Indian Public sector banks

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					                                EXECUTIVE SUMMARY

The word bank is derived from the word “BANCA” which means the table at which the dealer in
Money worked. The Indian financial system comprises of four segments or components out of
which banks come under financial institutional segment. Banks have influenced the economies
on a large scale as can be seen from the history. The primary purpose of the bank was to provide
loans to trading companies but now it has extended its services to individuals as well in the form
of Housing Loans, Car Loans etc.

In the current scenario, the subprime mortgage crisis is an ongoing financial crisis triggered by a
dramatic rise in mortgage delinquencies and foreclosures in the United States, with major
adverse consequences for banks and financial markets around the globe. The crisis, which has its
roots in the closing years of the 20th century, became apparent in 2007 and has exposed
pervasive weaknesses in financial industry regulation and the global financial system. Under
these circumstances the role of banks in reviving the economy is vital. So we choose to analyze
the banking sector (specifically public sector banks).

In 1969 the then prime minister of India, Indira Gandhi expressed her intention to the GOI for
the nationalization of the banks and the effect being GOI issued an ordinance and nationalized
the fourteen largest commercial banks. Six more banks were nationalized in 1980. Since 1991
various governments took steps in order to increase the financial strength of the country and
were able to achieve many milestones in the field of financial markets, Regulators, the banking
system, Non-banking finance companies, the capital market, the capital market, Mutual funds,
Overall approach to reforms, Deregulation of banking system, Capital market developments,
Consolidation imperative etc. each of which are discussed under separate heads in the report.

The main objective of this study was to do an in-depth analysis of the Public Sector Banks in
India through which we can understand the current trends in the sector in view of recession,
major competitors & study the Banks with respect to various financial ratios and to interpret the
results comparatively. It will also include major changes that have occurred in the sector post
1991 policy reforms.

Public Sector Banks are facing great competition 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. A
thorough comparison of public and Private Sector Banks is done on the basis of 11 parameters
few of which include Assets and Liabilities, Share in Aggregate Deposits, Priority Sector
Lending, Gross and Net NPAs, Capital Adequacy Ratio, ATM‟s etc. The findings of this analysis
           The Credit Deposit Ratio of Private sector banks is better compared to PSB‟s
           The Capital Adequacy Ratio of PSB‟s is satisfactory compared to that of Private Banks
           The Net Profit of PSB‟s is better than Private Sector
           PSB‟s need to improve in the services like ATM‟s, Credit and Debit cards. They lack
            behind in providing facilities like loans and other accounts.

This analysis is followed by the aggregate performance difference public & private sector banks,
Current Scenario Valuation of Public Sector Banks, findings of which are:
           1) The profit/branch of the public sector banks has increased by 400% over a period of six
              years whereas the increase for private sector banks is only 200%.
           2) The profit/employee of the public sector banks has increased by 250% over a period of
              five years whereas the increase for private sector banks 20% over a period of five

Ratio Analysis of the 12 banks is done on the basis of 9 ratios for last 5 years. The conclusion
and the analysis of each of the ratio along with the star performer for that particular ratio and
year is also shown in the report with the help of charts in order to substantiate the findings. The
criteria for selection of the 12 banks out of the total 27 banks are on the basis of the capital
structure of the banks. The banks with highest capital structure are chosen as a part of Analysis.

Last analysis includes the quantitative mapping of the various banks on the basis of two
parameters. The parameters and the findings are as follows:

   1) Between Sales and Profit:
       The X axis consists of sales as a measure and Y axis consists of profit of these banks as a
       measure. Almost all the banks has a turnover fall in the range between Rs.2500crs and
       Rs.16000crs with SBI being the only exception on a very higher side with sales of
       58437.42 Crs. The most important analysis comes when we compare the profit of the
       banks. NABARD having the second lowest turnover has the highest profit because it
       concentrates only in providing loans regarding to agriculture. Although Canara bank has
       the second highest sales turnover, it is the third lowest in terms of profit because of the
       high percentage of operating expenses.

   2) Total Assets and NPA Ratio:

       We took the total assets of the banks in X axis with Rs.30000crs as the lower limit and
       Rs.7, 50,000crs as the upper limit. NPA (Non performing assets to total assets ratio) is
       taken in Y axis with 0% as the lower limit and 2% as the upper limit. From the map it
       was observed that most of the points fall in the fourth quadrant, which specifies low NPA
       and a lower value of total assets. There are two banks in the first quadrant which specifies
       higher NPA with a lower value of assets. There is one bank which is an exception to all,
       SBI which has the highest value of total assets and a very high value of NPA.

       SBI, PNB and Canara bank are the biggest public sector banks in terms of market cap in
       India, sales and that is one of the reasons why their assets base is huge. Coming to the
       NPA ratios, NABARD has the lowest NPA since it mostly caters to agricultural based
       loans and since the return/the cash inflow is very high in this case, their NPA is
       noticeably very low and surprisingly SBI has the highest NPA.

SWOT Analysis of the banks showed that that the major strengths of the public Sector Banks
            Network Of Branches
            Goodwill Among The People
            Universal Banking Etc.
           While the major threats to the banks being the:
            Private And Foreign Banks
            Quality Services And Hedging Instruments

This analysis is followed by the Porter‟s Five Forces and PEST Analysis of the Banks which are
discussed in detail in the report. The last part of the Analysis includes the comparison of various
Banks in terms of:
                    Employee Productivity Ratios
                    Employee Cost Ratios

It was observed that the performance of the modern banks (foreign and new private sector banks)
was much superior to the traditional banks (public sector and old private sector banks). However,
the gap between the performance of modern and traditional banks on all the five variables has
shown a decreasing trend, which has significantly reduced during the period of 12 years under study.

The impact of measures taken by traditional banks to meet the challenges from modern banks to
improve operational efficiency has resulted in improved performance of traditional banks on all
the factors

1.1 BANK

The word bank has been derived from a Italian word “banca” which means “bench”, the table at
which dealer in money worked. An organization, usually a corporation, chartered by a state or
federal government, which does most or all of the following: receives demand deposits and time
deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes
loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks;
and issues drafts and cashier's checks.

Banks have influenced economies and politics for centuries. Historically, the primary purpose of
a bank was to provide loans to trading companies. Banks provided funds to allow businesses to
purchase inventory, and collected those funds back with interest when the goods were sold. For
centuries, the banking industry only dealt with businesses, not consumers. Banking services have
expanded to include services directed at individuals, and risk in these much smaller transactions
is pooled.

The main functions of a bank include

      Accepting Deposits from public/others (Deposits).
      Lending money to public (Loans).
      Transferring money from one place to another (Remittances).
      Acting as trustees.
      Keeping valuables in safe custody.
      Government business.


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 institutions segment. Banking in India has its origin as early as the Vedic period. It
is believed that the transition from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances
and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers
played a very important role in lending money and financing foreign trade and commerce.

Banking in India originated in the eighteenth century. The first banks were The General Bank of
India which began operations in the year 178, followed by The Bank of Hindustan. Both these
bank are not under operation now.

The Bank of Calcutta was the next one to start its operation In June 1806 followed by the Bank
of Bombay and Bank of Madras. These three together constituted the Presidency Bank and were
established under the charters from the British East India Company. These banks for many years
acted as the quasi-central banks. The three banks merged in 1925 to form the Imperial Bank of
India, which upon India‟s independence became the State Bank of India.

The Union Bank was establishes in the year 1838, but failed in the year 1848 because of the
economic crisis of 1848-49. The Allahabad Bank, established in 1865 is the oldest Joint Stock
Bank in India.

With the advent of trade many banks opened up during this period but most of them failed
because of the dealing with speculative ventures. Due to this the depositors lost money and
interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive
domain of Europeans for several next decades until the beginning of the twentieth century.

Foreign banks too started to arrive, particularly in Calcutta in the 1860s. The comptoire
d‟Escompte de Paris opened in Calcutta in 1860, and another in Bombay in 1862; branches in
Madras and Pondichery, then a French colony, followed. HSBC established itself in Bengal in
1869. Calcutta was the most active trading port in India, mainly due to the trade of the British
Empire, and so became a banking center.

The first entirely Indian Joint Stock bank was Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was Punjab National Bank, established in Lahore in 1895,
which has survived to the present and is now one of the largest in India.

At the turn of the twentieth century, many small banks, most of which served particular ethnic
and religious communities. The presidency banks dominated banking in India but there were also
some exchange banks and a number of Indian Joint stock banks. All these banks operated in
different segments of the economy. Indian Joint stock banks were generally undercapitalized and
lacked the experience and maturity to compete with the presidency and exchange banks.

The period between 1906 and 1911, saw the establishment of banks inspired by the swadeshi
movement. This movement inspires local businessmen and political figures and due to this a
number of banks were established and the most prominent one which have survived till date are
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank
of India.

The period between the First World War and the Second World War was challenging for the
Indian Banking. These years took a toll on the banks with many banks simply collapsing despite
the Indian economy gaining indirect boost due to war-related economic activities. At least 94
banks in India failed between 1913 and 1918.

India‟s independence marked the end of a regime of laissez-faire for the Indian banking. The
Government of India initiated measures to play an active role in the economic life of the nation,
and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed
economy. Despite these provisions, control and regulations, banks in India except the State Bank
of India, continued to be owned and operated by private persons. This all changed with the
nationalization of major banks in India on 19 July, 1969.


The Indian banking industry had emerged as a large employer and a debate had ensued about the
possibility to nationalize the banking industry. Indira Gandhi, the then Prime Minister of India
expressed the intention of the Government of India in the annual conference of the All India
Congress Meeting. Her move was swift and sudden, and the GOI issued an ordinance and

nationalized the fourteen largest commercial banks with effect from the midnight of July 19,

A second dose of nationalization of six more commercial banks followed in 1980. The reason
stated for the nationalization was to give government more control of credit delivery. With this
the government owned ninety one percent of the banking business of India. In the year 1993, the
government merged New bank of India with the Punjab National Bank. It was the only merger
between the nationalized banks and resulted in the reduction of the number of nationalized banks
from twenty to nineteen.


The last decade witnessed the maturity of India's financial markets. Since 1991, every
governments of India took major steps in reforming the financial sector of the country.
The important achievements in the following fields are discussed under separate heads:

       Financial markets
       Regulators
       The banking system
       Non-banking finance companies
       The capital market
       Mutual funds
       Overall approach to reforms
       Deregulation of banking system
       Capital market developments
       Consolidation imperative

Now let us discuss each segment separately.

Financial Markets
In the last decade, Private Sector Institutions played an important role. They grew rapidly in
commercial banking and asset management business. With the openings in the insurance sector
for these institutions, they started making debt in the market.
Competition among financial intermediaries gradually helped the interest rates to decline.
Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high
price while depositors had incentives to save. It was something between the nominal rate of
interest and the expected rate of inflation.

The Finance Ministry continuously formulated major policies in the field of financial sector of
the country. The Government accepted the important role of regulators. The Reserve Bank of
India (RBI) has become more independent. Securities and Exchange Board of India (SEBI) and
the Insurance Regulatory and Development Authority (IRDA) became important institutions.
Opinions are also there that there should be a super-regulator for the financial services sector
instead of multiplicity of regulators.

The banking system
Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still
dominating the commercial banking system. Shares of the leading PSBs are already listed on the
stock exchanges.
The RBI has given licences to new private sector banks as part of the liberalization process. The
RBI has also been granting licences to industrial houses. Many banks are successfully running in
the retail and consumer segments but are yet to deliver services to industrial finance, retail trade,
small business and agricultural finance.
The PSBs will play an important role in the industry due to its number of branches and foreign
banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient
banking system, the onus is on the Government to encourage the PSBs to be run on professional

Development finance institutions
FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and
equity funds.
Convertibility clause no longer obligatory for assistance to corporate sanctioned by term lending
Capital adequacy norms extended to financial institutions.
DFIs such as IDBI and ICICI have entered other segments of financial services such as
commercial banking, asset management and insurance through separate ventures. The move to
universal banking has started.

