LIST OF ABBRIVIATIONS

BOI: Bank of India

UBI: Union Bank of India
NPA: Non Performing Assets
RBI: Reserve Bank of India
NBFCs: Non Banking Financial Corporations
PLR: Prime Lending Rate
IPO: Initial Public Offering
SSI: Small Scale Industry
MNC: Multinational Company
ATM: Automatic Teller Machine
DP: Employees Development Programmed
TBA: Total Branch Automation
SBI: State Bank of India
IDBI: Small Industries Development Bank of India
SBC: Hong Kong and Shanghai Banking Corporation
IFCI: Industrial Finance Corporation of India
SFCs: State Financial Corporations
EIBI: Export Import Bank of India
NBARD: National Bank for Agricultural and Rural Development
CP: commercial Paper
CD: Certificate of Deposits
BSE: Bombay Stock Exchange
NSE: National Stock Exchange
SEBI: Securities Exchange Board of India
ADR: American Depository Receipt
GDR: Global Depository Receipt
IBA: Indian Bank Association
ANOVA: Analysis of Variance
Fcal : Calculated Value of F-test
Ftab: Table Value of F- Test
H0: Null Hypothesis
SSC: Sum of Square due to Column
SSE: Sum of Square due to Error
SST: Total Sum of Square of Variation.

BANKING INDUSTRY AN OVERVIEW

1

No.

Particular

Page No

1.

History of Banking

2.

Indian Financial system

3.

Development of Banking in India

4.

Types of Banks

11

5.

Functions of Commercial Bank

14

6.

Recent Development in Banking Sector in India

16

HISTORY OF BANKING
2

It may be said that banking in its most simple form is as old as authentic history.
As early as 2000 B.C. Babylonian had developed a system of banks. In ancient Greece
and Rome the practice of granting credits was widely prevalent. Traces of credit by
compensation and by transfer order are found in Assyria, Phoenicia, and Egypt before
the system attained the full development in Greece and Rome. The books of the old
Sanskrit laws giver, Manu, are full of regulation governing credit. He speaks of judicial
proceeding in which credit instrument were
Called for interest on loans to banker, usurer and even of the renewal of commercial
papers.
In Rome, the bankers were called Argentarii, Mensaril or Callybistoe. The banks
were called Tabornoe Argentarii. Some of the banks carried business on their own
account and others were appointed by the governments to receive the taxes. They used
to transact their business on similar lines as those of modern banks. People used to
settle their accounts with their creditors by giving a cheque or draft on the bank. If the
creditors had also an account at the same bank the account was settled by an order to
make the transfer of such money from one name to another. To pay money by a draft
was known as Prescribers and Rescribere and the draft was known as Attributio. These
bankers also received deposits and lent money. Loan banks were also common in
Rome. From the loan banks the poor citizens received loans without paying interest.
They lent money for a period of three to four years on the security of land.
Although during the early periods, Private individual did banking business, many
countries established public banks either for the purpose of facilitating commerce or to
serve the government. The Bank of Venice, established in 1157, is supposed to be the
most ancient bank. Originally, it was not a bank in the modern sense, being simply an
office for the transfer of the public debt.
As early as 1349 the Drapers of Barcelona carried on the business of banking.
The drapers were not allowed to commence this business until they had given sufficient
securities. During 1401 a public bank was established in Barcelona. It used to exchange
money, receive deposits and discount bills of exchange both for the citizens and the
foreigners. The Bank of Amsterdam was established in 1609 to meet the needs of the
merchants of the city. It accepted all kinds of specie on deposits could be withdrawing
his deposits within six month. These written orders were used in the same manner as
modern cheque. In course of time, it is interesting to note that European banks in
existence were formed on the model of the bank of Amsterdam.

The beginning of English banking may correctly be attributed to the London

Goldsmiths. They used to receive their consumers valuables and funds for safe custody
and issue receipts acknowledging the same. These notes, in course of time, became
payable to bearer on demand and hence enjoyed considerable circulation. In fact, the
3

Goldsmith note may be considered a precursor of the bank note. The business of the
Goldsmith got a rude shock by the ill treatment of the government of Charles II under
the cable ministry. However, the ruin of goldsmith marks turning point in the history of
English banking, Which resulted in the growth of private banking and the establishment
of the Bank of England in 1694.
Globally, the story of banking has much in common, as it evolved with the
moneylenders accepting deposits and issuing receipts in their place. According to the
Central Banking Enquiry Committee (1931), money lending activity in India could be
traced back to the Vedic period, i.e., 2000 to 1400 BC. The existence of professional
banking in India could be traced to the 500 BC. Kautilyas Arthashastra, dating back to
400 BC contained references to creditors, lenders and lending rates. Banking was fairly
varied and catered to the credit needs of the trade, commerce, agriculture as well as
individuals in the economy. Mr. W.E. Preston, member, Royal Commission on Indian
Currency and Finance set up in 1926, observed ....it may be accepted that a system of
banking that was eminently suited to Indias then Requirements was in force in that
country many centuries before the science of banking became an accomplished fact in
England.
Although the business has of banking is as old as authentic history. Banking
institution has since then changed in character and content very much. They have
developed from a few simple operations involving the satisfaction of a few individuals
needs to the complicated mechanism of modern banking, involving the satisfaction of
the capital seeking employment and providing the very lifeblood of commerce.

INDIAN FINANCIAL SYSTEM

Indian Financial System

Financial Instruments

Financial Markets

Financial Institutions

Financial Services

Non Banking Institutes

Banking Institutes

Scheduled Commercial
Banks

Scheduled co-operative
Bank

Public Sector Banks

Private Sector Banks

Foreign Banks
Regional Rural Banks
Economic growth and development of any country depends upon a well-knit
financial system. Financial system comprises a set of sub-systems of financial
institutions, financial markets, financial instruments and services which help in the
formation of capital. Financial system comprises of four major components. These
components are
5

Financial Institutions
These are institutions which mobilize and transfer the savings or funds from
surplus unit to deficit units. These institutions can be classified into, banking and non
banking institutions. Banking institutions include commercial banks, cooperative banks
and other Banks. Non Banking institutions include Organized and unorganized financial
institutions.
Financial Markets
This is a place or mechanism where funds or savings are transferred from
surplus units to deficit units. These markets can be broadly classified into money
markets and capital markets. Money market deals with short-term claims or financial
assets less than a year whereas capital markets deal with those financial assets which
have maturity period of more than a year.
Financial Instruments
The commodities that are traded or dealt in a financial market are financial
assets or securities or financial instruments. There is a variety of securities in the
financial markets as the requirements of lenders and borrowers are varied . For eg. Of
these financial instruments are equity shares, preference shares, debentures, bonds
etc.
Financial Services
Financial Services includes Fund based services and Fee based services. Fund
based services include Leasing, Hire purchase, and Factoring. Fee based services
include Merchant Banking, Credit rating and Merger.

