MINOR PROJECT REPORT ON

A COMPARATIVE STUDY BETWEEN PUBLIC AND

PRIVATE SECTOR BANKS

PROJECT SUPERVISOR : SUBMITTED BY :

MS. AARTI MALIK VIDHI MEHROTRA
(ASST. PROFESSOR) ENROLL NO. - 04314901815
BBA (B&I) - 3rd SEMESTER

Submitted in partial fulfillment of the requirement of

Department of Business Administration
Maharaja Surajmal Institute (MSI)
C-4 JanakPuri, New Delhi-110058.
Phones: 25528116, 25552667.
Website-www.msi-ggsip.org
CERTIFICATE

This is to certify that the project titled"A COMPARATIVE STUDY BETWEEN PUBLIC
AND PRIVATE SECTOR BANKS, is an academic work done by VIDHI MEHROTRA
(04314901815) submitted in the Partial fulfillment of the requirement for the award of the
degree of Bachelor of Business Administration from Maharaja Surajmal Institute , Delhi,
under my guidance & direction. To the best of my knowledge and belief the data &
information presented by her in the project has not been submitted earlier.

MS. AARTI MALIK

(Asst. Professor)
ACKNOWLEDGEMENT

Project work is never the accomplishment of an individual rather it is an amalgamation of the

efforts, ideas and cooperation of a number of entities. Thus I would like to extend my sincere
thanks to all those people who helped me in accomplishing my project.

I would like to thank GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY for giving
us all an opportunity to work on a valuable project. I owe my project success to all faculty
members, especially our Director Sir, Dr. Rajesh Kumar Tyagi for providing us with this
wonderful opportunity and guidance. This project provided me a platform to increase my
knowledge and empowered me with a better understanding of concepts in the real world
scenario.

THANK YOU ONE AND ALL

VIDHI MEHROTRA
BBA (B&I) 3rd SEM.
CONTENTS:

PAGE
S.NO TITLE
NO.

1.1 Introduction
1.2 Objective of the study

1.3 Research Methodology

Chapter 1

1.4 Limitations of the study

Profile of the organization

Chapter 2

3.1Review of literature and conceptual framework

Chapter 3
3.2Analysis and interpretation

Conclusion and Recommendations

Chapter 4

Bibliography

Annexure
 Chapter 1
Introduction
Chapter 1 - INTRODUCTION

1.1 INTRODUCTION

The Indian Financial System comprises of four segments or components. These are
financial institutions, financial markets, financial instruments and financial services.
Banks come under the Financial Institution segment.

Bank is defined in many ways by various authors. The evolution of different types of
banks, each specializing in a particular field, gives emphasis on each and every kind of
bank. One common definition of Bank states that, Bank is an institution, which deals in
money and credit. Acc. to this definition bank accepts deposits from public and make
advances and loans to them. In practice bank receives deposits of money in savings and
current accounts at lower rates of interest or profit and gives on credit to needy persons
and businessmen at a higher rate of interest or profit.

The Indian Financial System was quite well developed even prior to Indias political
independence in august 1947. Both foreign and domestic banks were present and so was
a well developed stock market.

Indian Banking System currently employs 1,175,149 employees and has a total of
109,811 branches in India and 171 branches abroad and manages an aggregate deposit of
Rs.67,504.54 billion (US $1.1 trillion or Euro820 billion) and bank credit of Rs.
52,604.59 billion (US $880 billion or Euro 640 billion ). The net profit of the banks
operating in India was Rs.1027.51 billion (US $17 billion or Euro12 billion) against a
turnover of Rs9148.59 billion ( US $150 billion or Euro110 billion ) for the fiscal year
2012-13.

While the private sector banks are on the threshold of improvement, the Public Sector
Banks (PSBs) are slowly contemplating automation to accelerate and cover the ground
lost. To content the new challenges posed by Private Sector Banks, PSBs are pumping
huge amounts to update their IT. The Private Sector Banks in order to compete with
large and well established PSBs, are not only foraying into IT, but also shaking hands
with peer banks to establish themselves in the market. While one of such initiative was
taken in November where IBS joined the M&A bandwagon. Prior to this private bank
merger, there have been quite a few attempts made by the Govt. to rescue weak banks
and synergize the operations to achieve scale economies.

On the other hand, if the merger turns out to be mere arithmetic number crunching of
two balance sheets without a proper strategic outlook and reorienting goals, it might
results in disharmonious human resource problems.
1.2 OBJECTIVE OF THE STUDY :

This study has been conducted with a variety of important objectives in mind. The following
provides us with the chief objectives that I have tried to achieve through this study. The Chief
Objectives of the study are as follows:

To find the Banking Sector largely preferred by the customers.

To find out the factors which influences the customers to choose a particular type of
Bank.

To study the problems faced by the customers in public as well as private sector
banks.

Other Objectives could be :-

To differentiate between Public and Private Sector banks.

To study and analyse the growth of PSBs and Private Sector Banks in India.

To study the working of various banking institutions.

1.3RESEARCH METHODOLOGY

INTRODUCTION:

Research is an art of scientific investigation. The word research refers to finding the truth about
something through a systematic study. In other words research is a scientific and systematic
search for pertinent information on a specific topic.
Research may be done to:
Gain familiarity with a phenomenon or to achieve new insights into it.
Gaining knowledge regarding the method and procedure adopted for achievements
of objective of the project.
Helps in evaluation of results.
Portray accurately the characteristics of the particular individual, situation or a group.
Determination of frequency with which phenomenon occurs or with which it is
associated with another.