Non-banking finance companies
In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net
owned funds, has been raised to Rs.2 crores.
Until recently, the money market in India was narrow and circumscribed by tight regulations
over interest rates and participants. The secondary market was underdeveloped and lacked
liquidity. Several measures have been initiated and include new money market instruments,
strengthening of existing instruments and setting up of the Discount and Finance House of India
The RBI conducts its sales of dated securities and treasury bills through its open market
operations (OMO) window. Primary dealers bid for these securities and also trade in them. The
DFHI is the principal agency for developing a secondary market for money market instruments
and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility
(LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out
through repo auctions.
On account of the substantial issue of government debt, the gilt- edged market occupies an
important position in the financial set- up. The Securities Trading Corporation of India (STCI),
which started operations in June 1994, has a mandate to develop the secondary market in
government securities.
Long-term debt market: The development of a long-term debt market is crucial to the financing
of infrastructure. After bringing some order to the equity market, the SEBI has now decided to

concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of
dematerialization    of    debt   instruments   in   order   to   encourage   paperless   trading.

The capital market
The number of shareholders in India is estimated at 25 million. However, only an estimated two
lakh persons actively trade in stocks. There has been a dramatic improvement in the country's
stock market trading infrastructure during the last few years. Expectations are that India will be
an attractive emerging market with tremendous potential. Unfortunately, during recent times the
stock markets have been constrained by some unsavoury developments, which has led to retail
investors deserting the stock markets.

Mutual funds
The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996
and amendments thereto.
The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly
Rs.70, 000 crores, but its share is going down. The biggest shock to the mutual fund industry
during recent times was the insecurity generated in the minds of investors regarding the US 64
schemes. With the growth in the securities markets and tax advantages granted for investment in
mutual fund units, mutual funds started becoming popular.
The foreign owned AMCs are the ones which are now setting the pace for the industry. They are
introducing new products, setting new standards of customer service, improving disclosure
standards and experimenting with new types of distribution.
The insurance industry is the latest to be thrown open to competition from the private sector
including foreign players. Foreign companies can only enter joint ventures with Indian
companies, with participation restricted to 26 per cent of equity. It is too early to conclude
whether the erstwhile public sector monopolies will successfully be able to face up to the
competition posed by the new players, but it can be expected that the customer will gain from
improved service.
The new players will need to bring in innovative products as well as fresh ideas on marketing
and distribution, in order to improve the low per capita insurance coverage. Good regulation will,
of course, be essential.

Overall approach to reforms
The last ten years have seen major improvements in the working of various financial market
participants. The government and the regulatory authorities have followed a step-by-step
approach, not a big bang one. The entry of foreign players has assisted in the introduction of
international practices and systems. Technology developments have improved customer service.
Some gaps however remain (for example: lack of an inter-bank interest rate benchmark, an
active corporate debt market and a developed derivatives market). On the whole, the cumulative
effect of the developments since 1991 has been quite encouraging. An indication of the strength
of the reformed Indian financial system can be seen from the way India was not affected by the
Southeast Asian crisis.
However, financial liberalisation alone will not ensure stable economic growth. Some tough
decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The
fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the
case of financial institutions, the political and legal structures have to ensure that borrowers
repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt
companies continues. Further, frauds cannot be totally prevented, even with the best of
regulation. However, punishment has to follow crime, which is often not the case in India.

Deregulation of banking system
Prudential norms were introduced for income recognition, asset classification, provisioning for
delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy
norms,    substantial     capital   were     provided     by    the    Government       to   PSBs.
Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash
reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost
entirely were deregulated.
New private sector banks allowed promoting and encouraging competition. PSBs were
encouraged to approach the public for raising resources. Recovery of debts due to banks and the
Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate
quicker recovery of loan arrears.
Bank lending norms liberalised and a loan system to ensure better control over credit introduced.
Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk

management systems in banks encompassing credit,               market and operational risks.
A credit information bureau being established to identify bad risks. Derivative products such as
forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.

Capital market developments
The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues was
abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was
established in 1992.
Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after
registration with the SEBI. Indian companies were permitted to access international capital
markets through euro issues.
The National Stock Exchange (NSE), with nationwide stock trading and electronic display,
clearing and settlement facilities was established. Several local stock exchanges changed over
from floor based trading to screen based trading.

Private mutual funds permitted
The Depositories Act had given a legal framework for the establishment of depositories to record
ownership deals in book entry form. Dematerialisation of stocks encouraged paperless trading.
Companies were required to disclose all material facts and specific risk factors associated with
their projects while making public issues.
To reduce the cost of issue, underwriting by the issuer were made optional, subject to conditions.
The practice of making preferential allotment of shares at prices unrelated to the prevailing
market prices stopped and fresh guidelines were issued by SEBI.
SEBI reconstituted governing boards of the stock exchanges, introduced capital adequacy norms
for brokers, and made rules for making client or broker relationship more transparent which
included separation of client and broker accounts.

Buy back of shares allowed
The SEBI started insisting on greater corporate disclosures. Steps were taken to improve
corporate governance based on the report of a committee.

SEBI issued detailed employee stock option scheme and employee stock purchase scheme for
listed companies.
Standard denomination for equity shares of Rs. 10 and Rs. 100 were abolished. Companies given
the freedom to issue dematerialised shares in any denomination.
Derivatives trading starts with index options and futures. A system of rolling settlements
introduced. SEBI empowered to register and regulate venture capital funds.
The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating new credit rating
agencies as well as introducing a code of conduct for all credit rating agencies operating in India.

Consolidation imperative
Another aspect of the financial sector reforms in India is the consolidation of existing institutions
which is especially applicable to the commercial banks. In India the banks are in huge quantity.
First, there is no need for 27 PSBs with branches all over India. A number of them can be
merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the
situation is different now. No one expected so many employees to take voluntary retirement from
PSBs, which at one time were much sought after jobs. Private sector banks will be self
consolidated while co-operative and rural banks will be encouraged for consolidation, and
anyway play only a niche role.
In the case of insurance, the Life Insurance Corporation of India is a behemoth, while the four
public sector general insurance companies will probably move towards consolidation with a bit
of nudging. The UTI is yet again a big institution, even though facing difficult times, and most
other public sector players are already exiting the mutual fund business. There are a number of
small mutual fund players in the private sector, but the business being comparatively new for the
private players, it will take some time.
We finally come to convergence in the financial sector, the new buzzword internationally. Hi-
tech and the need to meet increasing consumer needs is encouraging convergence, even though it
has not always been a success till date. In India organizations such as IDBI, ICICI, HDFC and
SBI are already trying to offer various services to the customer under one umbrella. This
phenomenon is expected to grow rapidly in the coming years. Where mergers may not be
possible, alliances between organizations may be effective. Various forms of bancassurance are
being introduced, with the RBI having already come out with detailed guidelines for entry of

banks into insurance. The LIC has bought into Corporation Bank in order to spread its insurance
distribution network. Both banks and insurance companies have started entering the asset
management business, as there is a great deal of synergy among these businesses. The pensions
market is expected to open up fresh opportunities for insurance companies and mutual funds.
It is not possible to play the role of the Oracle of Delphi when a vast nation like India is
involved. However, a few trends are evident, and the coming decade should be as interesting as
the last one.


Today the commercial banking system in India may be distinguished into:

Public Sector Banks

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

    b. 20 nationalized banks

    c. Regional Rural Banks mainly sponsored by Public Sector Banks

Private Sector Banks

    a. Old generation private banks

    b. New generation private banks

    c. Foreign banks in India

    d. Scheduled Co-operative Banks

    e. Non-scheduled Banks

Co-Operative Sector

The co-operative banking sector has been developed in the country to the suppliment the village
money lender. The co-operative banking sector in India is divided into 4 components:

    1. State Co-operative Banks

    2. Central Co-operative Banks

    3. Primary Agriculture Credit Societies

    4. Land Development Banks

    5. Urban Co-operative Banks

    6. Primary Agricultural Development Banks

    7. Primary Land Development Banks

    8. State Land Development Banks

Development Banks

   1. Industrial Finance Corporation of India (IFCI)

   2. Industrial Development Bank of India (IDBI)

   3. Industrial Credit and Investment Corporation of India (ICICI)

   4. Industrial Investment Bank of India (IIBI)

   5. Small Industries Development Bank of India (SIDBI)

   6. SCICI Ltd.

   7. National Bank for Agriculture and Rural Development (NABARD)

   8. Export Import Bank of India

   9. National Housing Bank

Rao and Tiwari (2008) in their article attempts to study the significant changes that has taken
place in the banking sector post liberalization especially in terms of capital adequacy,
profitability and the asset quality. A study of five public sector banks was conducted to find out
the factors which affect the efficiency of these banks. The study included independent variables
like Deposits, Advances and Assets and dependent variables included efficiency factors related
to employees, per branch, operations, liquidity and ultimate profits. The results reveal that only
efficiency factors related to per branch and operation were the only ones which had a positive
correlation on the deposits, assets and the advances of the bank, while the other three i.e.
efficiency factors related to employees, liquidity and ultimate profits had no significant
correlation on the variables.

Source: Rao. N and S. Tiwari (2008) “A Study Of Factors Affecting Efficiency Of Public Sector
Banks”, Journal of Services Research, 8(2):73-89, October.

Kumar and Gulati (2008) in their article talk about the changes in the operation in the banking
sector post the reforms of 1991 under the chairmanship of Narashimham Committee,
Narasimham Committee II (1998), and Verma Committee (1999). The principle objective of the
reforms process was to improve the efficiency of PSBs in their operations. Talking about the
market share of PSBs, it has 75.4% in the total asset whereas the private and foreign banks
together constitute for the 24.6% (as on 2005/05).
PSBs are facing severe competition from the private and foreign players as share of PSBs in
terms of investment, advances, deposits and total assets have declined. PSBs still command a
lion‟s share in the banking sector, as they have strong presence in the rural and semi – rural
The article attempts to study the efficiency of the PSBs. The finding of the analysis reveals that
Andhra Bank had been observed to be the most efficient bank followed closely by Corporation
Bank whereas UCO and Bank of India were ranked the lowest.

Source: Kumar.S and R.Gulati (2008), “Evaluation Of Technical Efficiency And Ranking Of
Public Sector Banks In India”, International Journal of Productivity and Performance
Management, 57(7): 540-568.

A.K.Khandelwal, the Managing Director of Bank of Baroda in his article talks about the
successful implementation of HRD (Human Resource Development) which resulted in drastic
transformation in the bank‟s operations. It enabled the bank to become highly customer centric
which was the need of the hour along with the technologically competitive. The author used his
HRD knowledge and was poised to overcome the legacy culture, high degree of unionization,
poor compensation associated with the PSBs.

Source: Khandelwal.A.K (2007), “Transformation of Indian Public Sector Banks”, Human
Resource Development International, 10(2):203-213, June 2007

Sarma and Nikaido in their article focus on one particular prudential norm, the capital adequacy
requirement. It is measured by Capital to Risk-Weighted Asset Ratio (CRAR). RBI has said that
the Indian banks would comply with the BASEL II norms from March 2008. Under this the
credit rating agencies would play a significant role in determining regulatory risk capital. The
requirement of extensive data and software for implementation of Basel II will pose a major
challenge in India‟s migration towards Basel II regime. In the long run, adherence to Basel II by
Indian banks will result in improved accounting, risk management and supervisory principles
that are in line with internationally accepted best practices. Moreover, India‟s growing IT
industry is likely to benefit from the increased business opportunities in the long run.

Source: M .Sarma & Y. Nikaido (2007) “Capital Adequacy Regime In India: An Overview”,
Journal of Indian Council For Research On International Economic Relations, 196:1-28

Sanjeev in the article attempts to find out the relationship between the efficiency and size of the
bank. The study revealed that there was generally a decline in the efficiency levels of the PSBs.
Corporation Bank and the State Bank of Bikaner & Jaipur have emerged as the most efficient
banks throughout the study period. No conclusive relationship can be established between size
and efficiency. Thus, it cannot be said with certainty that increase in size as a result of
consolidation will surely help the Indian banks in achieving higher efficiency.