DEVELOPMENT OF BANKING IN INDIA

Financial system of any country consists of specialized and non-specialized
financial institutions, of organized and unorganized financial markets, of financial
instruments and services that facilitate transfer of funds. The word System in the
financial system implies a set of complex and closely connected and interlinked
6

institutions, agents, practices, markets, transactions, claims, and liabilities in the

economy.
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 pivotal role in leading money and financing foreign trade and
commerce. During the days of 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 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; Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of
Madras in 1843. These three banks are also known as Presidency Banks. These
three banks amalgamated in 1920 and 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 of India as the Central Bank of country 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. The Central Bank of India Ltd on July 19, 1969, 14 major
banks of the country was nationalized and on 15th April 1980 six more commercial
banks were also taken over by the government.
The Indian banking broadly categorized into nationalized government owned
banks, Private Banks and Specialized Banking Institutions. The Reserve Bank of India
act as a centralized body monitoring any discrepancies and shortcoming in the system.
Since the nationalization of banks in 1969, the public sectors banks or the nationalize
banks have acquired a place of prominence and has since then seen tremendous
progress. The need to become highly customer focused has forced the slow-moving
public sector banks to adopt a fast track approach.The unleashing of product and
services through the net has galvanized players at all levels of the banking and financial
institutions.
Conservative banking practices allowed Indian banks to be insulted partially from
the Asian currency crisis. Indian banks are now quoting a higher valuation when
compared to banks in other Asian countries (viz. Hong kong, Singapore, Philippines
etc.) that have major problem linked to huge Non-Performing Assets (NPA) and
payment defaults. Co-operative banks are nimble footed in approach and armed with
efficient branch networks focus primarily on the High Revenue niche retail segments.
The Indian banks have finally worked up to the competitive dynamic of the New Indian
market and are addressing the relevant issue to take on the multifarious challenges of
7

globalization. It has come a long way from being a sleepy business institution to a highly
proactive and dynamic entity. Banks that employ IT solutions are perceived to be
futuristic and proactive players.
Capable of meeting the multifarious requirement of the large customer base.
Private Banks have been fast on the uptake and are reorienting their strategies using
the Internet as medium. The Internet has emerged as the new and challenging frontier
of marketing with the conventional physical world tenets being just as applicable like in
any other marketing medium.
The transformation has been largely brought by the large dose of liberalization
and economic reforms that allowed banks to explore new business opportunities rather
than generating revenue from conventional streams. (Borrowing and lending)
The banking in India is highly fragmented with 30 banking units contributing to
almost 50% of deposits and 60% of revenues. Indian nationalized banks (banks owned
by the government) continue to be the major lenders in the economy due to their sheer
size and penetrative networks which assure them high deposits mobilization. The Indian
banking can be broadly categorized into nationalized, private banks and specialized
banking institutions.
RBI is the foremost monitoring body in the Indian fi
nancial
sector.
The
nationalized banks continue to dominate the Indian banking arena. Industry estimate
indicate that out of 274 commercial banks operating in India, 223 banks are in the public
sector and 51 are in private sector. The private sector banks grid also include 30 foreign
banks that have started their operation here.

Under the ambit of the nationalized banks comes the specialized banking
institution. These co-operative, rural banks also focus on area of agriculture, rural
development etc. Unlike commercial banks these co-operative banks do not lend on the
basis of a Prime Lending Rate (PLR). They also have various tax sope because of their
holding pattern and lending structure and have lower overheads. This enables them to
give a marginally higher percentage on saving deposits.
Many of these co-operative banks diversified into specialized areas (catering to
the vast retail audience) like car finance, housing loans, truck finance etc. In order to
keep pace with their public sector and private counterparts, the co-operative banks too
have invested heavily in Information Technology to offer high-end computerized banking
services to its clients. Completing the roles of the nationalized and private banks are the
specialized financial institution (NBFCs). With their focused portfolio of products and
services, these Non Banking Financial Institutions acts as an important catalyst in
contributing to the overall growth of the financial services sector. NBFCs offer loans for
working capital requirement; facilitate mergers and acquisitions, IPO finance, etc. Apart
from financial consultancy services. Trends are now changing as banks (both public and
private) have now started focusing on NBFC domains like long and medium term
finance, working capital requirement, IPO financing etc. To meet the multifarious need
of the business community.

STRUCTURE OF BANKING IN INDIA

9

TYPES OF BANKS
10

Central Bank
11

Central Bank is Apex Banking authority in any country. It usually controls

monitory policy and is the lender of the lat resort in the event of crisis. They are often
charged with controlling the money supplies, including printing paper money. Example
of the central bank is the European Central Bank and Reserve Bank of India.
Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant shortterm loans and advances to their customers. It also provides mid-term and long term
loans to Business Enterprises.
Types of Commercial banks
Commercial banks are of three types i.e., Public sector banks, Private sector banks and
foreign banks.
(i) Public Sector Banks : These are banks where majority stake is held by the
Government of India or Reserve Bank of India.
(ii) Private Sectors Banks : In case of private sector banks majority of share capital of
the bank is held by private individuals
(iii) Foreign Banks : These banks are registered and have their headquarters in a
foreign country but operate their branches in our country. The number of foreign banks
operating in our country has increased since the financial sector reforms of 1991.
c) Development Banks
Business often requires medium and long-term capital for purchase of machinery
and equipment, for using latest technology, or for expansion and modernization. Such
financial assistance is provided by Development Banks.
d) Co-operative Banks
People who come together to jointly serve their common interest often form a cooperative society under the Co-operative Societies Act. When a co-operative society
engages itself in banking business it is called a Co-operative Bank State.

Types of Co-operative Banks

12

1. Primary Credit Societies These are formed at the village or town level with
borrower and non-borrower members residing in one locality.
2. Central Co-operative Banks These banks operate at the district level having
some of the primary credit societies belonging to the same district as their
members.
3. State Co-operative Banks These are the apex (highest level) co-operative
banks in all the states of the country. They mobilize funds and help in its proper
channelization among various sectors.
e) Specialized Banks
There are some banks, which cater to the requirements and provide overall
support for setting up business in specific areas of activity. EXIM Bank, SIDBI and
NABARD are examples of such banks. They engage themselves in some specific area
or activity and thus, are called specialized banks.
I.

Export Import Bank of India (EXIM Bank) If you want to set up a business for
exporting products abroad or importing products from foreign countries for sale in
our country, EXIM bank can provide you the required support and assistance.

II.

Small Industries Development Bank of India (SIDBI) If you want to establish

a small-scale business unit or industry, loan on easy terms can be available
through SIDBI.

III.

National Bank for Agricultural and Rural Development (NABARD) It is a

central or apex institution for financing agricultural and rural sectors. If a person
is engaged in agriculture or other activities like handloom weaving, fishing, etc.
NABARD can provide credit, both short-term and long-term, through regional
rural banks.

FUNCTIONS OF COMMERCIAL BANKS

13

The functions of commercial banks are of two types.

(A) Primary functions; and
(B) Secondary functions.
(i)

Primary functions

The primary functions of a commercial bank include

a) Accepting deposits; and
b) Granting loans and advances.
a) Accepting deposits
The most important activity of a commercial bank is to mobilize deposits from the
public. People who have surplus income and savings find it convenient to deposit the
amounts with banks. Depending upon the nature of deposits, funds deposited with bank
also earn interest.
b) Grant of loans and advances
The second important function of a commercial bank is to grant loans and
advances. Such loans and advances are given to members of the public and to the
business community at a higher rate of interest than allowed by banks on various
deposit accounts.
i)

Loans

A loan is granted for a specific time period. Generally commercial banks provide
short-term loans.
ii)

Advances

An advance is a credit facility provided by the bank to its customers. It differs

from loan in the sense that loans may be granted for longer period, but advances are
normally granted for a short period of time.

