eminent scholars in
the field.
Sampling and Data Analysis
The researcher has selected 8 banks in Pune from public and private banks
depending on the market share. The banks studied are SBI, Bank of India, and
Central Bank of India from Public sector banks, ICICI, HDFC, Yes Bank from
Private Banks, Cosmos and Saraswat co operative Bank from cooperative bank
segment. The study of Citi international and HSBC international bank also has
been done for making a comparative analysis. The researcher has collected the
data by using three different questionnaire customers, bank employees, Branch
Managers, AGM etc.

The survey of 265 customers from public and private

banks, 35 bank employees, interview of 28 branch managers from public, private,

cooperative banks and 12 AGM from public, private and cooperative banks has
been conducted by the researcher. The researcher has collected the data of 109
public sector customers and 56 private sector bank customers.
Even though the topic of interest is only public and private sector, the researcher
has conducted the interviews of co operative and international bank branch
managers to understand the intricacies of the market and to learn the issues like

55

pricing of banking services, problems in accepting marketing as an integral part of

management function etc.

The information collected by interview of customers, employees and AGM of

different banks were a great learning for the researcher which led the way of
thinking and capacity of logical reasoning.
Concluding Remarks
The researcher has made a modest attempt to understand the concept of marketing
as applied to Indian commercial banks and the inter linkage of marketing
departmental activities with other functional departments of commercial banks.
This basket of knowledge is of great value to the researcher, Academicians and
the bankers to excel in their respective field.

56

References:
1.

RBI bulletin: Yearly publication; Trends in banking in India year, 2004 to

2010.

2.

Tarapore committee report 1999

3.

Das Gupta A 2001: Report on informal credit markets in India.

4.

Tandon 2003 : banking century

5.

Ghandi J.C. 2000: Marketing A managerial approach, Tata Publications.

6.

Kotler Philip: Marketing Management.

7.

Raju B Yerram: Bank marketing : A strategy for retail and rural outlets
Economic times

8.

Arora R. S. 2007: Marketing of services, Indian journal of commerce ,

Volume no 188

9.

H.S. Shrivastva, Journal of social service October 2008: New age youth
banking behavior an explorative study in Indian banking sector.

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