Source: G.M.Sanjeev (2006), “Does Banks Size Matter In India?”, Journal of Services
Research, 6(2): 135- 144

Ghosh in his article talks about PSBs coming out with their IPO (Initial Public Offering) which
diluted government ownership and enabled them to access capital market to raise additional
funds required. The study aimed at evaluating the stock return performance of the Indian banks
that made IPOs during the last decade (1990s) It was revealed that performance of the banks did
not differ in the basis of ownership ( be it private or public). It further stated that the post listing
years of banks showed signs of improvement on parameters which included return on assets,
operating income. It had been observed that asymmetric information between issuers and
investors about the reliability, authenticity and future growth potential of the new firms, had led
to underperformance of the IPOs.

Source: Ghosh.S (2005), “The Post - Offering Performance Of IPOs In The Indian Banking
Industry”, Applied Economics Letters, 12:89-94.

P.Ganesan in the article talks about the impact of the priority sector lending on the profitability
of the PSBs. In the year 1980, at the meeting of the Union Finance Minister with Chief
Executives of PSBs, the target for priority sector credit was raised to 40% of the total bank
credit. But, the banks didn‟t lend at the desired target level, reason being their concern over
piling NPA (Non Performing Assets), deterioration in profits, higher servicing cost of large
number of small accounts. It was at the recommendations of Financial Sector Reforms
Committee that suggested the reduction in the priority sector credit to 10%. The article further
says that for the PSBs to be sustainable in the long run there is a need to review the concept sub
– sectors of priority sector, productivity of bank employees and also formulation of strong and
immediate policy guiding the recovery of loans without any political intervention.

Source: P. Ganesan (2003) “Impact Of Priority Sector Advances On Profitability Of Public
Sector Banks In India”, Journal of Financial Management and Analysis, 16(2):14-2

Shirai in her article talks about the reforms that take place in the financial sector due to the
“current account” deficit in the year 1991. The Indian government had adopted the gradual
approach towards restructuring the banks. It was done to effectively to manage the competition.
Subsequently the amendment of the Banking Act allowed banks to raise the private equity up to

49% of the paid up capital. In the overall performance of the banking sector which was done on
the trend patterns of 1993-2000, it revealed that in general foreign banks performed better than
domestic banks ( PSBs and private domestic banks) in terms of cost, earnings efficiency and
soundness. The banking sector as a whole improved drastically after the reforms, one of the
reasons being banks involvement in non- traditional activities.

Source: Sayuri Shirai (2001) “Assessment of the Indian Banking Sector Reforms”, 109-132,
presented at a workshop in Bangkok

Abhiman Das in his paper talks about the productivity of the financial system in the country
wherein he mentions that promoting healthy financial institutions especially banks remains a
crucial policy challenge for all the central banks throughout the world.

In the paper, the author seeks to examine the interrelationships among risk, capital and
productivity change of the public sector banks in India wherein the author has taken five banks
for his analysis.

The analysis reveals that capital adequacy has a negative impact on the asset quality of the PSBs,
NPA play a major role in influencing capital of the banks, capital and NPA are crucial factors in
influencing productivity and regulations play an important role in influencing capital adequacy
and asset quality of the PSBs.

Source: Abhiman Das (2002) “Risk and Productivity Change Of Public Sector Banks”,
Economic and Political Weekly, February 2

Y.V.Reddy in his paper reviews the monetary and the financial sector reforms in India and also
discusses the future reforms required for the country.

He starts off with a brief background on the need for reforms taken in the year 1992 wherein he
discusses the environment of the financial sector pre-liberalization. The second part of the paper
tells us about the institutional aspects of the reforms mainly about the ownership of the
institutions, the competition and the regulation and supervision of the financial sector. Then he
talks about the policy framework i.e. the change in the monetary policy framework, the credit

delivery, the fiscal policy and its effect on the financial sector. Fourthly he speaks about
managing the process of reforms in the financial sector and the relationship between the RBI and
the Government.

Finally he talks about some elements which present themselves as critical for future reforms in
the financial sector especially the banking industry.

Source: Y.V.Reddy “Monetary and Financial Sector Reforms in India: A Practitioner's Perspective”, The
Indian Economy Conference, Program on Comparative Economic Development (PCED) at Cornell


MSMEs are an important part of the Indian economy. MSMEs contribute around 45% to the country‟s
manufactured production and 40% to exports. They employ 42 million people. The slowdown in demand
had an impact on MSMEs too. In view to meet the problem government has asked the banks to provide
adequate loans to them. Even the measures taken by RBI like releasing Rs 3,88,000 crores worth of
liquidity, cutting key interest rates to increase the flow of money, it didn‟t suffice as the banks still prefer
to park money in government securities and RBI through reverse repo.

According to data released from RBI bank credit provided to SMEs grew 7.4% year on year as compared
to 35% last year. Therefore providing loan to the MSMEs is the need of the hour.

This article talks about the slew of tax related proposals suggested by the Indian Bankers
Association (IBA). The public sector banks have urged the Government to exempt tax deduction
at source (TDS) on their income as stating TDS requirements causes considerable inconvenience
in view of the huge number of TDS certificated from their customers. This also leads to loss of
tax-benefits on the non-receipt of the TDS certificates.

IBA wants the present provision on bad and doubtful debts be replaced by an allowance based on
actual provisioning made as per the RBI guidelines. IBA has pointed out that there is a

considerable divergence between provision made under RBI guidelines and that admissible
under the income tax law.



This article speaks about the market share of the public sector banks vis-à-vis the private sector
banks and the foreign banks for the quarter ended 30 th September, 2008. According to the data
released by the RBI the public sector banks increased their share in deposits from 47.9% in
September 2007 to 48.6% during the quarter ended 30 th September, 2008 while that of private
and foreign banks dipped from 20.3% and 6.1% respectively to 19.4% and 5.8% respectively.

The share of credits forwarded of the nationalised banks went up from 47% in September 2007
to 47.9% in September 2008. While the share of private banks dipped from 20.6% to 19.3% that
of foreign banks rose marginally from 6.8% to 7.2%.It also talks about the Credit-Deposit ratio
of the commercial banks which amounted to 74.9% as on September 30, 2008. The CDR of the
foreign banks was the highest at 92.4% then was followed by the SBI group which was at 75.5%,
private banks 74.6% and the nationalised banks at 73.8%.



    The main objective of this study is to do an in-depth analysis of the Public Sector Banks in India
    through which we can understand the current trends in the sector in view of recession, major
    competitors and foreign banks coming to India with attractive plans and offerings. The study will
    also include major changes that have occurred in the sector post 1991 policy reforms. With more
    global players seeing India as the most important market for their growth in financial & banking
    sector, the purpose of this study is

   To understand the Public Sector Banks thoroughly through various analyses and the take-away‟s
    that they have for Institutions as well as for individuals.
   To have a comparative study and analysis among various Public Sector Banks.
   To find the recent developments and challenges faced by the sector in view of recession and
    financial meltdown.
   To study the Banks with respect to various financial ratios and to interpret the results
    comparatively in order to determine the USP of each Public Sector Bank.
   To project the future trends in the Public Sector Banks because of the various actions taken by
    the RBI in order to ease the liquidity in the financial markets in order to boost demand.
   Also the study will include the concept of perceptual mapping wherein each bank will be viewed
    from various aspects and a perceptual map will show the perceptions of the individuals or the
    end users for each of the banks along with the recommendations in order to increase the service
    effectiveness and gain more customers.


   Data on the Public Sector Banks would basically be secondary data collected from databases
like Capitaline, respective Bank websites, government websites, research articles and various
annual reports and analysis of the Banking sector. Also the primary source of data collection will
be one-on-one interview with the Bank officials in order to gather the basic data on strategies,
operation and various steps taken to protect the Bank from the liquidity crunch. We are also
planning to have a sample Market Research Survey in order to understand the perceptions of the
particular Bank in the minds of the consumer.

The analyses of the data will be carried on using several tools and techniques that will have a
greater impact in revealing in-depth information about the study .Some of them will be -:

QUALITATIVE ANALYSIS: Measures like market share, customer preference customer
relationships are analyzed in comparison with the sector average. Also we will try to find out the
point of Parity and Point of differences among various banks. The other analyses that will be
done are:

SWOT ANALYSIS: We will carry out a SWOT analysis to analyze the strengths and
weaknesses of Public sector Banks and also to analyze the opportunities and threats for the same.

PEST ANALYSIS: The various Political, Economic, Social and Technological factors that are
affecting Public sector Banks will be considered here.

QUANTITATIVE MAPPING: Perceptual Mapping is useful to know the perception of the
people or the end consumer about the Particular Bank.

PORTER FIVE FORCES MODELS: We will also carry out this analysis to study and analyze
the impact that forces may have on the sector both within and outside India.

Comparative Analysis: - Through this we will study the comparative data of banks both Private
as well as Public Sector Banks and also we will compare the performance of Public Sector
against Private Sector.

QUANTITATIVE ANALYSIS: All parameters of the sector that can be quantifiable will be
analyzed here. The various analyses that can be done are as follows:

       Ratio Analysis will be one of the most important analyses that will be carried out in order
       to know the financial performance of the sector as a whole and also to evaluate and
       compare the performance of various banks with respect to each other. Key financial ratios
       will be:
      a. Credit-Deposit ratio
      b. Investment to Deposit
      c. Cash to Deposit
      d. Interest expended to Interest earned
      e. Other income to total income
      f. Operating expenses to Total income
      g. Net interest income to Total funds
      h. Net profits to Total funds
      i. Return on Net Worth

3.3 Banks Considered for analysis
   1) Allahabad Bank
   2) Bank of Baroda
   3) Bank of india
   4) Canara bank
   5) IDBI

   6) Indian Bank
   7) Indian Overseas Bank
   8) NABARD
   9) Punjab and Sind Bank
   10) Punjab National Bank
   11) State Bank of India
   12) United Bank of India

The banks were chosen on the basis of the total Capital of the bank. A total of twelve banks were
chosen according to the selected parameter. The basic reason for opting Capital base of the banks
was to give an exact picture about the size of the banks in terms of their capital size. This let us
to cover not only the big banks like SBI, PNB, Canara Bank but also some smaller known banks
like Indian Overseas Bank, United Bank of India.
Apart from choosing the commercial banks, we also chose two banks IDBI and NABARD which
were formed by the Government for some special purpose. IDBI focuses mainly on giving
industrial credit to small, medium and big enterprises. While NABARD‟s main focus is to
support the farmers. They give loans to credit societies, Commercial banks who in turn advance
credit to the needy farmers.
This let us compare the whole Public Sector Banking industry as a whole wherein all the aspects
of banking have been covered.

      4.1 public sector banks
      The banking sector in India is dominated by nationalized banks. These are Public Sector Banks.
      Banks can be categorized as Scheduled and Non – scheduled. Scheduled banks are further
      classifies as Commercial banks and Co-operatives. PSBs are sub part of Commercial Banks.
      CHART # 4.1.1                  STRUTURE OF INDIAN BANKING SYSTEM

                                         RESERVE BANK OF INDIA

                                 (Central Bank and Monetary Authority)

                                                Scheduled Banks

          Commercial Banks                                            Co-Operatives

                                                                             Urban Co-operatives (52)

                                                                             State Co-Operatives (16)

Public Sector            RRB’s (196)                      Foreign Banks               Private Sector
Banks (27)                                                (27)                        Banks

State Bank &             Other Nationalized
Associate Banks (8)      Banks (19)                              Old (22)                       (18)
                                                                                            New 28
TABLE # 4.1.1                   NET WORTH OF BANKS

BANKS                               NET WORTH                      % OF TOTAL NET
ALLAHABAD                           20.86                          4.08
BANK OF BARODA                      27.68                          5.41
BANK of INDIA                       53.61                          10.49
CANARA                              2.27                           0.44
IDBI                                9.02                           1.76
INDIAN BANK                         41.1                           8.04
INDIAN OVERSEAS BANK                21.98                          4.30
NABARD                              18.31                          3.58
PUN. & SIND BANK                    31.68                          6.2
PUNJAB NATIONAL BANK                6.32                           1.23
SBI                                 56.66                          11.08
UNITED BANKS                        13.89                          2.71
OTHERS                              207.56                         40.62
SOURCE: Capitaline

The table represents the net worth of the banks taken under study and also the percentage in
terms to total net worth, which is summation of all the Public Sector Banks. Net worth for a bank
is total assets minus total liabilities. Net worth is an important determinant of the value of an
organization, considering it is composed primarily of all the money that has been invested since
its inception, as well as the retained earnings for the duration of its operation. Net worth can be
used to determine creditworthiness because it gives a snapshot of the company's investment
history also called owner's equity, shareholders' equity, or net assets.