Types of Advances
a) Cash Credit
14

Cash credit is an arrangement whereby the bank allows the borrower to draw
amount up to a specified limit. The amount is credited to the account of the customer.
b) Overdraft
Overdraft is also a credit facility granted by bank. A customer who has a current
account with the bank is allowed to withdraw more than the amount of credit balance in
his account.
c) Discounting of Bills
Banks provide short-term finance by discounting bills that is, making payment of
the amount before the due date of the bills after deducting a certain rate of discount.
ii) S

econdary functions

In addition to the primary functions, banks perform a number of other functions,

which are called secondary functions. These are as follows.
a. Issuing letters of credit, travelers cheque, etc.
b. Undertaking safe custody of valuables, important document and securities by
providing safe deposit vaults or lockers.
c. Providing customers with facilities of foreign exchange dealings.
d. Transferring money from one account to another; and from one branch to
another branch of the bank through cheque, pay order, demand draft.
e. Standing guarantee on behalf of its customers, for making payment for purchase
of goods, machinery, vehicles etc.
f. Providing reports on the credit worthiness of customers.
g. Providing consumer finance for individuals by way of loans on easy terms for
purchase of consumer durables like televisions, refrigerators, etc.
h. Educational loans to students at reasonable rate of interest for higher studies,
especially for professional courses.

RECENT DEVELOPMENTS IN BANKING SECTOR IN INDIA

The Reserve Bank and government has initiated a host of measures for the
creation of a competitive environment and to improve efficiency of banking sector.The
first phase of reform includes nationalization of the bank to achieve social objectives.
15

Second phase of reforms started with liberalization of the sector in early nineties. After
India embarked upon the process of liberalization and regulation, reforms have been
undertaken in the following Ares.
The control, regulation and supervision of the banking system has also been
liberalized with full freedom to the banks in conducting the banking business subject to
prudential norms and other regulatory requirements of the Reserve Bank of India.
Controls on credit have also been relaxed except certain requirements of lending to
priority sector. Interest rates are deregulated.
The Banks rights have been strengthened by enactment of following Laws
1) The Recovery of Debts due to Banks and Financial Institutions Act, 1993 (DRT
Act)-Under DRT Act Debt Recovery Tribunal was set up for Recovery of loans of
banks and financial institutions. These tribunals are functioning efficiently which
can be seen from the fact that average recovery period is one year as against 5
to 7 year of civil court.
2) The best indicator of the health of the banking industry in a country is its level of
NPAs. Indian banks seem to be batter placed then their Asian neighbors in this
regard. The net NPA ratio of Indian scheduled commercial bank stands at 2.9%
as per 2004 figures. A few banks have even managed to reduce their net NPAs
to less than one percent (before the merger of Global Trust Bank into Oriental
Bank of Commerce, OBC was a zero NPA bank.) This has largely been possible
due to SARFAESI (Securitization and reconstruction of financial assets and
enforcement of security interest) Act, 2002. This Act has empowered banks with
regard to recovery of defaulted loan.
To enhance risk management skills, to correct mismatch between assets and
liabilities RBI has issued ALM (assets-liability management) and risk management
guidelines. The guidelines require that banks should give importance to credit risk.

Major Reform Initiatives

Some of the major reform initiatives in the last decade that have changed the
face of the Indian banking and financial sector are
Interest rate deregulation. Interest rates on deposits and lending have been
deregulated with banks enjoying greater freedom to determine their rates.
Adoption of prudential norms in terms of capital adequacy, asset classification, income
recognition, provisioning, and exposure limits, investment fluctuation reserve, etc.
Reduction in pre-emption lowering of reserve requirements (SLR and CRR), thus
releasing more lendable resources which banks can deploy profitably.
16

 Banks now enjoy greater operational freedom in terms of opening and swapping of
branches, and banks with a good track record of profitability have greater flexibility in
recruitment.
New private sector banks have been set up and foreign banks permitted to expand
their operations in India including through subsidiaries. Banks have also been allowed
to set up Offshore Banking Units in Special Economic Zones.
New areas have been opened up for bank financing insurance, credit cards,
infrastructure financing, leasing, gold banking, besides of course investment banking,
asset management, factoring, etc.
New instruments have been introduced for greater flexibility and better risk
management e.g. interest rate swaps, forward rate agreements, cross currency forward
contracts, forward cover to hedge inflows under foreign direct investment, liquidity
adjustment facility for meeting day-to-day liquidity mismatch.
Several new institutions have been set up including the National Securities
Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd.,
Credit Information Bureau India Ltd.
Limits for investment in overseas markets by banks, mutual funds and corporate have
been liberalized. The overseas investment limit for corporate has been raised to 100%
of net worth and the ceiling of $100 million on prepayment of external commercial
borrowings has been removed.
Universal Banking has been introduced. With banks permitted to diversify into longterm finance and DFIs into working capital, guidelines have been put in place for the
evolution of universal banks in an orderly fashion.
Technology infrastructure for the payments and settlement system in the country has
been strengthened with electronic funds transfer, Centralized Funds Management
System, Structured Financial Messaging Solution, and Negotiated Dealing System and
move towards Real Time Gross Settlement.

Adoption of global standards, prudential norms for capital adequacy,asset

Classification, income recognition and provisioning are now close to global standards.
RBI has introduced Risk Based Supervision of banks (against the traditional transaction
based approach). Best international practices in Accounting systems, corporate
governance, payment and settlement systems, etc. are being adopted.
Credit delivery mechanism has been reinforced to increase the flow of credit to priority
sectors through focus on micro credit and Self Help Groups.
17

 RBI guidelines have been issued for putting in place risk management systems in
banks. Risk Management Committees in banks address credit risk, market risk
andoperational risk. Banks have specialized committees to measure and monitor
various risks and have been upgrading their risk management skills and systems.
The limit for foreign direct investment in private banks has been increased from 49%
to 74% and the 10% cap on voting rights has been removed. In addition, the limit for
foreign institutional investment in private banks is 49%.
Wide ranging reforms have been carried out in the area of capital markets. Fresh
investment in CPs, CDs are allowed only in dematerialized form. SEBI has reduced the
settlement cycle from T+3 to T+2 from April 1, 2003 i.e. settlement of stock deals will be
completed in two trading days after the trade is executed, taking the Indian stock trading
system ahead of some of the developed equity markets. Stock exchanges will set up
trade guarantee funds. Retail trading in Government securities has been introduced on
NSE and BSE from January 16, 2003. A Serious Frauds Office is proposed to be set up.
Fungibility of ADRs and GDRs allowed.

AN OVERVIEW OF SAMPLE UNITS

No

Particular

Page No

Bank of Baroda

20

Union Bank of India

21

18

ABOUT THE SAMPLE UNITS

Bank of India
Vision
To become the bank of choice for corporate, medium business and up market
retail customers and to provide cost effective developmental banking for small
business, mass markets and rural markets.
19

Mission
To provide superior, proactive banking services to niche markets globally, while
providing cost effective responsive services to others in our role as a development bank
and in so doing, meet the requirements of our stakeholders.
Quality Policy
We, at bank of India, are committed to become the bank of choice by providing
superior proactive, innovative state of the art banking service with an attitude of care
and concern for the customers and patrons.
About Bank
Bank of India was founded on September 7, 1906 by a group of eminent
businessmen from Mumbai. In July 1969 Bank of India was nationalized along with 13
other banks. Beginning with a paid-up capital of Rs.50 lakh and 50 employees, the
Bank has made a rapid growth over the years. It has evolved into a mighty institution
with a strong national presence and sizable international operations. In business
volume, Bank of India occupies a premier position among the nationalized banks.
Presently, Bank of India has 4000 branches in India spread over all states/ union
territories including 93 specialized branches. These branches are controlled through 50
Zonal Offices.
The Bank has been the first among the nationalized banks to establish a fully
computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in
1989. Bank of India was the first Indian Bank to open a branch outside the country, at
London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank
has sizable presence abroad, with a network of 23 branches (including three
representative office at key banking and financial centers viz. London, New York, Paris,
Tokyo, Hong-Kong, and Singapore.Bank of India is India's 4th largest bank, after SBI,
PNB and Central Bank of India. The Bank completed its first one hundred years of
operations on 7 September 2006. Smt. V.R Iyer is the Chairman\ Managing Director of
BOI W.E.F 5th November 2012.