TYPE OF STUDY:

The type of the study was descriptive in nature. Descriptive studies aim at portraying accurately
the attitudes or views of a particular group of people towards any situation.

METHODOLOGY:

To fulfill any task, it is necessary to follow a systematic method. The methodology adopted for
studying the objective of the project was surveying the bank accountholders within a specified
sample space. So keeping in view the nature of requirement of the study to collect all the
relevant information regarding the comparison of Public Sector Banks and the Private Sector
Banks, Direct Personal Interview Method with the help of structured questionnaire was adopted
for collection of Primary Data. Secondary Data has been collected through the various sample
data available on the internet and from newspapers and magazines. Some data has also been
collected through surfing internet and by visiting the websites of Indian Banking Association.

SOURCE OF INFORMATION:
The relevant data in the subject matter was collected by using two main methods i.e. Primary
Data and Secondary Data.

1) PRIMARY DATA Primary Data is the data which is used or collected for the first time
and it is not used by anyone in the past. There are a number of sources of primary data from
which the information can be collected. We took the following resources for our research.
a) Questionnaire This method of data collection is quite popular, particularly in case of
big enquiries. Here in our research we set 15 simple questions and requested the
respondents to answer these questions with correct information.
2) SECONDARY METHOD Secondary method is the data which is available in the
readymade form and which has already been used by other people for various purposes i.e.
it refers to that data which have already been collected by someone else, earlier this time.
The sources of secondary data are newspaper, Internet, Websites of Indian Banking
Association, Journals and other published documents.

Some other relevant information relating to Collection of Data:

I. SAMPLE DESIGN A sample design is definite plan for obtaining a sample from
a given population. It refers to the techniques or the procedures that the researchers
would adopt in selecting items for the samples. Sample design may as well lay down
the number of items to be included in the sample i.e. the size of the sample. Sample
design is determined before data are collected. Since it will not be possible to study
the whole population so here we select a section of total population. The selected
respondents should be as representatives of the total population.
II. SAMPLING TECHNIQUE Stratified convenient sampling. All the bank
account holders were taken into considerations. Research was conducted on clear
assumptions that the respondents would give frank and fair answer in a pragmatic
way without any biasness.
III. SAMPLING DESCRIPTION In order to understand the nature and
characteristics of various respondents in this study, the info. was collected
&analyzed acc. to their socio-economic background.

1.4 LIMITATIONS OF THE STUDY

Due to constraints of time and resources the study is likely to suffer from certain limitations.
Some of them are mentioned below so that the findings of the study are understood in the
proper way.

The present information provided in the study is upto date with respect to study but may
change with passage of time.

Collection of data was certainly an uphill task due to non-availability of exactly required
data.

Some of the respondents of the survey were unwilling to share the information.

The topic being vast everything was not being able to cover.

The information given by the respondents might be biased because some of them might
not be interested in providing the correct information.
CHAPTER 2
CHAPTER 2
PROFILE OF THE ORGANISATION

INTRODUCTION TO PUBLIC AND PRIVATE SECTOR

BANKS

Scheduled Commercial Banks in India are categorized into 5 different groups acc. to their
ownership and nature of operation.
These bank groups are :
State Bank of India and its associates
Other Nationalized Banks
Regional Rural Banks (RRBs)
Foreign Banks
Other Indian SCBs (in the Private Sector)

Scheduled Commercial Banks consist of 28 Public Sector Banks (State Bank of India and its
seven associates, nationalized banks and other PSBs), 9 New Private Sector Banks, 20 Old
Private Sector Banks and 31 Foreign Banks. PSBs are the ones in which the Government has
a major holding. They are divided into 2 groups i.e. Nationalized Bank of India and its
associates. Private Sector Banks came into existence to supplement the performance of Public
Sector Banks and serve the needs of the economy better. As the public sector banks were
merely in the hands of the government, banks had no incentive to make profits and improve
the financial health. Nationalization killed competition and stifled competition in banking.
Banks operated in regulatory environment with administered rate of interest structure,
quantitative restrictions on credit, high reserve requirements and significant proportion of
bendable resources going to the priority and government sectors. This resulted in low levels
of investment and growth, decline in productivity and erosion of profitability of banking
sector. As on March 2006, the number of scheduled commercial banks in India stood at
2182. As on June 2006, the number of banked centers served by scheduled commercial banks
stood at 34,513. Of these centers 29,039 were single office centers and 45 centers had 100
and more bank offices. The top 100 centers out of 34,513 banked centers, arranged to the size
of deposits accounted for 67.7% of the total deposits and the 100 centers arranged according
to the size of bank credit accounted for 76.6% of total bank credit. Aggregate deposits of top
100 centers grew at 27.7% in June 2006 over June 2005 compared to 18.0% growth recorded
a year 2006 over June 2005, compared to 32.9% growth recorded in June 2005.
 PUBLIC SECTOR BANKS (PSBs)

Those banks where the Government holds the majority stake (more than 50% of the
shares) are known as public sector banks.

There are a total of 27 public sector banks in India. These can further be classified as
19 Nationalised Banks + 6 State Bank Group (SBI and its associates) + rest two are
IDBI BANK and BHARATIYA MAHILA BANK, which are categorised as PSBs.

Shares of these banks are listed on stock exchange.

State Bank of India is a public sector bank as the government holding in this bank is
58.60%. Similarly, PNB is a public sector bank as the government holds a stake of
58.87%.

The funds needed (capital adequacy) to start up a PSB is less as compared to a Pvt.
SB.

The formalities required to start up a PSB is generally less. With limited no. of
certificates they can commence/start their business.