                                4.083                                  Allahabad
                                                                       Bank of Baroda
                                                                       Bank of India
                                                                       Canara Bank
                                                            0.444      IDBI
                                                               1.765   Indian Bank
                                                                       Indian Overseas Bank

                                                  4.302                Pun. & Sind Bank

                                          6.200      3.584             SBI
                           11.089                                      United Bank
                                         1.237                         others

SOURCE: Capitaline

It is the pictorial representation of the net worth. It can be seen from the chart that SBI is leading
with a share of 11.08% followed closely by Bank of India.


Public sector banks in the country are losing around one per cent market share per annum on an
average for over 15 years to the private sector.

The banking sector in the country has been witnessing a fierce growth in competition since the
last decade and the worst hit have been public sector banks (PSBs), which have constantly failed
to keep up the pace with their private counterparts and to some extent foreign banks as well.

The market share of PSBs in terms of total assets was 75.6 per cent in 2003, which reduced to
70.5 per cent in 2007. However, private banks, which had a share of 17.5 per cent in terms of
total assets, stood at 21.5 per cent in 2007.

CHART # 4.1.3

                     MARKET SHARE IN TERMS OF ASSETS
                           FOR THE YEAR 2007

                                                                     Public Sector Banks
                                                                     Private Banks

                                            70.5                     Other Banks

           SOURCE: above data

It is seen that PSBs are the dominating player in the banking sector even though the competition
has become so intense.

TABLE # 4.1.2                             BANKING SHARE

             PUBLIC SECTOR BANKS                PRIVATE BANKS           FOREIGN BANKS
             FY 99   FY 04  FY 08           FY 99   FY 04  FY 08        FY 99  FY 04  FY 08
Deposits   87.16   79.92    74.32    7.95    14.96           19.85      4.89         5.12    5.83
Advances 85        75.26    72.93    8.37    17.71           20.46      6.63         7.03    6.61
Assets     85.72   76.4     70.17    7.73    16.71           21.29      6.55         6.89    8.53
Net profit 76.55   72.13    62.44    9.44    17.86           22.03      14.01        10.02   15.53
SOURCE: Public Sector Banks, A brand new mould

        Sapna Agarwal/ Mumbai February 24, 2009, Business Standard

The table tells about the total deposits of the banks. For the PSBs the quantum of deposits has
reduced by 14.73% in the year 2008 as against 1999 due to competition by the private ba nks.
The advances of the PSBs has reduced by 14.2% whereas the Private Banks advances increased
by 144%. Similarly the assets and net profit for PSB has reduced to certain extend while that of
Private Banks has increased marginally.

Allahabad Bank is the oldest public sector bank in India. It was set up in 1865 by a group of
Europeans with a seed capital of Rs 2 lakhs. By the end of 19th century, the bank had branches at
Jhansi, Kanpur, Lucknow, Bareilly, Nainital, Kolkata and Delhi. In 1920, Allahabad bank was
taken over by P&O Banking Corporation and its Head Office was shifted to Kolkata in 1923 for
business considerations and operational convenience. In 1927, the bank went into the fold of
Chartered Bank that acquired the controlling interest in the P&O Banking Corporation.

On July 19, 1969, Allahabad Bank was nationalized along with 13 other major commercial
banks. At the time of nationalisation, the Bank had a network of 151 branches, deposits of
Rs.114 crores and advances of Rs.82 crores to its credit..

The Bank made a foray into merchant banking activity in 1984 and subsequently transferred the
merchant banking activities to All Bank Finance Limited, a wholly owned subsidiary, in 1991. In
October 1989, United Industrial Bank Limited was amalgamated into Allahabad Bank.

In 1989, Allahabad Bank ventured into the credit card business by launching its credit card - the
BOBCARD-Allahabad Bank, with Bank of Baroda. The Bank, in 1992-93, entered into a
Memorandum of Understanding with Bank of India to launch Indiacard, replacing BOBCARD.

Allahabad Bank became the first nationalised bank in Eastern India to become a depository
participant of National Securities Depository Limited (NSDL) to offer demat and related services
and initiated "Flexi-fix Deposit Scheme" to mobilise resources. The Bank also introduced "Kisan
Card" to facilitate agriculture related activities as well as to meet the domestic requirements of

Allahabad Bank has opened its 2154th branch in at Pudukkottai, Tamil Nadu during March of
the year 2008. The Bank has 211 ATM's and Card members can now have access at over 16500
ATM's all across the country under National Financial Switch. One of the premier nationalised
banks of the country, Allahabad Bank has commenced the process of implementing the
Agricultural Debt Waiver and Debt Relief Scheme-2008 in June of the year 2008.

CHART # 4.2.1               NPA & CRAR IN % OF ALLAHABAD BANK

  P 14                                                         12.04
  E 12                                            12.52
            12.52          12.53
  R 10
  C 8                                                                     CRAR
  E                                                                       NPA
  T 4         2.37
  A 2                                 0.84         1.07
  G 0                     1.28                                     0.80
  E       2003-2004    2004-2005   2005-2006    2006-2007            YEAR

SOURCE: Capitaline

The above line graph shows the NPA to total assets of the bank and also the CRAR for a period
of five years. As evident from the graph the NPA‟s have gone down marginally from 12.52% to
12.04%. This shows that the asset quality of the bank have improved over time and so is the
recovery of loans by the bank.


A public sector bank going towards 100 year services in banking sector, which was
incorporated in the year of 1908 by Sir Maharaja Sayajirao Gaekwad - III of Baroda. Bank of
Baroda (BoB) was nationalised in 1969 and the first branch of the Bank was opened in the city
of Ahmadabad in 1910 , the fifth largest bank in India have 2772 branches across the country
and overseas also, out of that 616 branches and offices including 47 specialized branches were
brought under ISO certification.

In mid-eighties, the Bank of Baroda diversified into areas of merchant banking, housing
finance, credit cards and mutual funds. It provides lending, banking, financing rehabilitation,
treasury and investment management services to consumers and to industries. In 1995 the Bank
raised Rs 300 crores through a Bond issue. In 1996 the Bank tapped the capital market with an
IPO of Rs 850 crores.

The Benares State Bank was integrated with the Bank at June, 2002. The Bank has
amalgamated South Gujarat Local Area Bank Ltd with itself with effect from 24th June 2004.
In the year 2004-05 the bank has expanded its interconnected ATM network to cross 501,
spread over 180 centres in the country. BoB has launched its new logo 'The Baroda Sun' in June
2005 subsequently the bank has commissioned global data center during the year 2006 and also
given inter-connectivity for over 1300 branches in the country.

In the year 2007 Bank of Baroda and Dun & Bradstreet (D&B) signed an agreement regarding
assigning ratings to the bank's small-scale industry (SSI) customers. The bank's SSI customers
will get D&B's globally accepted rating at a special fee, it help them tap global business
opportunities. As on 6th October 2007 Pioneer Global Asset Management SpA, Italy tied up
with BoB to launch joint venture for asset management business (Baroda Pioneer Asset
Management Company). The joint venture would first offer products of Indian origin and later
bring international investment opportunities to the Indian market.

CHART # 4.3.1          NPA & CRAR IN % OF BANK OF BARODA

  P          13.91               13.65
  E                                                      12.91
  R                  12.61
  C   10                                      11.80
  E    8                                                         CRAR
  N                                                              NPA
  A    4      2.99
                        1.45      0.87
  G    2                                   0.60
  E    0                                                 0.47
           2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

SOURCE: Capitaline

The graph shows that the NPA of the bank has been fluctuating from year ending 2004 to year
ending 2008. The NPA reached the lowest of 11.80% in the year 2006-07, but swung back up to
12.91% the very next year. While the CRAR has been coming down on a continuous basis and
touched 0.47% in the year 2008


The Bank of India (BOI), a traditional bank have 101 year of experience in banking sector. It
was started in the year 1906 under private ownership and continued till 1969 by the group of
eminent businessmen in Bombay, later it was nationalised along with 13 other major Banks. The
Bank came out with its maiden public issue in 1997. BOI plays a vital role in several areas, such
as Merchant banking, Housing Finance, Leasing, Venture capital, Credit card, Mutual Fund,
Stock Broking etc. BOI embarked on a major expansion plan of increasing its branch network in
rural and semi urban areas after its nationalisation. During the year 2002 the bank returned Rs
150.42 crore of equity capital to Government, with this the government stake in the bank reduced
to 69.3% from 76.5% earlier.

BOI has tied-up with ICICI Prudential Life Insurance for providing reference to customers for
sale of their life insurance products against a referral fee. BOI have also a strategic tie up with
Securities Trading Corporation of India (STCI), in facilitating secondary market sale of
Government Securities. As on May 2007, BOI tied up with National Bulk Handling Corporation
(NBHC) for lending to farmers against warehouse receipts at 10.25 per cent, 50 basis points
(bps) lower than the normal agri lending rate of 10.75 per cent.

Bank of India has several firsts to its credit. The Bank has been the first among the nationalised
banks to establish a fully computerised branch and ATM facility at the Mahalaxmi Branch at
Mumbai way back in 1989. It pioneered the introduction of the Health Code System in 1982, for
evaluating/ rating its credit portfolio. 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 offices) at key banking and financial centres viz. London, New York, Paris,
Tokyo, Hong-Kong, and Singapore.

Government of India rated the second Best Bank for 'Excellence in Lending to Tiny Sector' in
2005-06. Bank also received the Skock Challenger Award - 2007 for social impact. As on
August 2007, BOI announced plans to provide free insurance cover on deposits which have a
minimum base of Rs 1 lakh and cheaper insurance cover on education loans to attract low-cost
deposits and more customers and also bank has restructured its business model by segmenting its

2,734 branches in four categories - resources center, profit center, priority sector and general
banking center. The resource center will have 522 branches under its fold which are mainly
located in residential areas and will focus on mobilising low-cost deposits.

CHART # 4.4.1               NPA & CRAR IN % OF BANK OF INDIA

 P                13.01                                 11.75
     12                                                                   12.04
 R   10                                      10.75
 C    8
 E                                                                                 CRAR
 N    6
                 4.50                                                              NPA
 T    4
 A                                         1.49
      2                                                  0.95
 E    0                                                                   0.52
            2003-2004     2004-2005    2005-2006     2006-2007     2007-2008     YEAR

Source: Capitaline

The NPA for the bank has come down from 13.01% in the year 2004 to 12.04% in the year 2008.
This indicates the good quality of lending done by the bank. The CRAR has also come down
from a high 4.50% in the year 2004 to 0.52% in the year 2008.


Canara Bank (Canbank) founded as 'Canara Bank Hindu Permanent Fund' in July of the year
1906 at a small port in Mangalore, Karnataka, by late Sri. Ammembal Subba Rao Pai, a
philanthropist, this small seed blossomed into a limited company as 'Canara Bank Ltd.' in 1910
and became Canara Bank in 1969 after nationalisation.

The Bank has undergone various phases in its growth path over hundred years of its existence.
The growth of Canara Bank was phenomenal, especially after nationalization in the year 1969,
attaining the status of a national level player in terms of geographical reach and clientele
segments. Eighties was characterized by business diversification for the Bank. The Bank has
expanded its domestic presence, with 2678 branches spread across all geographical segments.
Apart from 111 specialized service branches, the Bank has 195 Extension Counters. In view of
the centrality of customer convenience, the Bank provides a wide array of alternative delivery
channels that include over 2006 ATMs- covering 694 centres.

Also the Bank providing Internet and Mobile Banking (IMB) services 'Anywhere Banking'
services. Under advanced payment and settlement system, the Bank offers Real Time Gross
Settlement (RTGS) and National Electronic Funds Transfer (NEFT). Across the borders, the
Banks‟ presence comprised two overseas branches in London and Hong-Kong.