Union Bank of India

Vision
To become the Bank of first choice in our chosen areas by building beneficial
and lasting
relationship with customers through the process of continuous
improvement
Mission
20

Our corporate mission is to gain market recognition in chosen areas by building

effective strategies
About Bank
Union Bank of India was inaugurated by the Father of the Nation, Mahatma
Gandhi, on November 11, 1919. Started as a limited company in Mumbai, it was one of
the few Financial Commercial banks in India. Until 1947, UBI had only 4 branches - 3 in
Mumbai and 1 in Saurashtra, all concentrated in key trade centers. Catering to all the
sectors of the society, be it agriculture, industry, trade and commerce,
services or
infrastructure, the bank has also played a major role in rendering services to the
financial needs of every section. Apart from this, the bank also extended financial
support to educational, housing and trade sector.
Union Bank of India undertook the task of establishment of village knowledge
centers and self-employment training centers. It was in 1975, that the Union Bank of
India was nationalized. It was, then, that it merged with the Belgaum Bank, a private
sector bank. Another merger was on cards in 1985, this time with the Miraj State Bank.
Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government
of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and
Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is
presently held by institutions, individuals and others.
UBI Launched core banking solution in 2002. The head office of union Bank of
India is in Mumbai. The Bank (as on march 2010) now has a wide net work of over 2805
branches and more than 1000 of ATMs in India. Mr. D. Sarkar is the Chairman\
Managing Director of UBI in year 2012.

CONCEPTUAL
SECTOR

FRAMEWORK

No

OF

PRODUCTIVITY

Particular

IN

BANKING

Page no

Introduction

23

Meaning of Productivity

24

Productivity in Banking Sector

26
21

Measuring Productivity in Banks

28

INTRODUCTION
The origin of productivity is deeply rooted in the context of mass production
therefore issues of productivity are mainly analyzed in this sphere. This may be the
main reason for the prolonged neglect of the productivity issues in the sphere of
service. Service organizations are recognized as the largest and fastest-growing
segment of the economy in the world. Johnston and Jones (2004) states, that despite
the importance of productivity in service organizations it is surprising that there is
relatively little empirical research on this topic.
The concept of productivity has considerable importance, as it is an index of
economic welfare. The link between productivity and economic growth is almost selfevident. Productivity drives has a significance role to play in increasing the production
22

per unit of input and thereby, augmenting national income. It is inextricably intertwined
with the very survival of a nation.Thus, it is an acknowledge fact that the productivity is
a basic requisite for obtaining the economic, social and political goals of the country and
for raising the standard of living of the people to enable the country to join the cadres of
developed countries.
From the point of view of an Organization, it is a strategic parameter crucial to
long-term industrial growth and competitiveness. Today, we know that productivity isthe
true source of competitive advantage. But what we must also realize is that it is he key
to social stability as well.
Productivity is the major goal of all Organizations. It is crucial to the survival of an
organization. The price of survival is to move forward and this makes the concept of
productivity central and crucial. It is the key to the economic health of every
organization. That is why; it has become a matter of counsel in recent years and has
gained due attention of industrial and management scientists all over the world.

MEANING OF PRODUCTIVITY
The term Productivity is controversial. Therefore, it has different meanings for
different people. To economists, it is the relationship between output and input; to
behavioral lists, it is attitude of mind; to cost accountants, it is a mere cost reduction
concept; to labor leaders, it is a source of bargain and quarrel; to politicians, it is
employment generation; to engineers, it is machine utilization; and to managers, it is
profitability. Thus, it is a multi-dimensional concept, encompassing the entire economy
and affecting every one and each person can draw a meaning to fit his or her own
situation.
The dictionary meaning of productivity is Output per unit of input. It is the yield
obtained from any process or product by employing one or more factors of production.
23

Productivity is usually calculated as an index number i.e., the ratio of output to input. It
is not merely a measure of production, but the ratio of efforts to result.
It may be defined as a practical measurement relating to the total output of any
one of the measurable factors of production, in a ratio, preferring the scarce or
predominant nature of the input. As a ratio between output and input, it denotes a
quantitative relationship between what is produced and what is introduced into the
process. Thus, it is a measure of how well resources are utilized to achieve
organizational objectives.
Productivity refers to a comparison between the quantity of goods or services
produced and the quantity of resources employed in turning out these goods or
services. The purpose of comparison between the quantity produced and the quantity
used is to know the ability of an organization. Hence, Productivity means the ability to
produce.
Productivity signifies continual striving toward the economically most efficient
mode of production of goods, Commodities and services needed by a society.
The concept of productivity must be broad enough to denote the purpose for
which it is measured. The productivity index, as a ratio, measures how well resources
are expended in the context of accomplishing a mission or a set of objectives. It is the
measure of how specified resources are managed to accomplish timely objectives
stated in terms of quantity and quality.
In a general sense, Productivity represents a close integration of effectiveness
and efficiency. It is a combination of effectiveness and efficiency of a system. It implies
effective and efficient use of available and potential resources. Peter Drucker has
distinguished between efficiency and effectiveness, stating that while the former is
doing things right, the letter means doing right things. Efficiency indicates optimum
utilization of resources and effectiveness being the achievement of performance results.
It is achieving the highest result possible while Consuming the least volume of
resources. How will resources are brought together and utilized is indicated by the ratio
of the volume of results called output to the volume of the resources called input.

Productivity, thus, denotes the relationship between the use of resources and
the results obtained out of those resources. It may be expressed as under

24

PRODUCTIVITY IN BANKING SECTOR

Banking is essentially a service industry. It provides the basic services of
accepting the deposits, repaying them on demand and lending credit for productive
investment . Therefore if operations are confined to financial transactions aimed at
satisfying certain needs of the society, Banks are multi-product organizations. That is,
they provide a variety of deposit-oriented and credit- oriented services to the bank
clientele.
The banking services have the following characteristics

They are intangible in nature.

They are produced, delivered and consumed instantly.
25

The range of bank services is wide enough.

The type and number of services to be offered by the bank are influenced by the
environment.
Growth in bank services must be perfectly guided by the tradeoff between risk
and return
They are multiplicative.

Productivity concept is new to the banking industry. It has started playing its effective
role in this industry very recently. Though it is difficult to measure productivity in
banking industry, yet it is the only solution to the many problems of banking system.
Through improved productivity alone, banking becomes more viable to meet the
challenges of growth. The productivity may not be measured with precision, but can be
reflected, and seen, felt and experienced in many ways such as the achievement of the
given target, exploration of new market area, identification f potential viable locations
for branch expansion, etc.
In the productivity analysis, we need to find the answers of the following questions
first.
- Which resources are utilized?
- How are the resources measured? How is the value determined?
- Is the time scale of measurement important?
- What is achieved within how much time?
- To what extent the resources are used effectively and efficiently to achieve specified
target within the specified time limit?
- To what extent a particular bank has been able to achieve socio-economic objectives?
- To what extent it has been able to fulfill aspiration and hopes of the society?
Answering the above questions will give the idea of the productivity of a
particular bank.
In recent years, planners of our country used the banking system as a tool for
economic growth and for the achievement of socio- economic objectives. Our banking
system is expected to accomplish the following task
a wider geographical coverage, with an emphasis on the spread of banking into
rural areas,
- a larger mobilization of deposit, and
- a re-allocation of bank credit in favor of people with limited means and of sectors
which had hitherto been neglected ,such as agriculture.
-

However, it is equally significant to ensure that the social objectives should not
lead to inefficiency. That is why, the productivity measurement must be based both on
the fulfillment of social objectives as well as financial viability. With the widening of the
objectives of banks, their implications for operational efficiency cannot be ignored.
26

No doubt, the concept of productivity which is somewhat more precise in the

industrial sector becomes obscure in service organizations, like banks. In spite of these
complexities, there are so many areas where productivity Norms can be developed and
applied. In a border sense, the productivity of banking system is to be judged by the
extent to which it is responsive to the needs of the economy. Only certain broad criteria
can be used to form a judgment.
Even though these productivity indicators may not tell us the complete story but
they definitely provide signals so that one can go into the details and find out the
reasons for changes. It is clear from the discussion that mere input and output ratios
can not give us the perfect idea of the bank productivity but more comprehensive and
multidimensional approaches are required. The present project wok describes such
approaches that are useful to measure productivity of a bank.