Public Sector Banks account for bulk of the branches in India (88 percent till 2009)

In the rural areas, the presence of the Public Sector Banks is overwhelming. In 2009
96 percent of the rural bank branches belonged to the Public Sector. The Private
Sector Banks and the Foreign Banks have limited presence in the Rural Sector.
EMERGENCE OF PUBLIC SECTOR BANKS
The Central Government entered the banking business with the nationalization of the
Imperial Bank of India in 1955. A 60% stake was taken by the Reserve Bank of India and the
new bank was named as the State Bank of India. The seven other state banks became the
subsidiaries of the new bank when nationalised on 19 July 1960. The next major
nationalisation of banks took place in 1969 when the government of India, under Prime
Minister Indira Gandhi, nationalised an additional 14 major banks. The total deposits in the
banks nationalised in 1969 amounted to 50 crores. This move increased the presence of
nationalised banks in India, with 84% of the total branches coming under government
control.
The next round of nationalisation took place in April 1980. The government nationalised six
banks. The total deposits of these banks amounted to around 200 crores. This move led to a
further increase in the number of branches in the market, increasing to 91% of the total
branch network of the country. The objectives behind nationalisation were:

To break the ownership and control of banks by a few business families,

To prevent the concentration of wealth and economic power,
To mobilize savings from masses from all parts of the country,
To cater to the needs of the priority sectors.

PUBLIC SECTOR BANKS BEFORE THE ECONOMIC

LIBERALISATION

The share of the banking sector held by the public banks continued to grow through the
1980s, and by 1991 the public sector banks accounted for 90% of the banking sector. A year
later, in March, 1992, the combined total of branches held by public sector banks was 60,646
across India, and deposits accounted for Rs. 1,10,000 crore. The majority of these banks were
profitable, with only one out of the 27 public sector banks reporting a loss.
Problem with nationalised banks reported a combined loss of Rs. 1160 crores. However, in
the early 2000s saw a reversal of this trend, such that in 2002-03 a profit of Rs. 7780 crores
by the public sector banks: a trend that continued throughout the decade, with a Rs. 16856
crore profits in 2008-2009.
LIST OF PUBLIC SECTOR BANKS
Nationalised Banks:
1. Allahabad Banks
2. Andhra Bank
3. Bank of India
4. Bank of Baroda
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Oriental Bank of Commerce
13. Punjab and Sindh Bank
14. Punjab National Bank
15. Syndicate Bank
16. UCO Bank RC
17. Union Bank of India
18. United Bank of India
19. Vijaya Bank

State Bank and its Associates:

1. State Bank of India
2. State Bank of Bikaner and Jaipur
3. State Bank of Hyderabad
4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Travancore

Other Public Sector Banks

1. IDBI Bank
2. Bharatiya Mahila Bank
NATIONALISED BANKS
The term nationalised banks refers to those banks which were nationalised under
the Banking Companies (Acquisition and Transfer of Undertaking) Bill.

According to IMF (International Monetary Fund), NATIONALISATION is defined as

government taking control over assets and over a corporation, usually by acquiring the
majority or the whole stake in the corporation.

Nationalised Banks dominate the banking system in India. The history of nationalised
banks in India dates back to mid-20th Century, when Imperial Bank of India was
nationalised (under the SBI Act of 1955) and re-cherished as State Bank of India (SBI)
in 1955. Then on 19th July 1960, its seven subsidiaries were also nationalised with
deposits over 200 crores.

Nationalised Banks are a total of 19 Banks Allahabad Bank, Andhra Bank, Bank of
Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of
India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental
Bank of Commerce, Punjab & Sind Bank, Punjab National Bank, Syndicate
Bank, UCO Bank, Union Bank of India, United Bank of India, Vijaya Bank, and The
KarurVysya Bank.

National Bank as a group accounted for 48.5% of the aggregate deposits.

Nationalised Banks held the maximum share of 47.6% in the total bank credit.

Why was Banks Nationalised?

The nationalization of banks was a significant move undertaken by the government for the
development of the country. Firstly, it instilled public confidence in the banking system
encouraging the masses to save and invest. It allowed for elimination of regional bias and
promoted opening up of branches in the remote areas of the country as well, thus
strengthening the banking network. By elimination of monopoly or credit competition,
nationalization streamlined banking practices in the country, thereby directing funds where it
was most necessary towards industrial and sectoral development as planned by the RBI
and the Indian government.s
PRIVATE SECTOR BANKS

The Private Sector Banks in India represent part of the Indian Banking Sector that is
made up of both private and public sector banks.

Private sector banks are owned by private lenders i.e. they are managed and
controlled by private promoters.

These are those banks where private institutions/individuals hold more than 50% of
the shares and are called as Private Sector Banks.

Banking in India has been dominated by public sector banks since the 1969 when all
major banks were nationalized by the Indian government. However, since
liberalization in government banking policy in the 1990s, old and new private sector
banks have re-emerged. They have grown faster & bigger over the two decades since
liberalization using the latest technology, providing contemporary innovations and
monetary tools and techniques.

ICICI is a private sector bank as private institutions and individuals own majority of
its shares.

Another interesting example is the Axis Bank. It is classified as a private sector bank.
However, about 29% of its shares (as of writing) are held by institutions which
themselves are owned and controlled by the Government of India.

As per the information available from the Ministry of Finance, there are 22 Private
Sector Banks operational in India. These include 12 old private sector banks and 10
new private sector banks.