     The Bank's 1000th branch was inaugurated in the year 1976.
     Canara Bank had launched the Canbank Mutual Fund & Canfin Homes in the year 1987
       and the Canbank Venture Capital Fund was started during the year 1989. The Bank had
       opened the factoring subsidiary during the year 1989-90 under the name of Canbank
       Factors Limited.
     Canara Bank is one of the premier banks in the country with a network of 2513 branches
       spread all over the country.

     It was the first bank to be conferred FICCI award for contribution to rural development.
        Canara Bank Bank was the first among banks to launch networked ATMs and obtain
        ISO Certification.
     Canara Bank had opened a 'Mahila Banking Branch', first of its kind at Bangalore during
        the year 2001-02 for catering exclusively to the financial requirements of women
     During the year 2002-03, the bank had entered into the capital market with the maiden

For the year 2004-05, Canara Bank clocked the highest net profit (Rs.1110 crore) among
nationalized banks, with significant improvement in capital adequacy ratio (12.78%) and asset
quality (net NPA ratio of 1.88%). In 2005-06 Bank launched Core Banking Solution in selected

Canbank awarded the 'First National Award' instituted by the Ministry of Micro, Small &
Medium Enterprises, Government of India, for excellence in 'Micro & Small Enterprises (MSE)
lending' for 2006-07. The Bank had launched the multilingual Biometric-voice enabled ATMs
during September of the year 2007, the number of such ATMs increased to 8 locations across
India. Canara Bank is the first bank in the country to launch mobile Biometric-voice enabled
ATM in Bangalore rural.

In keeping with a fast changing environment, Canara Bank launched a new brand identity on
29th December of the year 2007, The new logo for Canara Bank is based on the idea of a bond
and is a representation of the close ties between the Bank and its varied stakeholders- customers,
investors, employees, institutions and society at large, with a tag line 'Together We Can'.

CHART # 4.5.1              NPA & CRAR IN % OF CANARA BANK

  P                                              13.50
       14                    12.78
  E                                                                  13.25
  R                                        11.22
  E     8                                                                      CRAR

  N                                                                            NPA
  T     4      2.89
  A                                    1.12         0.94
  G                      1.88                                        0.84
             2003-2004   2004-2005   2005-2006     2006-2007   2007-2008    YEAR

Source: Capitaline

The NPA of the bank has actually increases when compared to 2004 levels. It has gone up by
almost 0.75%. The CRAR on the other hand has been declining gradually and has touched 0.84%
in the year 2008.

4.6 IDBI
A Development Financial Institution (DFI) transformed into a full-service commercial bank and
named as Industrial Development Bank of India Ltd (IDBI). It was incorporated as a wholly
owned subsidiary of Reserve Bank of India (RBI) in the year of 1964. The bank helps to build a
modern and industrially buoyant India and supports the dreams of Corporate India. IDBI
focuses on industrial and economic development of the country and inclusive banking,
pervasive growth and unbounded prosperity and Bank has been actively engaged in providing a
major thrust to financing of Small & Medium Enterprises (SMEs). In 1976 IDBI came under
the holding of Government of India (GOI) by the way of RBI's transfer. RBI surrendered its
100% stake to GOI. The Bank made its Initial Public Offer (IPO) in July, 1995, it brought down
GOI holding to 72% and the post-capital restructuring to 58.1%

In 1993, IDBI desired to offer a broad range of financial products and services, hence it formed
one wholly owned subsidiary company and named as IDBI Capital Market Services Ltd
(ICMS). The Bank had set up an another one wholly owned subsidiary company formed to
undertake Information Technology (IT) related activities of the organization in March 2000
namely IDBI Intech Ltd (IIL). The Bank also divested its entire stake in Discount & Finance
House of India Ltd. (DFHI) in favour of SBI. In September 2003, the Bank acquired the entire
shareholding of Tata Finance Ltd in Tata Home Finance Ltd. The company has since been
renamed as IDBI Home Finance Ltd (IHFL). In October 2004, IDBI was transformed into a
banking company to undertake all kind of banking activities while continuing to play its secular
Development Financial Institution role. To reflect this, IDBI's name was changed as Industrial
Development Bank of India Ltd.

In 2005, IDBI Ltd. merged its banking subsidiary 'IDBI Bank' with itself, IDBI is now a
universal bank. In October 2006, the Bank merged the erstwhile United Western Bank Ltd.
(UWB) with itself as a part of the inorganic growth strategy The Bank won the coveted
"Outstanding Achiever of the Year Award-2006" under both Corporate and Individual
categories at the Indian Banks' Association (IBA) Awards 2006 organized by IBA and Trade
Fares & Conferences International (TFCI) . It was also awarded the Special Award for "Best

Internet Bank for Corporate Customers" and for the "IT Team of the Year" by Institute For
Development and Research in Banking Technology (IDRBT) in the same year
As of 2007, the Bank has totally 432 branches, 18 extension counters and 523 ATMs spread
across 255 cities, reflects its effort to spread its wings across the country.

CHART # 4.6.1                 NPA & CRAR IN % IDBI

  P   16
                 15.51        14.80
  E   14                                    13.73
      12                                                    11.95
  E                                                                   CRAR na
  N                                                                   NPA na
  T   6

  A   4
                1.74                      1.12
  G   2                     1.01
  E   0
            2004-2005    2005-2006     2006-2007     2007-2008
SOURCE : Capitaline
 The NPA of IDBI was a high 15.51% in the year 2005. But this has come down gradually and
has touched 11.95% in the year 2008. This proves how the bank has improved upon their
services offered. The CRAR has been coming down continuously from 2005.


A premier bank owned by the Government of India, the Indian Bank commenced its operations
in 15th August of the year 1907 as part of the Swadeshi movement.

Indian Bank is engaged in diversified banking activities and has 3 subsidiary companies to look
after them. These are: Indbank Merchant Banking Services Ltd, IndBank Housing Ltd., IndFund
Management Ltd.The Bank opened its first overseas branch in Colombo, Sri Lanka during the
year 1932 and also opened its Singapore branch in 1941.

In the year 1962, Indian Bank acquired the businesses of Royalaseema Bank, the Bank of
Alagapuri, Salem Bank, the Mannargudi Bank and the Trichy United Bank. The Bank was
nationalised in 19th July of the year 1969. The Bank name was changed to Indian Bank after the
nationalisation. As if now the Indian Bank has 240 Overseas Correspondent banks in 70

Indian Bank is a front runner in specialised banking. The bank has 90 Forex Authorised branches
inclusive of 3 Specialised Overseas Branches at Chennai, Bangalore and Mumbai exclusively for
handling forex transactions arising out of Export, Import, Remittances and Non Resident Indian

Indian Bank had launched a scheme called Cash Management Services' in the year 2001 for
speedy collection of outstation cheques. The Bank in two branches implemented the Core
Banking Solution in December of the year 2004.

In 2006, Indian Bank sets up new branch in Mumbai and also launched the Bharat Card.. As of
March 2007, Indian Bank launched Ind on-line Doorstep Banking to deliver Banking and
Financial Services at the doorsteps of the common man. The Bank signed an agreement with
Indian Railway Catering and Tourism Corporation Limited (IRCTC) for offering train ticket
booking services through IRCTC website

Indian Bank is a pioneer in rural development. It has launched several innovative loan products
like Artisan Card, Kisan Card, Kisan Bike Scheme, Yuva Kisan Vidya Nidhi Yojana to meet
diverse credit needs of farmers.

The network of the bank comprises 100% Business Computerisation, 168 Centres throughout the
country covered under 'Anywhere Banking', Core Banking Solution (CBS) in 1557 branches and
66 extension counters, 618 connected Automated Teller Machines (ATM) in 225 cities/towns
and also 24 x 7 Service through 32000 ATMs under shared network.

CHART # 4.7.1                NPA & CRAR IN % OF IDBI

                            14.14               14.14
         12     12.82                13.19

         8                                                          CRAR
         6                                                          NPA

         4       2.71
         2                  1.35    0.79       0.35
         0                                                  0.24
              2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

SOURCE: Capitaline

The NPA has been fluctuating and is showing an upward-downward trend. The NPA of the bank
is at the same level as in that of the year 2004. While the CRAR is showing only a downward


Indian Overseas Bank (IOB) was founded on February 10, 1937 by Shri.M.Ct.M. Chidambaram
Chettyar. IOB had the unique distinction of commencing business on the inaugural day itself in
three branches simultaneously - at Karaikudi and Chennai in India and Rangoon in Burma
(presently Myanmar) followed by a branch in Penang. It was established with twin objectives of
specialising in foreign exchange business and overseas banking.

Indian Overseas Bank has an ISO certified in-house Information Technology department, which
has developed the software that 900 branches use to provide online banking to customers. The
Products & Services of the bank includes NRI Services, Personal Banking, Forex Services, Agri
Business Consultancy, Credit Cards, Any Branch Banking and ATM Banking. Saga of the IOB
is covered into four categories, such as Pre-nationalisation era (1947- 69), at the time of
Nationalisation (1969), Post - nationalisation era (1969-1992) and Post-Reform Period -
Unprecedented developments (1992 & after).

In Pre-nationalisation era (1947- 69), IOB expanded its domestic activities and enlarged its
international banking operations. IOB was the first Bank to venture into consumer credit. It
introduced the popular Personal Loan scheme during this period.

At the time of Nationalisation (1969), IOB was one of the 14 major banks that was nationalised
in 1969. On the eve of Nationalisation in 1969, IOB had 195 branches in India with aggregate
deposits of Rs. 67.70 Crs. and Advances of Rs. 44.90 Crs.

 In Post - nationalisation era (1969-1992), during the year 1973, IOB had to wind up its five
Malaysian branches as the Banking law in Malaysia prohibited operation of foreign Government
owned banks. This led to creation of United Asian Bank Berhad in which IOB had 16.67% of the
paid up capital. The Bank sponsored 3 Regional Rural Banks viz. Puri Gramya Bank, Pandyan
Grama Bank and Dhenkanal Gramya Bank. The Bank had setup a separate Computer Policy and
Planning Department (CPPD) to implement the programme of computerisation, to develop
software packages on its own and to impart training to staff members in this field. In the year
1988, IOB acquired Bank of Tamil Nadu in a rescue.

In Post-Reform Period - Unprecedented developments (1992 & after), IOB formulated its Web
site during the month of February in 1997. The Bank got autonomous status during the year
1997-98. IOB had the distinction of being the first Bank in Banking Industry to obtain ISO 9001
Certification for its Computer Policy and Planning Department from Det Norske Veritas (DNV),
Netherlands in September 1999.

The Bank made a successful debut in raising capital from the public during the financial year
2000-01, despite a subdued capital market. IOB bagged the NABARD's award for credit linking
the highest number of Self Help Groups for 2000-2001 among the Banks in Tamil Nadu. IOB
was one among the first to join Reserve Bank of India's negotiated dealing system for security
dialing online.In September 2006, Indian Overseas Bank (IOB) has finally taken control of
Bharat Overseas Bank (BhOB), an unlisted private bank. This is the first instance of a public
sector bank taking over a strong private sector bank without resorting to the moratorium route.
IOB have a network of more than one thousand eight hundred branches all over India located in
various metropolitan cities, urban, suburban and rural areas. IOB plans to set up banking
operations in Malaysia in a joint venture with two other India-based banks Bank of Baroda and
Andhra Bank with a minimum capital investment of RM320 million (US$100 million).


            P                      14.20
                14                                     13.27
            R   12                          13.04                    11.96
            C   10
            E   8                                                            CRAR
            N                                                                NPA
            A   4       2.85
            G                      1.27
                2                           0.65       0.55
            E   0                                                    0.60
                     2003-2004 2004-2005 2005-2006 2006-2007 2007-2008

         SOURCE: Capitaline


NABARD was established by an act of Parliament on 12 July 1982 to implement the National
Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit
Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and
Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agency
to provide credit in rural areas.

NABARD's refinance is available to State Co-operative Agriculture and Rural Development
Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs),
Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate
beneficiaries of investment credit can be individuals, partnership concerns, companies, State-
owned corporations or co-operative societies, production credit is generally given to individuals.