MEASURING PRODUCTIVITY IN BANK

The above discussion clarifies that it is not easy to measure the productivity of a
service unit like bank. So the comprehensive and multidimensional approaches are
required to measure the productivity of bank. So I have selected the three major areas
in which the productivity of bank can be measured. They are
Productivity of Capital
Productivity of Employee (Labor)
Productivity of Branch
The Researcher has used various ratios to measure the productivity of all these
three areas.
PRODUCTIVITY OF CAPITAL
27

Banking sector is a combination of man power as well as the capital. Here capital
means total resources (Total Liabilities or Total Assets) of a Bank as on a particular
date. In the modern age the use of mechanization and automation has taken the place
of use of manpower to the effective use of capital. The effective use of capital means
the productivity of capital. Only the effective utilization of capital can help a bank to
achieve decided goals. I have used the following ratios to measure productivity of
capital of the Bank.
Business Per Unit of Capital =

Business
Working Fund

Business=Deposits + Advances
Working Fund= Capital + Reserves & Surplus + Deposits + Borrowings + Other
Liabilities & Provisions

PRODUCTIVITY OF EMPLOYEES
The banking sector is a service sector where human skills are very important to
achieve high productivity level. Here, the manpower forms a large portion of the
operation. The measurement of productivity of employee becomes very necessary in
this case. The productivity of employee in a particular industry or plant is the ratio of the
output of that industry or plant to employee input in the industry or plant. But the
meaning of input of employee varies. Here employee productivity means the volume of
output achieved in a particular period in relation to the sum of direct and indirect efforts
involved in the production of a given output. The following ratios are used to measure
the employee productivity of the Bank.

28

PRODUCTIVITY OF BRANCH
This is the age of decentralization. We can see that the organizations are
spreading their ranges of task. The same is the cases with banking sector. The banks
have opened several branches to provide their services to the society. In this manner,
the banks are providing place utility to the people. In this situation it is necessary to
measure the productivity of the branches of a bank. The branches can Prove to be
profitable only if their productivity is met with the decided objectives. The following
ratios are used by me to measure the branch productivity of the bank.

29

RESEARCH METHODOLOGY
No

Particular

Page No

Introduction

32

Literature Reviews

33

Title of the Research Study

40
30

Objectives of the Study

40

Period of the Study

40

Research Design

40

Universe of the Study

41

Selection of the Sample Units

41

Sources of the Data

42

10

Scope of the Study

42

11

Tools & Techniques of the Analysis

42

12

Hypothesis of the Study

45

13

Outline of the Chapter Plan

46

14

Limitation of the Study

47

INTRODUCTION
The growth of any country depends upon the strength of its Banking sector. The
economic enrichment and upliftment of social life depends upon the Banking sector of
that country. The Banking sector which reflects finance function of the country plays a
crucial role in transforming the small savings into the large capital. Thus the Banking
sector boosts the economic growth of the country.
In 1969 and 1980, the government nationalized the major banks in the private
sector. Since that time no new bank could have been setup in India, though there was
no legal bar to that effect. After the recommendation of The Narsimham Committee on
Financial sector Reforms, The Reserve Bank of India issued guidelines for the setup of
31

new banks in the private sector in January 1993. The guidelines ensure that the new
banks are financially viable and technologically modern from the very beginning. It
means these banks will function in a professional manner, So that the banking system
in India can improve image and win the
confidence of the public.
The project report attempts to analyze the productivity of Bank of India and Union
Bank of India. Thus the present project work makes an in depth study of the productivity
of BOI and UBI Banks in India during the 5 years. (2007-08 to 2011-12)

LITERATURE REVIEW
(1) The purpose of this study is to examine the productivity in co-operative banking
industry with special reference to Dakshina Kannada district in Karnataka State. The
study analyses the various parameters of productivity and the different analytical tools
and techniques employed to analyse the physical as well as financial productivity
variables of co-operative banks. In order to provide a more holistic approach to the
notion of productivity, the study also includes discussion on customer services and role
of information technology in co-operative banks. (A. H. Sequeira, Productivity in CoOperative Banking Industry A Case Study of Dakshina Kannada District (Karnataka),
May 19, 2012)

32

(2) Productivity as a concept in both manufacturing as well as service industries is a

function of inputs and outputs. Banking is a service industry with its product in the form
of services. Where a firms final output consists of some quantitative commodity, the
concept of productivity in relation to that firm is likely to be a relatively simple matter.
Even in a single service firm, the concept of productivity would not be a complicated
affair so long as some quantitative measurement of the service produced is agreed
upon. As a result of the reform process unleashed in the early 1990s, Indian economy
has undergone the paradigm shift. Productivity holds the key for growth of Indian Cooperative Banking Industry in the third millennium. It is very necessary that productivity
measurement should deserve attention of policy makers and bank management
.Keeping this in view, an attempt is made in this paper to examine the parameters that
may qualify for selection in defining the idea of productivity in co-operative banks. This
paper also covers the analytical tools and techniques, which could be used for
measuring the performance of co-operative banks. (A.H.Sequeira, Productivity in Cooperative Banks An Operational Framework,June 18, 2012).
(3) This study examines changes in the productivity of commercial banks in Kenya in
the context of liberalization using Data Envelopment Analysis (DEA). We measure the
productivity growth and its components from a time series dataset obtained from
Central Bank of Kenya publications and National Banking Surveys. DEA method is used
to measure Malmquist index of total factor productivity for a sample of 34 banks for the
period 1999-2008. A decomposition of Total Factor Productivity (TFP) measure is done
to establish the source of changes in factor productivity. The results suggest that TFP
deteriorated over the period while Efficiency change (EFFCH) increased as Technical
Change (TECH) declined implying that deterioration of TFP was due to either
technological innovations or shocks. Given that technology is the main driver of
productivity, we recommend that the monetary authorities design practicable protocol as
a technological standards requirement. (Ciliaka Millicent W.Gitau & Seth Omondi Gor,
Measuring Factor Productivity of the Banking Sector in Kenya, OIDA International
Journal of sustainable Development. Vol. 2. No. 12. Pp. 11-18. 2011)
(4) This paper examines shareholder value drivers in European banking focusing on
the efficiency and productivity features of individual banks. In particular, we analyse the
value relevance of bank cost efficiency and total factor productivity (TFP) (in all its
components, including technological change, pure technical efficiency change and
scale efficiency change) to see how these influence shareholder value creation in
European banking. The paper focuses on the French, German, Italian and UK banking
systems over the period 1995-2002 and includes both listed and non-listed banks. We
find that TFP changes best explain variations in shareholder value (measured by
market-adjusted returns, MAR, for listed banks and by the ratio of EVAbkg to invested
capital at time t-1 for non-listed banks). In both samples, we also find that technological
change seems to be the most important component of TFP influencing shareholder
value creation in European banking. (Franco Fiordelisi & Philip Molyneux, Total Factor
Productivity and Sherholder Returns in Banking, February 1, 2010)

