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PREPLACEMENT TRAINING - 2011

Dr. K. Sriharsha Reddy Professor & Head Department of Business Management, MIPGS Saidabad, Hyderabad.

Evolution and progress of Indian banking

STRUCTURE OF BANKING IN INDIA As at the end of March 2007: 20 nationalized banks, 8 SBI banks, 17 old private sector banks, 8 new private sector banks, 29 foreign banks, 96 regional rural banks.

Back drop of reforms since 1991


In the beginning of 1990, the social banking goals set for the banking industry made most of the public sector banks unprofitable.

Reasons for poor performance of banks (1) high cash reserve ratios and statutory liquidity requirements (2) low yields on government bonds (as compared with those on commercial advances); (3) directed and concessional lending; (4) administered interest rates; and (5) lack of competition.

Summary of banking sector reforms since 1991


First, the CRR declined from 15% in 1991 to 5.0% in 2006. The SLR also declined, from 38.5% in 1991 to 25% in 1997, remaining at this level until today . Decline in the CRR and SLR increased banks flexibility in allocating credit and improved their profitability. Second, interest rates became flexible as to almost all term deposits rates and lending rates on advances in excess of Rs200,000. Interest rate deregulations have encouraged banks to improve their cost efficiency and diversify their business into non-traditional areas.

Third, reform in priority sector lending mainly through the expansion of coverage and interest rate decontrols on advances in excess of Rs200,000 helped banks to mitigate the negative impact arising from such policy loans. Fourth, entry barriers were reduced for private sector and foreign banks. The entry of new banks has increased competition. Public sector banks were allowed to rationalize some branches, while branch licensing was removed.

Fifth, various prudential norms and more appropriate accounting standards were introduced. Better accounting standards have revealed some of the true status of NPA problems of public sector banks. This enabled the Government to impose appropriate policies to deal with NPA problems. Sixth, the Government recapitalized nationalized banks and public sector banks have been partially privatized.

Return on Assets (ROA)


3 2 1 0
2 -1 99 1 4 99 1 6 99 1 8 99 1 0 00 2 2 00 2 4 00 2 6 00 2 8 00 2

-2 -3 -4

SBG NB PB FB ASCB

Net Interest Margin (NIM)


5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0
20 02 20 06 19 92 19 94 19 96 19 98 20 00 20 04 20 08

SBG NB PB FB ASCB

Operating Cost Ratio (OCR)


12 10

SBIG NB 6 PB FB SCB 4

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth of assets in Indian banking


6000000 5241331 5000000 4000000 3000000 2000000 1000000 0 1980 1990 2000 2006 2009 58238 292770 1152604 2875520 Assets in Rs Crs

Asset Structure of Indian Commercial Banking System


60 50 40 31.2 30 20 10 0 1980 1990 2000 2006 4.9 3.8 3.3 5.4 33.2 29.1 24 6.7 5.1 7.1 14.6 5.2 6.9 59.1 55.7 48.1 46

SBI NB OPB NPB FB

Bank group wise deposits of Scheduled Commercial Banks to Total Deposits in percentages
70 60 50 40 30 20 10 0 7.2 6.9 5.5 5.3 4.6 3.9 2.9 2.9 4.4 12.6 4.7 4.5 Domestic private 27.4 29.3 28.1 27.8 28.5 27.6 25.1 18.5 17 Foreign

64.4 63.2 63.6

58.2 53.4 50.7 51.7 SBI & its Associates Nationalized

1980 1985 1990 1995 2000 2005 2006

Bank group wise share of advances of scheduled Commercial banks to Total advances in percentages
70 60 50 40 30 20 10 0 1980 1990 2000 2002 2004 2006 SBI & its Associates Nationalized Foreign Domestic private

NPA s of Scheduled Commercial Banks as percent of Net Advances (Bank Group-wise)


9 8 7 6 5 4 3 2 1 0 1998 2001 2003 2005 2007 2009 PSB FB DPB ASCB

Distribution of Scheduled Commercial Banks by CRAR Year 19951996 Bank Group <4 4-8 8-10 >10 <4 4-8 8-10 >10 SBG 6 2 7 NB 5 3 7 4 1 19 OPB 3 3 7 12 15 NPB 1 8 7 FB 3 12 16 30 SCB 8 9 33 42 1 78

200809

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