NABARD has its head office at Mumbai, India. NABARD operates throughout the country
through its 28 Regional Offices and one Sub-office, located in the capitals of all the states/union
territories. Each Regional Office [RO] has a Chief General Manager [CGMs]as its head, and the
Head office has several Top executives like the Executive Directors[ED], Managing
Directors[MD], and the Chairperson. It has 336 District Offices across the country, one Sub-
office at Port Blair and one special cell at Srinagar. It also has 6 training establishments.

NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's banks
to lend to self-help groups (SHGs). Because SHGs are composed mainly of poor women, this has
evolved into an important Indian tool for microfinance. As of March 2006 2.2 million SHGs
representing 33 million members had to been linked to credit through this programme.


Punjab & Sind Bank was established in 1908 by Bhai Vir Singh, Sir Sunder Singh Majitha and
Sardar Tarlochan Singh. The Bank was founded on the principle of social commitment to help
the weaker section of the society in their economic endeavours to raise their standard of life.

Punjab & Sind Bank is the first bank in Northern India to get ISO 9002 certification for its
selected branches. The Bank has 760 branches and 131 extension counters. It has opened an
exclusive Housing Finance Branch in order to cater the credit need of the house aspirants.

In July 2004, Punjab & Sind Bank in collaboration with ICICI Bank, launched the 'Punjab &
Sind Bank-ICICI Bank Credit Card'.Punjab & Sind Bank has special tie-up arrangements for
Non Life insurance business with M/s Bajaj Allianz General Insurance Company and Life
Insurance business arrangements with M/s Aviva Life Insurance Company India Pvt. Ltd. for
providing its valued customers all the insurance related services under one roof.
CHART # 4.10.1           NPA & CRAR IN % PUN. & SIND BANK

       14                            12.83       12.88
       12      11.06
   E                                                           11.57
   R   10
   C     8
               9.62          8.11
   E                                                                   CRAR
   N     6
   T     4
         2                                       0.66
   G                                2.43
   E     0                                                     0.37
             2003-2004 2004-2005 2005-2006 2006-2007 2007-2008
       -2                                                             YEAR

SOURCE: Capitaline
The NPA of the bank is presently at 11.57% of the total assets. While the CRAR stands at


Punjab National Bank (PNB), established in the year 1895 at Lahore, undivided India, has the
distinction of being the first Indian bank to have been started solely with Indian capital. The
bank was nationalised in July 1969 along with 13 other banks. It has its presence in all the
important centres of the country and offers a wide variety of banking services which include
corporate and personal banking, industrial finance, agricultural finance, financing of trade and
international banking.

PNB came out with its first Initial public offer (IPO) in March 2002 for 5, 30, 60,700 equity
shares of Rs 10 each. During the year 2002, the bank started its branch in M.G. Road,
Bangalore named as Mid-Corporate Branch (MCD) to provide its corporate clients with a credit
limit of Rs 3.5 crore and above. PNB made joint venture with Infosys for the implementation of
a Centralised Banking Solution for it. The Bank received the Best Bank Award' for excellence
in banking technology. PNB tied up with Cisco Systems for networking 3870 branches as part
of its Rs 150 crore plan.


     PNB has taken over Kozhikode-based Nedungadi Bank Ltd (NBL) in February of the
        year 2003.

     The Bank has entered into an alliance with New India Assurance for selling its general
        insurance products in the same year 2003.

     The Bank       has formed a strategic alliance with Infrastructure Leasing and Financial
        Services Ltd (IL&FS) to set up a private equity fund for investing in domestic

     In the year 2004, PNB acquired the assets of Hindustan Transmission Product Limited
        (HTPL) under Sarfaesi.

     PNB and ICICI Bank had signed a MOU for ATM network sharing. PNB implements
        Loans and Advances Data Desk for Evaluations and Reports, (LADDER) system for
        rationalisation of returns, asset classification and provisioning, credit monitoring NPA.

The Bank had commenced commercial banking operations in Hong Kong on 17th December
2007 and made a formal inauguration on 30th of January 2008.PNB aims to expand its base in
the entire northern India region for providing banking facilities at the doorsteps of the peoples.
The Bank is serving over 3.5 crore customers through 4540 Offices including 421 extension
counters - largest amongst Nationalized Banks. PNB is moving with the vision, to be India's
most profitable Universal Bank.

CHART # 4.11.1                  NPA & CRAR IN % OF PNB

  P                            14.78
  E    12
  R             13.10
                                       11.95        12.29
  E     8                                                                     CRAR
  N     6                                                                     NPA
  T     4
  A     2        0.98       0.20        0.29       0.76
  G                                                                 0.64
            2003-2004    2004-2005   2005-2006   2006-2007    2007-2008

SOURCE: Capitaline

The NPA of the bank has been showing an upward trend for the past three years and has
touched 12.96% for the year ending 2008. While the CRAR which has been low has shown an
slight increase and has touched 0.64% in 2008 from 0.20% in the year 2005.


SBI, started as Imperial Bank then named State Bank of India commenced its operations from
the year 1955, is the largest commercial bank in India in terms of profits, assets, deposits,
branches and employees. As of March 2008, the bank has had 21 subsidiaries and 10,000
branches. SBI offering the services of banking and as well as non- banking services to their
customers. It provides a whole range of financial services which includes Life Insurance,
Merchant Banking, Mutual Funds, Credit Cards, Factoring, Security Trading & Primary
dealership in the Money market. The Bank is actively involved in non- profit activity called
community services banking apart from its normal banking activity.

The bank also concentrate in agriculture, for that it took initiative spotlight kharif and spotlight
rabi campaigns for higher disbursement. It introduced Automated Teller Machine with Kishan
Credit Cards in all circles to assist agriculture peoples, cumulatively the bank has credit linked
7.68 lac Self Help Groups and disbursed loans to the extent of Rs 3,468 crs, so far. In the year
2001 the SBI Life was started. SBI is the only Bank to have been permitted a 74% stake in the
insurance business. The Bank's insurance subsidiary "SBI Life Insurance Company" is a joint
venture with Cardif S.A holds 26% stake. SBI Life enjoys the unique distinction of being the
first private sector life insurance company in India to make profits for two consecutive years.

SBI opened its 10,000th branch in March 2008, it becomes only the second bank in the world to
have more than 10,000 branches after China's ICBC. SBI is pursuing aggressive IT policy,
where the Automated Teller Machines are now also enabled to pay utility bills, college fees,
book air-line tickets and accept donations, further bilateral sharing of ATMs was extended to
thirteen banks covering 15,700 Automated Teller Machines and an Memorandum of
Understanding has been signed with the Indian railways for installing ATMs at 682 railway
stations. SBI is targeting to emerge as the best rated bank among public, private, foreign and
state -owned banks by the end of the next fiscal.

CHART # 4.12.1                 NPA & CRAR IN % OF SBI

  P 14        13.53
  E 12                                                             12.64
  R 10                  12.45        11.88           12.34
  C                                                                        CRAR
  N 6        3.48
  T 4                                   1.88        1.56
  A 2                   2.65                                       1.78
  G 0
  E      2003-2004    2004-2005   2005-2006    2006-2007     2007-2008    YEAR
SOURCE: Capitaline

The NPA has fallen down by almost a percent from 2004 and has touched 12.64% in the year
2008, while the CRAR is down to 1.78% from 3.48% in 2004.


The Origins of United Bank of India (UBI) can be traced back to 1914. Its predecessor the
United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz.
Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union
Bank Ltd. (1922) and Hooghly Bank Ltd. (1932). United Bank of India (UBI) is one of the 14
major banks, which were nationalised in 1969.

After nationalisation, the Bank expanded in a big way and actively participated in the
developmental activities, particularly in the rural and semi-urban areas in conformity with the
objectives of nationalisation. In recognition of the role played by the United Bank of India, it was
designated as Lead Bank in several districts and at present it is the Lead Bank in 34 districts in
the States of West Bengal, Assam and Tripura.

UBI played a significant role in the spread of banking services in different parts of the country,
more particularly in Eastern and North-eastern India. United Bank of India is also known as the
'Tea Bank' because of its age-old association with the financing of tea gardens. It has been the
largest lender to the tea industry.

Presently the Bank has a three-tier organisational set-up consisting of the Head Office, 28
Regional Offices and 1315 branches. The Bank has three full fledged Overseas Branches one
each at Calcutta, New Delhi and Mumbai.

CHART # 4.13.1                    NPA & CRAR IN % OF UBI


  P   18                     18.16
  E   16
  R   14

  C   12                                                  11.88
  E   10                                       12.02              CRAR
  N    8                                                          NPA
  T    6
  A    4                   2.43
                                        1.95   1.50
  G    2
  E    0
           2003-2004 2004-2005 2005-2006 2006-2007 2007-2008   YEAR

SOURCE: Capitaline

The NPA of the bank stands at 11.88% which below many banks. This indicates the quality of its
lending when compared to the other banks. The CRAR has been decreasing right from 2004 and
is currently at 1.1% of the assets.


                                         A COMPARISON

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 increasingly 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 11 parameters, which are critical
while evaluating their performance. These criteria are as follows:

1.     Assets and Liabilities
2.     Share in Aggregate Deposits
3.     Priority Sector Lending
4.     Sensitive Sector Lending
5.     Credit Deposit Ratio
6.     Cost of Funds and Return on Funds
7.     Operating Profit and Net Profit
8.     Net Profitability of Banks
9.     Gross and Net NPAs
10.    Capital Adequacy Ratio
11.    ATM‟s

The analysis and statistics for the above is depicted below-

   1. Liabilities and Assets of Banks

As you can see below the percentage of total assets and liabilities of New Private sector banks is
higher than the Public sector Banks

On the back of robust economic growth and industrial recovery, loans and advances witnessed
strong growth, investments, in a rising interest rate scenario. Deposits showed a lackluster
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 group-wise, assets of new
private sector banks grew at the highest rate, followed by public sector banks and old private
sector banks.

TABLE # 5.1.1

Source: RBI NOTE: Scheduled commercial banks (SCBs) consist of 28 public sector banks
(State Bank of India and its seven associates, nationalized banks and other public sector bank
(one)), 9 new private sector banks, 20 old private sector banks and 31 foreign banks.

   2. Share of Aggregate Deposits

As you can see below Deposits of SCBs grew at a lower rate during 2004-05 as compared in the
previous year because of slowdown in demand deposits and savings deposits. Deceleration in
demand deposits was due mainly to the base effect, as demand deposits had witnessed an
unusually high growth last year. The growth in demand deposits, however, was in line with the
long-term average. Savings deposits, which reflect the strength of the retail liability franchise
and are at the core of the banks‟ customer acquisition efforts, grew at a healthy rate, although the
growth was somewhat lower than the high growth of last year. The higher growth of term
deposits was mainly because of NRI deposits and certificates of deposit (CDs). Excluding these
deposits, the growth rate of term deposits showed a deceleration, which was on account of a
possible substitution in favor of postal deposits and other investment products, which continued
to grow at a high rate benefiting from tax incentives and their attractive rate of return in
comparison with time deposits.

Across bank groups, the rate of expansion of deposits was highest in respect of new private
sector banks (21.1 per cent), followed by PSBs (15.6 per cent), old private sector banks (10.8 per
cent) and foreign banks (7.9 per cent). The share of new private sector banks in total deposits has
gradually increased over the years. They are the ones, which took the initiative in hiking the
deposit rates.

CHART # 5.1.1

Source: RBI

    3. 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 were 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.
Agricultural sector gets less importance in priority sector as compared to other sectors because
private sector banks concentrate less on this sector as compared to PSB‟s.

TABLE # 5.1.2


   4. 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 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 # 5.1.3


   5. Credit Deposit Ratio
Among bank-groups, the new private sector banks had the highest C-D ratio, followed by foreign
banks, old private sector and public sector banks. The C-D ratio, which implies greater credit
orientation of banks, is used as a credit efficiency indicator for analyzing the role of banks in
promoting productive sectors and contributing to economic growth. In a bank -based financial
system, the C-D ratio is regarded as an aggregative measure for gauging the effectiveness of
credit delivery system. Although the deployment of credit and the time path of C-D ratio, in
general, are influenced by the structural transformation of the economy, the role of credit culture
and banks‟ lending policy have an inherent impact on the size of the ratio. This ratio is indicative
of percentage of funds lend by the bank out of total amount raised through deposits. Higher ratio
reflects ability of bank to make optimal use of available resources.