33

(5) This paper examines the changes in productivity and its components for Saudi
Commercial Banks between 1996 and 2009. We employ Data Envelopment Analysis
(DEA) to estimate efficiency frontier, followed by a Malmquist Index of Total Factor
Productivity (TFP). Results show that Saudi Arabian Banking industry experienced
sustained productivity growth driven mainly by technological progress. (Abdul Malik
Syed, Bank Productivity Changes in Saudi Arabia Results from a DEA-Malmquist
Approach, September 19, 2010)
(6) The study measures the level of Productivity and Efficiency in the Ghanaian
Banking sector over a 10 years period from 1997 to 2006 using Data Envelopment
Analysis (DEA) and Stochastic Frontier Analysis (SFA). Various assumptions of DEA
and SFA are modeled for comparison. The difference between Productivity and
Efficiency is illustrated with an aid of a graph. The study estimates the Technical
Efficiencies of the banks over time. The Technical Efficiency is decomposed to obtain
the Technical Efficiency Change, Technological Change, Pure Technical Efficiency
Change, Scale Efficiency Change and Total Factor Productivity Change over time.
(Stephen Karanu, Productivity and Efficiency in the Ghanaian Banking Sector,
November 24, 2010).
(7) Financial openness is often associated with higher rates of economic growth. We
show that the impact of openness on factor productivity growth is more important than
the effect on capital growth. This explains why the growth effects of liberalization appear
to be largely permanent, not temporary. We attribute these permanent liberalization
effects to the role financial openness plays in stock market and banking sector
development, and to changes in the quality of institutions. We find some indirect
evidence of higher investment efficiency post-liberalization. We also document
threshold effects countries that are more financially developed or have higher quality of
institutions experience larger productivity growth responses. Finally, we show that the
growth boost from openness outweighs the detrimental loss in growth from global or
regional banking crises.
(8) This paper assesses the evolution of output and productivity in the Greek banking
industry for the period 1990-2006. Three main categories of bank outputwere estimated
based on modern theoretical approaches, while for the estimation ofoutput and
productivity (partial and total factor) we relied on the index number method (Tornqvist
index). We also considered the effect of labor quality on banks' productivity and the
contribution of total factor productivity to bank output growth. Bank output and labor
productivity outpaced considerably the respective GDP
growth and labor productivity of the Greek economy during the period under
examination. Capital and total factor productivity have also improved remarkably mainly
since 1999, due to the structural changes that took place within the industry, capital
(mainly IT) investments and improvement in the quality of human capital.(Panayiotis P.
Athanasoglou, Evaggelia Georgiou & Christos Staikouras, Assessing Output and
Productivity Growth in the Banking Industry, Quarterly Review of Economics and
Finance, Vol. 49, No. 4, 2009, August 18, 2009)
34

(9) The purpose of this study is to examine the efficiency and productivity of a Greek
bank's branches. The sample consists of 458 branches of a Greek commercial bank,
operating in 13 regions of Greece over the period 2002-2005, a total of 1,795
observations. We first use data envelopment analysis (DEA) to explore the efficiency
and productivity of the branches. Then, we use fixed and random effects models to
determine the impact of internal and external factors on the efficiency and productivity
scores. The results indicate that the branches in our sample could have achieved
improved overall performance during 2002-2005. Also, our results indicated that the
inclusion of loan loss provisions as an input variable increases the efficiency score, but
for the total factor productivity change, the results are mixed. The second stage
regressions indicate that both the logarithm of personnel and the logarithm of income
per capita in the local market have a significant impact on efficiency, while the loans to
total assets ratio has a significant impact on pure technical efficiency only.
(Chrysovalantis Gaganis, Aggeliki Liadaki, Michael Doumpos & C.Zopounidis,
Estimating and Analyzing the Efficiency and Productivity of Bank Branches Evidence
from Greece, Managerial Finance, Forthcoming, 2008)
(10) This study employs stochastic frontier analysis to analyze Malaysian commercial
banks during 1996-2002, and particularly focuses on determining the impact of Islamic
banking on performance. We derive both net and gross efficiency estimates, thereby
demonstrating that differences in operating characteristics explain much of the
difference in outputs between Malaysian banks. We also decompose productivity
change into efficiency, technical, and scale change using a generalised Malmquist
productivity index. On average, Malaysian banks experiencemild decreasing return to
scale and annual productivity change of 2.37 percent, with
the latter driven primarily by technical change, which has declined over time. Our gross
efficiency estimates suggest that Islamic banking is associated with higher input
requirements. In addition, our productivity estimates indicate that the potential for fullfledged Islamic banks and conventional banks with Islamic banking operations to
overcome the output disadvantages associated with Islamic banking are relatively
limited. Merged banks are found to have higher input usage and lower productivity
change, suggesting that bank mergers have not contributed positively to bank
performance. Finally, our results suggest that while the East Asian financial
crisis had an interim output-increasing effect in 1998, the crisis prompted a continuing
negative impact on the output performance by increasing the volume of non-performing
loans. (Mariani Abdul-Majid, David S. Saal & Giuliana Battisti, The Efficiency and
Productivity of Malaysian Banks An Output Distance Function Approach, 21st
Australasian Finance and Banking Conference 2008 Paper)
(11) The aspects of measuring, analyzing and optimizing operational performance play
a vital role when the decrease of margins is considered. Especially, the evaluation of
productivity and efficiency of banks is critically important (Burger, 2008). (Burger A.
35

Produktivitt und Effizienz in Banken Terminologie, Methoden und Status quo //

Frankfurt School of Finance & Management Working Paper, 2008. 92. 96 pp).
(12) Besides performing productivity analysis, banks should strive for measuring the
efficiency on the level of business processes. Simple analyses of productivity are
descriptive and should only serve as a starting point. However, empirical studies show
that ratios based on a process level are still rarely conducted and only used in the field
of business process management (Kueng, Meier, and Wettstein, 2001; Heckl, 2007)
(Kueng P., A. Meier, T. Wettstein. Performance Measurement Systems must be
engineered // Communications of AIS, 2007. 1. pp. 1-27.)
(13) This paper examines total factor productivity technical and scale efficiency changes
in regional rural banks by using data from 192 banks for the period 1996 to 2002. Rural
banks showed significant economies of scale in terms of assets and Number of
branches under each bank. Total factor productivity growth of rural banks Was higher in
profitability than in service provision during liberalization. Banks Located in
economically developed as well as low banking density regions exhibited Significantly
higher productivity growth. Overall there is a convergence of efficiency Of rural banks
during the study period. Parent public sector banks have no influence On the efficiency
and productivity growth of rural banks. There is a justification for Opening new banks in
low banking density regions as efficiency and productivity Growth of rural banks in
these areas is high. There is also a case for mergers and
Enlargement of the asset base and the number of branches under each rural bank.
( Amarender A. Reddy, Productivity Growth of Regional Rural Banks, Economic and
Political Weekly, Vol. 41, No.11, pp. 1079-1086, March 2006)
(14) The profitability of banks is particularly influenced by two factors the respective
Market conditions regarding competition and price levels as well as service production
capability (Varmaz, 2006). (Varmaz A. Rentabilitat im Bankensektor, Wiesbaden
Deutscher Universitats-Verlag, 2006. 314 pp.)