The private sector banks are split in two groups by financial regulations in India, old
and new. The old private sector banks existed prior to the nationalization in 1969 and
kept their independence because they were either too small or specialist to be included
in nationalization. The new private sector banks are those that have gained their
baking license since the liberalisation in 1990s.s
OLD PRIVATE SECTOR BANKS
The banks, which were not nationalized at the time of bank nationalization that took place
during 1969 and 1980, are known to be the old private-sector banks. These were not
nationalized, because of their small size and regional focus.Most of the old private-sector
banks are closely held by certain communities their operations are mostly restricted to the
areas in and around their place of origin. Their Board of directors mainly consists of locally
prominent personalities from trade and business circles. One of the positive points of
these banks is that, they lean heavily on service and technology and as such, they are likely to
attract more business in days to come with the restructuring of the industry round the corner.

LIST OF OLD PRIVATE SECTOR BANKS

1. City Union Bank
2. Dhanlaxmi Bank
3. Federal Bank
4. Tamilnad Mercantile Bank
5. Karnataka Bank
6. Jammu and Kashmir Bank
7. KarurVysya Bank
8. Lakshmi Vilas Bank
9. Nainital Bank
10. RBL Bank
11. South Indian Bank
12. Catholic Syrian Bank
NEW PRIVATE SECTOR BANKS

The banks, which came in operation after 1991, with the introduction of economic reforms
and financial sector reforms are called "new private-sector banks". Banking regulation act
was then amended in 1993, which permitted the entry of new private-sector banks in
the Indian banking sector. However, there were certain criteria set for the establishment of the
new private-sector banks, some of those criteria being: The bank should have a minimum net
worth of Rs. 200 crores.

1. The promoters holding should be a minimum of 25% of the paid-up capital.

2. Reliance Capital, India Post, Larsen & Toubro, Shriram Transport Finance are
companies pending a banking license with the RBI under the new policy, while IDFC
&Bandhan were given a go ahead to start banking services for 2015.
3. Within 3 years of the starting of the operations, the bank should offer shares to public
and their net worth must increased to 300 crores.

LIST OF NEW PRIVATE SECTOR BANKS

1. Axis Bank
2. ICICI Bank
3. Bandhan Bank
4. Development Credit Bank
5. HDFC Bank
6. Yes Bank
7. IDFC Bank
8. Induslnd Bank
9. Kotak Mahindra Bank
10. Bank of Punjab
# Difference Between Public and Private Sector Banks
BASIS OF PUBLIC SECTOR
COMPARISON BANKS
1 Shareholders / Basis In a Public Sector Bank more
than 50% of the stake is held
by the Government.
2 Interest Rates Interest Rates offered by the
Public Banks are slightly
higher.
3 Fees and Service Public Sector Banks fees and
services are less such as on
balance maintenance. A lot of
PSB are still picking up in the
service.
4 Customer Base Mostly Public Sector Banks
are opened for Government
employees for their salaries,
FDs , locker facility etc.
5 Financial Public Sector Banks lag
Performance behind Private Sector Banks
in terms of capital adequacy,
NPAs and Net Interest
Margin.
6 Fund Requirement Funds required to start a
Public Bank is generally less
as compared to a Private
Bank.
7 Safety of Job Government Jobs are
generally more secured than
Private ones. They have their
own benefits in terms of Jobs
Security and Pension Plans.
PRIVATE SECTOR
BANKS
In a Private Sector Bank
majority of the stake is held by
Private Shareholders.
In case of loans, Interest Rates
are marginally low.
Private Sector Banks have made
names in providing better
service, however they charge
for the extra services provided
by them.
Private Sector Banks in India
target Company employees, for
their salary accounts, credit
cards and Net Banking.
Private Sector have proved itself
in this respect. Their share price
is also significantly high.
In case of Private Sector Banks
fund requirement is quite high.
Jobs in Private Sector is not that
much secured. Theres always a
fear of loosing the job. Private
Sector Jobs are more concerned
with target completion within a
specified time limit.
 8 Commencement of A Public Sector Bank can Whereas, A Private Sector Bank
Business start and run its business with has to complete a lot of
minimum number of formalities before starting and
formalities. running its business.

FUNCTIONS OF PUBLIC AND PRIVATE SECTOR

BANKS
1) Primary Functions
a) Acceptance Deposits
i) Time Deposits These are deposits repayable after a certain fixed period.
Deposits are not repayable by cheque, draft or by any other such means. It
includes the following :-
Fixed Deposits The deposits can be withdrawn only after the expiry of
certain period, say 3 years or 5 years or 10 years. The banker allows a
higher rate of interest depending upon the amount and period of time.
Previously the rate of interest payable on fixed deposits was determined by
RBI. The Rate of interest differs acc. to each bank. Every bank has its own
policies and bank rates. However, banks are not permitted to offer
different interest rates to different customers for deposits with same
maturity period, except in the case of deposits above Rs.15l lacs and
above. Fixed Deposits receipt can not be transferred to other persons.
Recurring Deposits The customer opens an account and deposits a
certain sum of money every month after a certain period say 1 year or 3
years or 5 years. The accumulated amount along with the interest is paid to
the customers. It is very helpful to the middle and poor sections of the
people. This deposit system is useful mechanism for regular savers of
money. Interest paid on such deposits is generally on cumulative basis.
Cash Certificate They are issued to the public for a longer period of
time. It attracts the people because its maturity value is in multiples of the
sum invested. It is an attractive and high yielding investment for those who
can keep the funds for a longer period of time. It is very useful account for
meeting future financial requirements at the occasion of marriage,
education of children etc. Cash certificates are generally issued at discount
to face value.