Private sector Banks are deploying their deposits in the way of loans at higher Interest rates
thereby making profit hence the credit-deposit ratio is higher compared to public sector banks
where the deposits are being deployed in the form of government securities and subsidies where
the returns is low or nil. Higher ratio generally helps in increasing the income of the banks.
PSB‟s cost of deposits is higher as compared to Private Banks as private banks concentrate more
on Currents accounts.

CHART # 5.1.2


   6. Cost of Funds and Return on Funds
Cost of deposits declined significantly during 2004-05, reflecting largely the impact of
significant decline in deposit rates in the last year. In the recent period, the decline in cost of
funds has emerged as a notable feature of operations of the banking sector, a trend that continued
during 2004-05. Significantly, the cost of borrowings was much lower than the cost of deposits
across all bank groups, barring foreign banks. The decline in cost of funds was accompanied by a
larger decline in return on advances, reflecting mainly the increased lending at sub-PLR rates
because of competitive pressures. As a result, interest spread came under pressure, suggesting
that the benefits of low interest rates have begun to percolate to banks‟ borrowers.

If the cost of funds is going up then obviously, banks have to increase the return on their
advances also. What is happening is that deposit rates are being increased without a parallel need
for the increase of the worth. As it is, the RBI's liquidity report suggests that there is an excess of
liquidity. If it is so then why the banks are taking the deposits at much higher rate of interest.
Since banks are taking the deposit at much higher rate of interest than the real rate at which they
should take it, they feel that the interest on the advances should be increased.

TABLE # 5.1.4


   7. Operating and Net Profit
Net profits declined by 7.0 per cent (excluding the conversion impact i.e. conversion of non-
banking entity to banking entity) during 2004-05 as against an increase of 30.4 per cent in the
last year. While net profits of nationalized banks, old private sector banks and foreign banks
declined, those of SBI group and new private sector banks increased. Sharp increase in the net
profits of new private sector banks was because of a sharp decline in provision and contingencies
Banks operating profit is calculated after deducting administrative expenses, which mainly
includes salary cost and network expansion cost. Operating margins are profits earned by banks
on its total interest income. Net Profit is calculated after deducting various cost of funds, since
the cost of funds i.e. the borrowing costs are higher as compared to the lending rates offered, the
PSB‟s net profit is lesser compared to the private banks.

    TABLE # 5.1.5


    8. Net Profitability of Bank Groups
Return on assets reflects the efficiency with which banks deploy their assets. Net profits to assets
ratio of SCBs declined marginally in 2004-05. However, except for the new private sector banks,
the ratio declined across bank groups, the decline being the highest in case of old private sector
banks, followed by foreign banks and public sector banks. In case of New Private Sector banks
the duration of investment is low, investment pattern differs, interest is high as a result the Net
Profitability is high.

CHART # 5.1.3


   9. Gross and Net NPAs

With provisioning for NPAs being somewhat lower during 2004-05, the decline in the NPA ratio
was attributable to both increased recovery of NPAs and overall reduction in asset slippages. In
absolute terms, non-performing assets in „doubtful‟ category increased, while those in sub-
standard category declined sharply, reflecting the change in asset classification norm from the
year ended March 2005, whereby an asset was treated as doubtful if it remained as NPA for 12
months as against the earlier norm of 18 months. However, NPAs in doubtful category as
percentage of net advances declined significantly.

PSB's NPA ratio is satisfactory compared to private banks. Higher NPAs ratio shows that bank is
unable to maintain the quality of its loans however; the ratio has been decreased compared to
previous year. Private banks NPA ratio is higher as they are offering loans without having
required deposits to lend them. PSB's have a better management and monitoring over their

deposits and the defaulters, which may turn its lent amounts into a debt that could be returned by
its defaulters comfortably as compared to the Private banks.

   TABLE # 5.1.6


   10. 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
nationalized banks registered a marginal improvement during the year. The CRAR of the State
Bank group, old private sector banks and foreign banks declined. A banks CAR is ratio of
qualifying capital to risk adjusted assets. The RBI has set the minimum CAR at 10%, a rate
below the minimum indicates that the bank is not adequately capitalized to expand its operations.
However banks CAR can be a 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. In case of PSB‟s CAR has decreased as compared
to previous year. Decreasing ratio could affect the business expansion and result in low level of
income. Higher CAR shows that bank can expand its business more and is less vulnerable to
external shocks.

TABLE # 5.1.7

                   SOURCE: RBI

   11. ATMs
Total number of ATMs installed in the country was 17,642 at end-March 2005. New private
sector banks constituted the largest share of ATMs, followed by the SBI group, nationalized
banks, old private sector banks and foreign banks. While nationalized banks and old private
sector banks had more on-site ATMs than off-site ATMs, SBI group, new private sector banks
and foreign banks had more off-site ATMs than on-site ATMs.

CHART # 5.1.4

Source: RBI


Public Sector Banks

The public sector banks are turning the spotlight on the customer and offering quicker, better
service. That includes everything from ATM machines and computerized branches to never
before seen marketing initiatives. Clearly, public sector banks have woken up to competition.
Post-liberalization, several new generation private sector banks changed the face of the industry.
Customers no longer had to stand in long queues or make 10 trips for loans to be sanctioned.
These changes are taking place at a particularly fast pace in few of the banks including the State
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda and the Union Bank of India.

Private sector banks brought in concepts like customer relations officers focused marketing
teams and single window banking. Moreover, with new technology, private sector banks like
ICICI and HDFC Bank could offer customer services like ATMs, phone banking, internet
banking, automatic money transfer, mobile banking, Core banking solutions and computerized
monthly statements. Recently a new technology of cheque truncation is being introduced. As

against physical travel of instruments, under cheque truncation only the image of the instrument
would travel. This would totally alter the face of clearing systems facilitating faster realization of
instruments. It is currently being implemented on a pilot basis in India.

Public sector banks‟ focus had earlier remained on industrial credit, which was slowing down.
Lending to corporate meant higher margins for banks. As interest rates came down corporate
began to consider alternate sources of funds. Banks then began to explore possibilities like retail

The two important challenges for public sector banks are:
      To maintain profitability inspite of government norms and regulations, as to maintain
       their PLR.
      Put in place appropriate technology of excellent standards that will make them be seen
       more as virtual banks rather than brick and mortar.

This will lead to consolidation of their respective network. They must be given autonomy --
operational and administrative -- and be completely board driven, including in the selection of
the chief executive officer. Finally, they must be taken out of the purview of the Central
Vigilance Commission, even if it entails bringing them under the Companies Act. They need to
improve in the services like ATMs, Credit and Debit cards. They lack behind in providing
facilities like loans and other accounts. These branches are not interlinked with each other and
customers visiting hours are less.

Private Sector Banks

There are two types of private sector banks, the old and the new. As far as the old (mostly
regional banks) are concerned, inadequacy of capital will lead to their mergers sooner rather than
later. Private sector banks have good technology for handling transactions and also offer
attractive products, but it cannot be said that corporate governance and risk management are far
superior to that of the Public Sector Banks.

Some of the most important challenges for private sector banks are:

      Priority sector credit: Generally, private sector banks lend money to individuals and
       corporate sector whereas sectors like agriculture, small-scale industries and retail trade
       small business is neglected.

      Consolidation and Convergence: The recent merger that happened was of Lord Krishna
       Bank with Centurion Bank. RBI may be inclined to approve the merger. The regulator,
       which has been insisting on promoters of smaller banks to lower their holdings, would
       possibly prefer such mergers. Centurion Bank of Punjab needs the additional business to
       compensate for its relatively higher cost structures. It can cross-sell its banking products
       through the LKB network, including traditional banking products and fee-based services
       like wealth management products, to affluent NRI customers.


In any banking system, no bank -- public or private -- can survive unless it continuously strives
to transform its organization 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 in two critical areas: comprehensive legal support for recovery of bad
debts and a fundamental change in the pattern of governance for the PSBs.
While public sector banks are in the process of restructuring, private sector banks are busy
consolidating through mergers and acquisitions (the sector has been recently opened up for
Foreign investments).

PSB‟s need to improve in the services like ATM‟s, Credit and Debit cards. They lack behind in
providing facilities like loans and other accounts. These branches are not interlinked with each
other and working hours are less.

In case of Private sector banks customers are not aware of the facts and hidden costs in view, as
there are various products and facilities provided by the banks. The charges that are been taken

are also too high. Challenges and Opportunities exist for both the public sector as well as the
private sector banks, their nature however differs.
From the 11 parameters, we have identified 3 areas of challenges separately for private and
public sector banks.
      The Credit Deposit Ratio of Private sector banks is better compared to PSB‟s
      The Capital Adequacy Ratio of PSB‟s is satisfactory compared to that of Private Banks
      The Net Profit of PSB‟s is better than Private Sector


       CHART # 5.2.1

       The first table shows the profitability and the second table shows the profitability of
       public sector & private sector banks.

CHART # 5.2.2

     Source: Annual reports * Avg of SBI,PNB,Canara, **Avg of ICICI,HDFC,Axis

     3) The profit/branch of the public sector banks has increased by 400% over a period of
        six years whereas the increase for private sector banks is only 200%.
     4) The profit/employee of the public sector banks has increased by 250% over a period of
        five years wheras the increase for private sector banks 20% over a period of five years.


Given below are the industry standards which are ideal for the organizations, as in our case it‟s
Public Sector Banks. There is an increase and viz-a- viz decrease in various ratios, this changes
occur because of overall performance of the banks and also constant reviewing of the working of
the banks leads to the industry aggregate to change.

Industry aggregate enables in measuring the performance of the bank and facilitates an unbiased
comparison between different organizations.

TABLE # 6.1.1

  Year                                  Latest   2007    2006    2005    2004

  No.Of Companies                           30     21      29      29      30
  Key Ratios
  Credit-Deposit(%)                      70.74   70.95   68.23   61.01   58.25
  Investment / Deposit (%)               39.58   36.31   43.13     50    51.75
  Cash / Deposit (%)                      9.53    8.87    9.14     9.2    9.19
  Interest Expended / Interest Earned
  (%)                                    60.79   62.17   58.46   57.93   61.63

  Other Income / Total Income (%)         14.1   13.06   14.85   17.22   20.19
  Operating Expenses / Total Funds
  (%)                                     2.12    1.48    2.22    2.22    2.25
  Profit before Provisions / Total
  Funds (%)                               0.99    0.71    0.95    1.06    1.26
  Net Profit / Total funds (%)            0.94    0.67     0.9      1     1.21
  RONW (%)                               14.87   11.44   13.59   15.13   19.95

6.2 ANALYSIS OF 2003-04


CHART # 6.2.1

       500                                            385.88
       200   58.25    48.97 50.89 65.2756.12 45.95 48.27   44.38 53.41 48.1 34.97

  SOURCE: Capitaline

  IDBI Bank showed the highest credit-deposit ratio followed by NABARD. Since them being
  specialized banks for some special purpose, they have very less deposits as compared to
  other commercial banks. Bank of India was the only commercial bank which had the higher
  credit-deposit ratio than the industry average which stood at 58.32%. This implies that
  58.32% of the deposits received by the bank are given away as credits to the customers of the


CHART 6.2.2

        500                                                  INVESTMENT/DEPOSIT(%)
        200            51.75                                                    48.44 46.51 58.24
                                       49.05 48.92 38.06 41.81 54.88 49.6
        100                                                               15.44

   SOURCE: Capitaline

NABARD showed the least investment as a percentage of the deposits, while IDBI had the
highest. United Bank had 61.37% investments while that of SBI was 58.24%. The industry
average for the same period was 51.75%


CHART 6.2.3

       15     9.19                              7.89 8.26 8.98          7.34 8.13          6.31
       10                    6.5
                                   4.68 5.59                     4.61               5.17

   SOURCE: Capitaline

Indian Overseas Bank had 8.98% of their deposits in cash while Indian Bank had 8.26%. Punjab
National Bank‟s figure stood at 8.13% while that of the industry as a whole was 9.19%. This was
majorly due to the figure of IDBI bank which stood at a whopping 24.65%


CHART 6.2.4



       80   61.63    59.31 58.17 62.0261.23               61.41      63.28 62.35
                                          58.11 57.4 55.79     53.41




   SOURCE: Capitaline

The interest expended to interest earned shows the amount of interest given by the bank to the
amount of interest earned. The industry average stood at 61.63%. SBI had to shell out 63.28% of
their interest income as interest to their customers. This is in line with the industry average,
which tells us that they have priced their products appropriately neither too high nor too low
either of which could have a bad implication on the performance of the bank.