(15) This paper investigates productivity growth and technical efficiency in the Greek
banking industry for the period 1982-1997. It also compares the 1982-92 and 1993-97
sub-periods, since after 1992 the Greek banking sector experienced substantial
Changes. The Malmquist productivity index and the DEA method are used to measure
and decompose productivity growth and technical efficiency, respectively. Productivity
growth is higher after 1992. Recent growth is mainly attributed to Technical progress,
while until 1992 growth is mainly attributed to improvements in Efficiency. Furthermore,
after 1992, pure efficiency is higher, and scale efficiency is Lower, indicating that
although banks achieved higher pure technical efficiency, they Moved away from
optimal scale. Finally, Tobit results show that size and specialization have positive
36

effects on both pure and scale efficiency. (Anthony N. Recites, Productivity Growth in
the Greek Banking Industry A Non-Parametric Approach, Empirical, Journal of Applied
Economics and Economic Policy, Vol. IX, 2006)
(16) This paper studies the influence of the evolution in intrastate and interstate
Deregulations on the total factor productivity growth of the US commercial banking
Sector for the 1971-1995 periods. We consider intrastate branching, intrastate
Multibank holding company (MBHC), interstate multibank holding company, and
Interstate multibank holding company de novo branching deregulations. Results
Indicate that long-standing banking restrictions affected negatively banks' productivity
growth and that relaxing restrictions on intrastate branching expansion Has a positive
long-run influence upon banks' productivity growth. The effect of
Interstate MBHC deregulations on banks' productivity growth is largely short-run and
Arises from regional reciprocity agreements. Interstate MBHC de novo branching
Deregulations have a negative long-run effect on banks' productivity growth. (Kenneth
N. Daniels, Dogan Tirtiroglu & Ercn Tirtiroglu, Deregulation, Intensity of Competition,
Industry Evolution and the Productivity Growth of US Commercial Banks, Journal of
Money, Credit and Banking, Vol. 37, No. 2, pp. 339-360, 2005)
(17) The purpose of this paper is fourfold first to empirically investigate the cost
Structure of the Greek banking sector, second to provide measures of economies
(Diseconomies) of scale, third to quantify technical change and its sources, and Fourth
to measure total factor productivity growth and identify its sources. Bank Production is
presented with two different approaches (i.e. the 'intermediation' and the 'production')
which are used in specifying a translog cost function. The two Different translog cost
models are estimated through the full information maximum
Likelihood method of estimation on pooled time series and cross sectional data. The
Results obtained are not significantly affected by model specification. Both models
Indicate significant economies of scale and negative annul rates of growth in technical
change and in total factor productivity. (Nicholas Apergis & Anthony N.Rezitis, Cost
Structure, Technological Change and
Productivity Growth in the Greek Banking, Sector International Advances in Economic
Research, Vol. 10, No. 1, 2004 )
(18) An evaluation of efficiency is impossible if only a single measurement point or
Several measurement points without an according benchmark exist. A scientific
Definition of efficiency usually follows the Pareto-Koopmans concept. Full (100%)
Efficiency is attained for an object if and only if none of its inputs or outputs can be
Improved without worsening some of its other inputs or outputs (Cooper, Seaford and
Zhu, 2004). (Cooper, W.W., L.M. Seiford, J. Zhu. Data Envelopment Analysis History,
Models and Interpretations. In W.W.,Cooper, L.M. Seiford, J. Zhu (Eds.) Handbook on
Data Envelopment Analysis // Boston Kluwer Academic, 2004. pp. 1-39).

37

(19) A well planned, efficiently organized, viable banking sector is the foundation of
Financial infra-structure of a country. That also acts as a catalyst for economic growth
and development of that country. To understand well whether an on-going banking
sector is efficient or not, it is necessary to see the financial health along with productivity
of each bank, each category of banks, and the banking sector as a whole. This article
tries to see the overall present banking scenario in Bangladesh, the position of each
banking category in terms of productivity and profitability in each sector, and a
comparative analysis between different sectors taken together. It also looks to find out
the causes of relatively good/ satisfactory performing category of banks along with less
satisfactory performing sector. (Jahangir Alam & Al Nahian Riyadh, Measuring
productivity and profitability in Bangladesh, Journel of Cost and Management, JulyAugust 2003)
(20) This paper contributes to the discussion on the measurement of banking sector
output. It is also a prelude to discussion on possible causes of productivity change in
banking. We demonstrate how the banking sector's service production can be
measured using aggregate financial statement and payment transactions data. We
Compute banking sector labour productivity Tornqvist indices for six countries (Finland,
Sweden, United Kingdom, Germany, France and Italy) over a period Varying from 11 to
20 years. According to the results, Finnish banking sector Productivity has improved via
a substantial reduction size of labor force, whereas
Output growth has been rather modest. Although in most of the other countries the
Restructuring process has been less intense; most of the sectors studied have
improved in terms of overall output and labor productivity, especially since the mid1990s. (Lena M Mortinnen, Banking Sector Output and Labour Productivity in Six
European Countries, Bank Of Finland Discussion Paper No. 12/2002, June 17, 2002)
(21) Besides performing productivity analysis, banks should strive for measuring the
efficiency on the level of business processes. Simple analyses of productivity are
descriptive and should only serve as a starting point. However, empirical studies show
that ratios based on a process level are still rarely conducted and only used in the field
of business process management (Kueng, Meier, and Wettstein, 2001; Heckl, 2007)
(Kueng P., A. Meier, T. Wettstein. Performance Measurement Systems must be
engineered // Communications of AIS, 2001. 1. pp. 1-27.)
(22) The main indicators for evaluating service capability are productivity and efficiency.
Studies of efficiency show that there are large differences between different banks
service capabilities. The room for improvement in comparison to Best-practice banks
are usually estimated at 15% to 25% (Berger and Humphrey, 1997). (Berger A.N., D.B.
Humphrey. Efficiency of Financial Institutions International Survey And Directions for
Future Research // European Journal of Operational Research, 1997. 2. pp. 175212.)

38

(23)
Process orientation is widespread in banks; such a mindset is neither fully
understood nor applied continuously. So far, only selected processes are measured And
controlled. Yet, to assess productivity of banks on the level of processes, a thorough
understanding of the banks processes, e.g. in the form of a process architecture
(Osterle, 1995) (Osterle H. Business Engineering. Proze und Systementwicklung I.
Entwurfstechniken, 2nd Edition, Berlin et al. Springer, 1995. 375 pp.)
(24) Concepts in banking output and the empirical literature on bank productivity
which employs output concepts--are critically surveyed. Related issues concerning
externalities from banking activity, which entail a deviation of private from social
measures of banking output, are outlined. For output, the national accounts, production
and intermediation approaches are compared. As regards productivity, both partial and
total factor productivity measures and the DEA and parametric approaches to the latter
are assessed. The externalities from banking are shown to include contributions to
economic development, external economies of scale between institutions, and
contagious effects of failures. Among the most striking results is the prevalence of
technical inefficiency in banking. In addition, externality issues are rarely considered in
combination nor assessed empirically. But more generally, it is also suggested that
measurement techniques have often outpaced the theory of what is to be measured,
notably in fields such as joint production, risk and competition. Alternative approaches
to address these issues are suggested. (R. J. Colwell & E. Philip Davis, Output,
Productivity and Externalities The Case of
Banking, Bank of England Working Paper No. 3, August 1992)
(25) Farrell M.J. has observed that the key to efficiency analysis is the identification of
a particular production function of the observed process. According to production
theory, the production function represents all best possible input output relations and
therefore represents the benchmark for a process comparison. The divergence from the
production function can be interpreted as inefficiency. The detected inefficiency thus
illustrates the opportunity for improvement in comparison to the best possible case
(Farrell, 1957). (Farrell M.J. The Measurement of Productive Efficiency // Journal of the
Royal Statistical Society, 1957. III, pp. 253-281.)