ii) Demand Deposits These are the deposits which may be withdrawn by the
depositor at any time without previous notice. It is withdraw able by cheque and
draft.
 Savings Deposits saving deposits can only be held by individuals and
non profit institutions. The rate of interest paid on saving deposits is lower
than that of time deposits. These account holders gets the advantage of
liquidity and small income in the form of interest but there are some
restrictions on withdrawals. Presently interest on saving bank account is
determined by RBI.
Current Account Deposits These accounts are maintained by the people
who need to have a liquid balance. Current account offers high liquidity.
No interest is paid on current deposits and there are no restrictions on
withdrawals from the current account. These accounts are generally in the
case of business firms, institutions and cooperative bodies. These schemes
may vary from bank to bank.
b) Advancing of Loans The commercial banks provide loans and advances in
various forms. Some of them are given below :-
i) Overdraft Facility this facility is given to holder of current account only.
This is an arrangement with the bankers thereby the customer is allowed to draw
money over and above his account has. This facility of overdrawing his account is
generally pre arranged with the bank up to a certain limit. It is a short term
temporary fund facility from the bank and bank will charge an interest on the
amount overdrawn. This facility is generally available to business firms and
companies.
ii) Cash Credit Cash credit is a form of working capital firms. The customer
can operate that account within the sanctioned limit as and when required. The
period of credit facility may be extended further one advantage under this method
is that bank charges interest only on account utilised and not an total amount
sanctioned or credited to the account.
iii) Discounting of Bills It may be another form of bank credit. The bank
may purchase inland and foreign bills before are due for payment by the drawee.
Debtors at discounted value. The bankers discount is generally the interest on the
full amount for the unexpired period of the bill, the account of the customer in the
case the bill are ultimately not paid i.e. dishonoured. The bill passes to the banker
after endorsement. Banks will not dis-accomodation bills.
iv) Loans and Advances It includes both demand and term loans, direct
loans and given to all type of customers mainly to businessmen and investors
against personal security or goods of moveable in nature. The loan amount is paid
in cash or by credit to the customer account which the customer can draw at any
time.
v) Education Loan Scheme- The RBI from august 1999 introduced a new
educational loan scheme for students of full time graduate/ post graduate/
professional courses in private professional colleges. Under the scheme all public
sectors banks have been directed to provide educational loan up to Rs. 15000 for
 free seat and Rs. 50000 for payment seat student at interest not more than 12%
p.a. This loan is available only for students whose annual family income does not
exceed Rs. 100000. The loan has to be repaid together with interest within five
years from the date of completion of course.
vi) Housing Finance Nowadays the commercial banks are competing among
themselves in providing housing finance facilities to their customers. It is
mainlyto increase the housing facilities in the country. State Bank of India, Indian
Bank, Canara Bank, Punjab National Bank have formed housing subsidiaries to
provide housing finance. Housing Finance upto Rs. 5 lakhs is treated as priority
sector advances for banks. The limit has been raised to Rs. 10 lakhs per borrower
in cities.
vii) Loans against Saving Certificate
viii) Consumer Loans and Advances
ix) Loans against Shares and Securities
x) Securitization of Loans
xi) Others
c) Credit Creation Credit creation is one of the primary functions of commercial
banking when a bank sanctions a loan to its customers, it does not give cash to him,
but a deposit account is opened in his name and the amount is credited to his account
he can withdraw the money whenever he needs. A bank sanction loan which creates a
deposit. In this way the bank increases the money supply of the economy, such
functions is known as credit creation.
2) Secondary Functions
a) Agency Functions
i) Collection of cheques, dividend interest As an agent the bank
collects cheque, draft, promissory notes, interest, dividends etc. on behalf of its
customers and credits the amount to their account. Customer may furnish their
bank details to corporate where investment is made in shares, debentures etc. as
and when dividend, interest is due the companies directly send the warrants/
cheque to the bank for credit to customer account.
ii) Payment of Rent, Insurance Premiums The banks make the
payments such as rent, insurance premiums, subscription on standing instructions
until further notice till the order is revoked the bank will continue to make such
payment regularly by debiting the customer account.
iii) Dealing in Foreign Exchange As an agent the commercial banks
purchase and sell foreign exchange as well for customers as per RBI exchange
control regulations.
iv) Purchase and Sale of Securities Commercial banks undertake the
purchase and sale of different securities such as shares, debentures, bonds etc. on
 behalf of their customers. They run a separate Portfolio Management Scheme for
their big customers.
v) Act as Correspondence Commercial banks acts as correspondent to
their customers. Small banks even get travel tickets, book vehicles; receive letters
etc. on behalf of the customers.
vi) Preparation of Income Tax Returns -They provide income tax returns
and provide advice on tax matters for their customers. For those purposes they
employ tax experts and make their services available to their customers.
b) General Utility Services:-
i) Safety Lockers Facility Safe keeping of important document, valuables
like jewels is one of the oldest services provide by commercial banks.Lockers are
small receptacles which are fitted in steel racks and kept inside strong rooms
known as vaults. These lockers are available on half year or annual rental basis.
The bank merely provided lockers and the key but the valuables are always under
the control of its users. Any customer of safety lockers after entering into a
register his name, account number and time can enter into the vault.
ii) Issue Travellers Cheque - Banks issue travellers cheque to help carry
money safely while travelling within India or abroad. Thus, the customer can
travel without fear,theft or loss of money.
iii) Letters of Credit It is payment document provided by the buyers banker
in favour of seller. This document guarantees payment to the seller upon
production of document mentioned in the letter of credit evidencing dispatch of
goods to the buyer. The letter of credit is an assurance of payment upon fulfilling
conditions mentioned in the letter of credit. The letter of credit is an important
method of payment in international trade. There are primarily 4 letters of credit.
iv) Acting as Referees The banks acts as referees and supply information
about the business transactions and financial standing of their customers on
enquiries made by third parties. This is done on the acceptance of the customers
and help to increase the business activity in general.
v) Provide Trade Information The commercial banks collect information
on business and financial conditions etc. and make it available to their customers
to help plan their strategy. Trade information services are very useful for those
customers going for cross border business.
vi) ATM Facilities Under this system the customers can withdraw their
money easily and quickly and all 24 hours a day. This is also known as Any Time
Money. Customers under this system can withdraw funds i.e. currency notes with
a help of certain magnetic card issued by the bank and similarly deposit cash/
cheque for credit to account.
vii) Gift Cheques
viii) Accepting Bills
ix) Merchant Banking
x) Advice on Financial Matters
xi) Factoring Service
xii) Credit Cards

CHAPTER 3
Chapter 3
3.1 REVIEW OF LITERATURE AND CONCEPTUAL
FRAMEWORK

Literature Review

A literature review is a body of text that aims to review the critical points of current
knowledge on a particular topic. Literature reviews are secondary sources, and as such, do not
report any new or original experimental work.

Most often associated with science-oriented literature, such as a thesis, the literature review
usually precedes a research proposal, methodology and results section. Its ultimate goal is to
bring the reader up to date with current literature on a topic and forms the basis for another
goal, such as future research that may be needed in the area.

A good literature review is characterized by: a logical flow of ideas; current and relevant
references with consistent, appropriate referencing style; proper use of terminology; and an
unbiased and comprehensive view of the previous research on the topic.

According to Cooper (1988) "a literature review uses as its database reports of primary or
original scholarship, and does not report new primary scholarship itself. The primary reports
used in the literature may be verbal, but in the vast majority of cases reports are written
documents. The types of scholarship may be empirical, theoretical, critical/analytic, or
methodological in nature. Second a literature review seeks to describe, summarize, evaluate,
clarify and/or integrate the content of primary reports".

A literature review provides an overview and a critical evaluation of a body of literature relating
to a research topic or research problem. It analyses a body of literature in order to classify it by
themes or categories, rather than simply discussing individual words one after the other.

A literature review often forms a part of a larger research project such as within a thesis, or it
may be an independent written work.

Purpose of a Literature Review

A literature review situates our topic in relation to previous researches and illuminates a spot
for our research. It accomplishes several goals

Provide background for topic using previous research.

Shows we are familiar with previous, relevant research.
Evaluates the depth and breadth of the research with regards to our topic.
Determines relating questions or aspects of our topic in need of research.

In our research the main source of information has been the Questionnaire filled up by the
respondents as well as the internet. The topic of our research comparative study of the Public
Sector and Private Sector Banks has not been published earlier. So the main argument of the
topic whether Public Sector Banks or Private Banks rule has been the main focus. The internet
questionnaires served by us to the respondents, website of particular banks have been the major
source of information. Few worth literatures like kiranprakashan bank books, arihants banking
knowledge have been very valuable. The facts and figures have provided in these respective
books and have been very helpful to us.
3.2 ANALYSIS AND INTERPRETATION

The performance and the roles of Private and Public Sector Banks are undergoing
changes. The banks, both private as well as public have to now operate in an
increasing competitive environment. The competition for public sector banks is
coming from the private sector banks. Despite having the advantage of a
substantial presence and penetration in the rural areas, the public sector banks are
under tremendous pressure to maintain their margins and to survive the
competition. The customer centric approach of private sector banks have thrown
open many more challenges for the public sector banks especially in retaining
customers and expanding customer base.

We have compared Public and Private sector banks based on certain parameters
like customers reference, assets and liabilities of both public and private sector
banks, market share, return on assets, services provided by the banksetc etc.

1) The respondents were asked about which banking sector

services they avail. The result is as follows

Banking sector Number of Respondents

Public 30

Private 45

Both 5

From the above pie chart it can be inferred that majority of our respondents avail
Private sector banks because of the extraordinary services provided by them. 30
respondents out of 80 avail Public sector services. The number of private sector
respondents is 45, which is quite high and both sector respondents are minimum,
number being 5. Hence it can be inferred that Private sector banks outweigh the
Public sector banks.
 0
5

banking secor
30
public
private
both

45

2) The respondents were asked regarding the account that they are
maintaining in their respective banks.

Here are the results:-

Saving Current FD Salary

Number of 55 4 7 14
respondents

From the above results it can be inferred that majority of our respondents are availing saving
bank account. Almost 70% of our respondents are saving bank account holders. Saving bank
account holders are 55 out of 80 while the next best account that is maintained in our country
is Salary account with 14 out of 80 respondents. Rest Current account has 4 out of 80
respondents and FD account has 7 out of 80 respondents.
 0

14
account
Saving
7
Current
4 FD
55 Salary
 3) The respondents were asked regarding the Bank that they
prefer the most

Bank Preferred Number of Respondents

ICICI Bank 25

HDFC Bank 20

SBI 18

Axis 7

Others 10

From the above pie chart it can be said that a large group of people prefer ICICI Bank, which
is a Private Sector Bank for saving and investing their income. It accounts for 25 respondents
out of a total of 80. While the bank that holds the second position in customers preference is
HDFC Bank which is again a Private Sector Bank, it accounts for around 20 out of 80
respondents. Whereas, SBI Bank which is a Public Sector Bank is preferred by only 18
respondents out of a total of 80 respondents. Other Banks like Axis Bank is liked by 7 out of
80 respondents. Other banks which include both public and private banks ( not mentioned
above ) also account for a share of 8% in totality i.e. 10 out of 80 respondents.

no. of respondents

10

25 ICICI Bank
7
HDFC Bank
SBI
Axis
18
Others
20
4) The respondents were asked regarding the reasons for choosing
a particular Bank.