39

TITLE OF THE RESEARCH STUDY

In the Present research work title of research study is A Comparative study of
productivity in Bank of India and Union Bank of India.

Objectives of the Study

No Work is started without any objective. The Present project work has also
some objectives. The present project report works has been under taken keeping in
view the following objectives
1. To analyse and identify the major trends in the banking operations of BOI and UBI.
2. To analyse the various trends in productivity of capital of BOI and UBI.
3. To analyze the various trends in productivity of labor of BOI and UBI.
4. To analyze the various trends in productivity of Branch of BOI and UBI.

40

Period of the Study

The present study has been made covering the period of last 5 years i.e. year
2008-09 to 2012-13. There is no special reason to choose this time period for the
purpose of study.

Research Design
According to Claire selltiz, Research Design is the arrangement of conditions for
collection and analysis of data in a manner that aims to combine relevance to the
Research purpose with economy in procedure.
Research Design includes conceptual structure within which the research has
Been conducted; it is the blue print for the collection measurement and analysis of The
data.
In short, Research Design suggests the decision regarding what, where, when, how
much, by what means an inquiry on a research study is conducted.

Universe of the Study

Universe of the study consists of all the banks working in India. Banking industry
of India consists of the following segments.
1. Scheduled Commercial Banks in Public Sector
(a) First 14 Nationalized Banks.
(b) Second 6 Nationalized Banks.
(c) SBI and its subsidiaries.
(Total 20 Nationalized Banks but now only 19 Banks are there.)
2. Scheduled Commercial Banks in Private Sector
(a) 21 old private Banks. (Before 1994)
(b) 9 new private Banks. (1994 and afterward)
3. Foreign Banks
36 foreign Banks are working on 31-3-2003.
41

Selection of Sample Units

From the above mentioned universe, the researcher has selected two units as
the sample for this study. As a part of the research study, Researcher has selected
public sector banks at micro level. For micro level, study the two units Bank of India
and Union Bank of India has been selected by the researcher.

Sources of the Data

The Present Study is mainly based on secondary data obtained from the Issues
of IBA bulletin and Annual Report of BOI and UBI.
To supplement the data, different publications, Bank quest, various books,
periodicals, journals and different websites related with banking industry etc. have been
used for better reliability.

Scope of the Study

In the present research study researcher has selected only two Banks i.e. BOI
and UBI, from the whole Banking Industry. To analyze the productivity of capital,
employee and branch and its comparison between BOI and UBI, researcher has used
various ratios like Business per unit of capital, interest income per unit of capital,
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interest expense per unit of capital, net profit per unit of capital, Business per employee,
profit per employee, business per branch and profit per branch etc.

Tools & Techniques for Analysis

The collected data are duly edited, classified and analyzed using all types of
relevant accounting ratios and statistical techniques. The data are presented through
simple classification and with the help of percentage, average and the hypothesis are
tested at 5% level of significance of employing F-Test.
There are many techniques which may be used for analyzing the financial
performance. These techniques have been classified as follows.
(1) Accounting Techniques
(2) Statistical Techniques

(1) Accounting Techniques

I have picked up the technique to suit the requirement and also on the basis of data
availability. Ratio analysis has been used as accounting technique which is used for the
analysis of financial statement of the selected units. Ratio analysis means the process
of computing, determining and presenting relationship of items and group of items in
the financial appraisal. Ratio expresses the numerical relationship between two figures.
Accounting ratios are used to describe significant relationship, which exist between
figures shown on a balance sheet, in a profit and loss account, in a budgetary control
system or in any other part of the accounting organization.
(2) Statistical Techniques
Use of statistical techniques has become a normal phenomenon in any type of
analysis; statistical tools which are used for financial analysis are as the following.
(a) Arithmetic Mean
One of the most important objectives of statistical analysis is to get one single
value that describes the characteristic of the entire mass of unwieldy data. Such a
value is called the central value or an average or the expected value of the variable.
The most popular and widely used measure of representing the entire data by one
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value is what most laymen call an average and what the statisticians call the
arithmetic mean. Its value is obtained by adding together all the items and dividing this
total by number of items.
(b) Test of Hypothesis
F-Test
F-Test is based on F-distribution and is used to compare the variance of the two
independent samples. This test is also used in the context of analysis of variance
(ANOVA) for judging the significance of more than two sample means at one and the
same time. It is also used for judging the significance of multiple correlation coefficients.
Test statistic, F, is calculated and compared with its Probable value (to be seen in the
F- ratio tables for different degree of freedom for greater and smaller variance at
specified level of significance) for accepting or rejecting the null hypothesis.
When we use the F- Test, we presume that,
1.The population is normal
2. Sample have been drawn randomly
3.Observations are independent
4. There is no measurement error.

Analysis of Variance (ANOVA)

The first object of the analysis of variance is to obtain a measure of the total
variation within the series and the second object is to find a measure of variation
between or among the components. Then the significance of difference between the
variations in two series or more may be measured. In other words, with the help of the
techniques of analysis of variance we can test the hypothesis that the mean of all the
components constituting a population are equal to the mean of the population or that
the sample has come from the population.
The technique of analysis of variance is referred to as ANOVA. A table showing
the sources of variance, the sum of squares, degree of freedom, mean square
(variance) and the formula for the F- ratio is known as ANOVA TABLE. The actual
analysis of variance is carried out on the basis of ratio between the variances. The
variance ratio is obtained by dividing the variance between the samples by the variance
within the samples

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HYPOTHESIS OF THE STUDY

FOR MEASURING PRODUCTIVITY OF CAPITAL
H01 There is no significant difference in Business per unit of capital ratio of selected
units, BOI and UBI.
H02 There is no significant difference in Net Profit per unit of capital ratio of selected
units, BOI and UBI.
H03 There is no significant difference in interest income per unit of capital ratio of
selected units, BOI and UBI.
H04 There is no significant difference in interest expenditure per unit of capital ratio of
selected units, BOI and UBI.

FOR MEASURING PRODUCTIVITY OF EMPLOYEES

H05 There is no significant difference in Business per employee ratio of selected units,
BOI and UBI.
H06 There is no significant difference in Profit per employee ratio of selected units, BOI
and UBI.
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H07 There is no significant difference in Net total income per employee ratio of
Selected units, BOI and UBI.
H08 There is no significant difference in working fund per employee ratio of selected
units, BOI and UBI.

FOR MEASURING PRODUCTIVITY OF BRANCH

H09 There is no significant difference in Business per branch ratio of selected units,
BOI and UBI.
H010 There is no significant difference in Profit per branch of selected units, BOI and
UBI.

Outline of Chapter Plan

The entire project report work has been presented in the following 6(six)
chapters, which are as under
1. Banking industry An Overview
2. An overview of Sample Units
3. Conceptual Frame Work of Productivity in banking sector
4. Research Methodology
5. Statistical Analysis, Interpretation and Comparison of the Data
6. Summary, Findings & Suggestions

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Limitations of the Study

The present project work is having certain limitations which are as follows

The data which is used for this study is based on annual reports of the bank and
secondly data collected from RBI & IBA Bulletins published from time to time.
Therefore the quality of this project work depends on quality and reliability of data
published in annual reports.
There are different methods to measure the productivity of the banks. In this
connection, view of experts differed from one another.
The present project work is largely based on ratio analysis; such analysis has its
own limitations, which also applies to the study.
This study is related with only two banks viz. BOI and UBI. Any generalization for
universal application cant be applied here.

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