Reason Number of Respondents

Friendly Behaviour by Staff 5

Trust/ Reliability 38

Quick and Fast Services 22

Location 15

From the above pie chart it can be inferred that the factor that helps the respondents in
choosing a particular bank is Trust and Reliability which comes over a period of time.
Earlier the banking sector largely preferred by the customers were Public Sector Banks.
But theres a shift in customers preference/ choice. Now in this fast moving life we all
want our work to be done in a quick, easiest and with minimum time and efforts. These
all facilities are provided by Private Sector Banks and thats why the theres a shift in
customers choice from Public To Private Sector Banks.

From the factors enlisted above, the widely used one is Trust and Reliability which is
chosen by38 out of a total of 80 respondents. Next best way is Quick and Fast Services
which is the demand of growing youth who wants their work to be done in a quick and
with minimum time. It accounts for around 22 i.e. roughly 30% .
The other factors are location which is selected by 15 out of 80 respondents and last but
not the least factor is Friendly Behaviour by Staff which is 5.
 No. of Respondents
40
35
30
25
20 38
15 No. of Respondents
10 22
15
5
5
0
Friendly Trust / Quick and Location
Behaviour By Reliability Fast Services
Staff

5) The respondents were asked regarding the services that they

are availing from their respective banks.

Services Availing Number of Respondents

ATM / Debit 55

Mobile 7

Insurance 5

Credit Cards 13

From the above analysis it can be inferred that majority of the respondents use ATM
(Automated Teller Machine) services that is being provided by all the banks except
RRBs. ATM users are 55 out of 80 respondent which is nearly 80% on an average.
Mobile Banking is used by 7 people out of a total of 80 respondents. Insurance services
are availed by 5 people. Credit cards the next best widely used services of banks is used
by 15 people. This shows that in this part of country they are more concerned with the
consecutive ways of using the bank and not ready to explore to other services.
 No. of Respondents

13

ATM/ Debit
5
Mobile
7 Insurance
Credit Cards
55
6) The respondents were asked regarding their satisfaction level
towards their bank.

Satisfaction Level Number of Respondents

Private Sector Bank 55

Public Sector Bank 20

Both 5

From the above results it can be inferred that the customers of Private Sector Banks are
more satisfied than the Public Sector Banks. Out of 80, 55 respondents have selected
Private Sector Banks towards their maximum satisfaction level. Public Sector Bank is
selected by 20 out of 80 respondents and nearly 5 respondents have chosen the option
Both i.e. they are satisfied by both Private and Public Sector Banks.

No. of Respondents
60

50

40

30
55
No. of Respondents
20

10 20
5
0
Private Sector Public Sector Both
Banks Banks
7) The respondents were asked regarding the factor for choosing the
Public Sector Banks.

Reason for choosing Public Sector Banks Number of Respondents

Friendly behaviour by staff -

Trust / Reliability 55

Quick services 8

Location 17

From the above analysis it can be inferred that the PSU ( Public Sector Banks ) are
chosen by respondents mainly due to two factors that is Trust / Reliability and Location.

Out of 80 respondents 55 respondents choose Trust and Reliability as the major reason
for choosing Public sector banks. This is because over a period of time PSU are oldest
banks, some from the time of independence. They have gained a lot of trust of the
people and people are more reliable to them as they are trusted and tried from years.
The next major factor of Location accounts for 17 out of 80 respondents.

Surprisingly not a single respondent gave the factor friendly behaviour by staff towards
the customers which put Public sector banks in bad light. Due to financial inclusion
policy of RBI the PSU banks have wide range of coverage and thus are a step ahead of
the private sector banks. Also the amount deposited by the customers is insured by
DICGC ( Deposit Insurance and Credit Guarantee Corporation ) which is why there is
trust factor in Public sector banks.
 No. of Respondents
60

50

40

30
55
20 No. of Respondents

10 17
0 8
0
Friendly Trust / Quick Location
Behaviour by Reliability Services
Staff
8) The respondents were asked regarding the factors for choosing
the Private Sector Banks.

Reasons for choosing Private Sector Number of respondents

Banks
Friendly behaviour by staff 11

Trust / Reliability 14

Quick services 50

Location 5

From the above study we have noticed that the major reason for selecting Private sector
banks over Public sector banks is the Quick Services provided by the Private Banks
which attracts customers to save their income in private sector banks. Since with the
passage of time theres a lot of changes in banking system and Private sector have also
changed his working style towards customer friendly ways. This is because that they
have realised that how valuable are their customers and a companys target can be
achieved effectively only when all its customers are satisfied.

Nearly 11 out of 80 respondents have chosen friendly behaviour by staff, 14 have

chosen Trust and Reliability and only 5 have chosen Location as a factor for choosing
Private Sector Banks over Public Sector Banks.

No. of Frespondents
60

50

40

30
50
20 No. of Frespondents

10
11 14 5
0
Friendly Trust / Quick Location
Behaviour by Reliability Services
Staff
Liabilities and Assets of Banks

As can be seen below the percentage of total assets and liabilities of New Private sector banks
is higher than the Public sector banks. Supported by robust economic growth and industrial
recovery, loans and advances witnessed strong growth, investments, in a rising interest rate
scenario. Deposits showed a lacklustre performance in the wake of increased competition
from other saving instruments. Borrowings and net owned funds (capital and reserves and
surplus), however, increased sharply underscoring the growing importance of non-deposit
resources of SCBs. Bank groups wise, assets of new private sector banks grew at the
highest rate, followed by public sector banks and old private sector banks. As their base is
small, private sector banks show a very acquisition of clients has been their main agenda and
technology has enabled them to scale their operations hugely. Six SBI and its associates, 19
nationalised banks and other public sector bank (2), 10 new private sector banks, 12 old
private sector banks and 31 foreign banks.

Table
Growth of Scheduled Commercial Banks: Bank group wise
Priority Sector Lending

The performance of private sector banks in the area of priority sector lending remained less
satisfactory with 12 out of 30 private sector banks failing to achieve the overall priority sector
targets. Only one private sector bank could achieve the sub-targets within the priority sector.
Advances to weaker sections for the private sector banks of net bank credit was much lower
than the Stipulated target for the sector. Public sector banks are enforced by government to
undertake lending mostly in the priority sector (40%) at subsidized rates to encourage and
support the rural sectors. Private sector banks aims at profitability and marginal returns, so they
concentrate more on the sensitive sector. Agriculture sector gets less importance in priority
sector as compared to other sectors because private sector banks concentrate less on this sector
as compared to PSBs.

Table
Priority sector lending by Public sector and Private sector Banks
Sensitive Sector Lending

Sensitive sector comprises of capital market, real estate market, commodities and venture
capital. Among bank groups, old private sector banks had the highest exposure to the
sensitive (measured as percentage to total loans and advances of banks), followed by new
private sector banks, foreign banks and public sector banks. Private sector banks focuses
more on sensitive sectors as these markets are private sector banks focuses more on sensitive
sectors as these markets are highly volatile involving high returns and higher risk. Since
public sector banks require high expertise and high risk is involved, they refrain from lending
to sensitive sector.

Table
Sensitive sector lending
Credit Deposit Ratio

The credit deposit ratio (C-D Ratio) is the proportion of loan assets created by the bank
from the deposits received. Among the 82 banks profiled, the aggregate C-D Ratio stood at
70.1% in FY06 as compared to 62.7% in FY05. Where in private banks, their C-D ratio
stood at 73.4% in FY06, higher than 70.9% in FY05. Public sector banks too showed a
growth in their C-D Ratio at 68.2% as compared to 59.5% in FY05.

As seen earlier, the high rate of bank credit growth during the last two years has resulted in
this unique behaviour of credit deposit ratio (C-D Ratio).

Table
Credit deposit ratio (C-D Ratio)
(in percentage%)
Capital Adequacy Ratio

Among bank groups, the CRAR of new private sector banks improved significantly,
which brought them closer to other bank groups.
Within the public sector banks, the CRAR of nationalised banks registered a marginal
improvement during the year 2005, but during the year 2006 CAR of nationalised
banks have declined.
A bank CAR is ratio of qualifying capital to risk adjusted assets.
The RBI has set the minimal CAR at 10%, a rate below the minimum indicates that
the bank is not adequately capitalised to expand its operations.
However, banks CAR can be little higher than the minimum.
Overall, Public Sector banks have shown satisfactory performance as compared to
private sector banks as they are more cautious while lending.
Decreasing ratio could affect the business expansion and result in low year of income.
Higher CAR shows that bank can expand its business more and is less vulnerable to
external shocks.

Table
Capital Adequacy Ratio (%)
Return on Assets

In the list of 82 banks profiled, the return on assets for Foreign Banks is highest at
1.5% followed by Private Sector Banks at 0.9% and Public Sector Banks at 0.6%.

The graph depicts that the return on assets bounced by smartly for Foreign Banks after
the slight decline it witnessed in FY05.

The return on assets for the Private Sector Banks have more or less remained the same
with just a slight decline in it.

While the return on assets for a Public sector banks shows a very sharp decline.

Return on Assets
Findings of the study

1. More number of people have bank account in Private Sector Banks.

2. Majority of the respondents whether in Public sector or Private Sector Banks have
Saving Bank accounts in their respective banks.

3. People want a change in the behaviour of the staff towards customers in public sector
banks.

4. The main reason for the existence of Public Sector banks till now is the Trust and
Reliability Factor.

5. The private sector banks need to enhance the number of their branches specially over
the rural areas so as to attract more customers.

6. In addition to this, Private sector banks needs to increase its awareness among the
mass to increase the trust factor in them.

7. The facility that was availed most whether in public sector bank or private sector bank
is ATM/ Debit Cards.
 Chapter 5

Conclusion and Recommendation

Conclusion

In any Banking System, no bank Public or Private can survive unless it continuously
strives to transform its organisation into a Self - Governing, Self Correcting and Self
Adjusting entity. For banks to grapple with these problems and manage the future,
structural and institutional rigidities need to be eased into critical areas:
comprehensive legal support for recovery of bad debts and a fundamental change in
the pattern of governance for the Public Sector Banks.

While Public Sector Banks are in the process of restructuring, private sector banks are
busy consolidating through mergers and acquisitions.
Recommendations

For Public Sector Banks

Bank staff should be customer friendly and highly motivated to serve the
normal customers.

As far as possible the bank should reduce the documentation process while
providing loans.

Computerisation should be done in banks at all levels and the operators should
be properly trained.

Token should be introduced so as to reduce the waiting line in the bank.

Proper ambience in the banks can develop a healthy work culture.

Quick Services should be provided.

 For Private Sector Banks

24 hours banking should be introduced so as to facilitate the customers who

dont have time in day or week days.

More ATM coverage should be provided for convenience of the customers.

Should reduce the amount while opening a new bank account.

Should enhance the number of branches in rural areas to attract more

customers.

Should advertise extensively regarding their operations and services to garner

faith in them.

ss