         CHART 6.2.5

                20.19        23.53 23.87 23.63 22.77 22.65                            20.91 20.12 20.14
         25             16.84                                                 16.72
          5                                                           0.47

   SOURCE: Capitaline

Other income to total income shows the percentage of the other incomes of the bank to the total
income. Other incomes include all the incomes apart from the interest that they earn. The
industry average is 20.19%. Most of the banks have a figure above the average. This shows that
almost 75% of the income of the bank is from their core activities i.e. lending and borrowing.


   CHART 6.2.6

    35                       27.78                      30.8                         25.72        25.94
              22.59                                            23.9                          24.25
    30                               22.36 23.0820.74
    15                                                                9.02

Operating expenses to total income shows the total operating expenses as a percentage of the
total income of the banks. IDBI bank had the lowest value which stood at 6.99% while the
industry average stood at 22.59%. This shows the efficiency and productivity of the bank as
compared to the others.


   CHART 6.2.7

                                   Net Interest Income / Total Funds (%)
                                                                3.63                 3.86
                            3.49    3.18                 3.37          3.52   3.35
       4     3.05                                 3.02                                             3.23
                                           2.74                                             2.85

   SOURCE: Capitaline

Net interest income to total funds shows the difference of the total interest earned and the total
interest expended as a percentage of the total funds of the bank.


   CHART 6.2.8

                           1.49                1.48
       1.5                              1.25                                                 1.3
             1.21                 1.2                 1.22 1.16                1.18

   SOURCE: Capitaline

Net profit by total funds shows the profit percentage of the bank when compared to the total
funds of the bank.


CHART 6.2.9

       40                                                       31.74
       35                                  28.04 29.23                                26.42
       25   19.95                  20.32                                                      19.67
       15                                                7.96           7.74
       10           4.84                                                       2.06

   SOURCE: Capitaline

Return on Net Worth tells the banks profits as a percent of their total net worth. Canara bank
showed the highest return among the commercial banks followed by Bank of India. This shows
that these banks assets are put to proper use and importantly very efficiently.

6.3 ANALYSIS OF 2004-05


CHART # 6.3.1

      100     61.01 50.52 51.2 67.45 59.44            49.82 53.08            56.33 52.55 40.23

  SOURCE: Capitaline

  The credit-deposit ratio of the public sector banks as a whole has seen a slight increase of
  approximately 3 percentage points. United bank has shown the highest growth while there is
  a sharp decline in the value of IDBI.

      CHART # 6.3.2

        300                                              Investment/Deposit Ratio(%)
        150                                     53.05 45.7135.32 48.56 55.83 59.53
        100     50 47.82 48.67 37.16 40.32

There has been a decline in the investment/deposit ratio across all the banks as compared to the
figures of year ending 2004.


   CHART # 6.3.3

        15                                                   9.92
              9.2                                                         8.48
        10          6.34          5.41 6.48                                      5.23 5.51
                           3.74                                     4.4

SOURCE: Capitaline

There has been a moderate increase in the cash/deposit ratio. This shows that the banks have a
higher cash reserve with them as compared to the previous year.

         CHART # 6.3.4

        80   57.93 57.18      62.91 58.39
        70              53.68                    54.59 53.0453.9552.64 57 57.09

The interest expended to earned ratio has fallen a bit. This indicated that the banks have received
more interest than last year and in the same period have paid less interest as compared to last
year. Still Bank of India had the highest percentage when compared with the other commercial
public sector banks.


   CHART # 6.3.5

                                               20.22                     20.54
       25                                                                        18.01 18.33
            17.22 17.07 17.29   16.08
                                        18.9        16.64 16.83

   SOURCE: Capitaline

The share of other incomes of the bank has come down when compared to previous year. This
year‟s aggregate average stood at 17.22%. Punjab National bank is the only bank which had
almost 20% of their total income from other sources.

       CHART # 6.3.6

              28.27 25.86 26.89                   26.68 27.75                          26.97
         24.8                                                                  25.48
   30                             22.59

   20                                     13.84


SOURCE: Capitaline

The total operating expenses as a percentage of the total income has gone up across board for
all the banks. This is mainly due to the increasing cost of labor. Punjab National Bank had
the highest operating cost which stood at 32.29% of their total income while the industry
average stood at 24.8%


   CHART # 6.3.7

                    3.45                               3.48                    3.51
         4   3.11          3.31                                                        3.21 3.4
       3.5                               3.01                          3.09
         3                        2.49
         1                                      0.52

   SOURCE: Capitaline

The net interest income of all the banks moved into positives thus showing a better and improved
performance of all the banks.


   CHART # 6.3.8

       1.6          1.37                                        1.33
       1.4                                                                                     1.12
              1                          1.06           1.09                            0.99
         1                                      0.85
       0.6                        0.38

The net profit is to total funds is highest for NABARD followed closely by Allahabad Bank.


   CHART # 6.3.9

       40                                                         29.85
                                           19.95                                 22.49
       25                                                                                19.43 16.48
       20   15.13           12.58
       15                                          10.45
                                    8.36                   7.42
       10                                                                 4.45

The total returns on net worth of the banks have taken a dip. Indian overseas bank and Punjab
National Bank are the only banks which have given a return of more than 20% on the total assets
of the company.

6.4 ANALYSIS OF 2005-06


   CHART # 6.4.1

             68.23 56.35 59.0469.8765.47    54.04 63.27       49.62 60.6 62.1349.29

   SOURCE: Capitaline

State Bank of India has witnessed the highest growth among the commercial public sector banks,
wherein the credit-deposit ratio has increased from 52.55% to 62.13%. The aggregate average of
the public sector banks has seen a growth of about 7% and now stands at 68.23%


   CHART # 6.4.2

                                        Investment / Deposit (%)

        80       43.13                                                    45.1441.1648.14 52.26
                                                        48.85 40.06
        60            41.42 41.25 35 35.13                          36.15

   SOURCE: Capitaline

The investment/deposit ratio has taken a fall steep and all the banks are collectively responsible
for bringing down the aggregate average from 50% to 43.13%


   CHART # 6.4.3

                                            Cash / Deposit (%)
          15      9.14
                         5.7                                    7.65          8.1
          10                          5.5 6.04           5.64                               5.15 5.54
             5                                                         1.08

The cash/deposit ratio of the banks have shown a small decrease, this is mainly attributable to the
increase in the credit-deposit ratio which shows that the banks have less liquid cash available at
their disposal and have advanced credit at an higher rate.


   CHART # 6.4.4

                       Interest Expended / Interest Earned (%)
        80                     62.55 58.89
        70   58.46 58.13 54.97                       55.11
                                                             53.09 56.53 51.48 51.31
                                                                                       56.67 56.76

   SOURCE: Capitaline

The total interest expended to the interest earned is highest for Bank of India which stands at
62.55% whereas the aggregate average of all the public sector banks is 58.46%. Punjab National
bank has the lowest interest expended to interest earned percentage and stands at 51.31%.


   CHART # 6.4.5

                           Other Income / Total Income (%)
                          16.51                         15.3                          16.55 17.3 17.13
       20   14.85 14.14           14.42 14.37                  14.18
       16                                                                     10.82
        4                                                              1.32

   SOURCE: Capitaline

The other incomes of the public sector banks have come down as a whole to 14.85% as
compared to previous year‟s figures of 17.22%. This indicates that major chunk of the banks
revenues are from their core activities. IDBI had the highest share of other incomes in their
revenues which is still at an acceptable level of 19.22%, while NABARD had a meager 1.32%


   CHART # 6.4.6

       40                 30.17                        28.93 28.21                    28.74        29.27
       35   26.04 26.65           25.75 23.68                                                 27.03
       20                                       12.9               10.58

Punjab and Sind bank continues to have high operating expenses and is way above the aggregate
average of all the banks. United bank, Indian Bank, SBI and Punjab National Bank have also got
a high operating expense/total income ratio and stands above the aggregate average.


   CHART # 6.4.7

                              Net Interest Income / Total Funds (%)
                                                           3.76          3.65
         4                                          3.46                        3.44 3.27 3.3
       3.5   3.01 3.18 3.05           2.95                        2.63
         3                     2.54
         1                                   0.45

The net interest income to total funds has declined indicating that the total interests earned by the
banks have come down. Among the commercial banks Bank of India had the lowest percentage
value on its total funds while the overall aggregate percentage value of all the public sector banks
stood at 3.01%


   CHART # 6.4.8

                   1.42                                   1.43 1.34
       1.6                                         1.16
       1.4                            1.1                                    1.06
       1.2   0.9                                                                    0.92
         1                0.79 0.68                                                        0.66
                                            0.66                      0.63

The net profit to total funds has not changed significantly. It has come down from 1% to 0.9%
for the public sector banks as a whole. Bank of India though had a positive change from 0.38%
to 0.68% while Allahabad Bank, Canara Bank, Bank of Baroda have shown minimal positive


   CHART # 6.4.9

                                               RONW (%)
       30                                   20.65
       25                                                                         15.34 17.01 17.04
       20   13.59           12.28                          12.65                                      11.63
       15                                           9.12
       10                                                                  3.52

Bank of India has shown a good positive increment in the Return on net worth. While the
aggregate figure has dropped down from 15.13% to 13.59%

6.5 ANALYSIS OF 2006-07


   CHART # 6.5.1

       250                                166.12
       200                                                       57.51 65.97
       150   70.95 65.19 65.67 70.29 68.65     58.64 68.6                      73.46 56.73

SOURCE: Capitaline

Credit-deposit ratio of SBI witnessed a steep increase from 62.13% to 73.46%. Allahabad Bank
and Bank of Baroda have also shown a high growth in the amount of credit disbursements. The
aggregate average touched 71%

       CHART # 6.5.2

                                  Investment / Deposit (%)
       60                                      45.39                                       43.26
       50   36.31                                      35.99       37.66           38.22
                    34 32.05 31.46 31.71                                   33.23
       30                                                      15.61

SOURCE: Capitaline

The investment to deposit ratio has shown a downfall wherein it has fallen from 43.13% to
36.31% in FY07. Apart from IDBI, Indian Bank, Punjab and sind bank, SBI and United bank all
the other banks have a percentage value less than the public sector banks cumulative average
which stands at 36.31%. This tells us that there has been a reduction in the investments by the
banks in various bonds, securities.


   CHART # 6.5.3

                                   Cash / Deposit (%)
       14                                      11.66
       12   8.87
       10                               6.56           6.86 6.51
        8          6.23          5.98                                                    6.22 6.2
                          4.46                                            5.26
        2                                                          1.02

SOURCE: Capitaline

Apart from a few banks all the other banks have shown a lower cash-deposit ratio as compared to
last year. Punjab National Bank had the highest ratio followed by IDBI bank. The indu stry
average stands at 8.87%


   CHART # 6.5.4

                         Interest Expended / Interest Earned (%)
       80    62.17 64.1560.27 61.5 64.57          57.51 56.09 58.8855.58 53.6 59.35 59.3

SOURCE: Capitaline

The total interest expended to interest earned for the public sector bank stands at 62.17% this
after a small increment of 3% over the last years figure. IDBI had the highest figure while Punjab
National Bank had the lowest.


   CHART # 6.5.5

                        Other Income / Total Income (%)
                                 14.89        14.29                              14.6815.96
        20    13.06                      11.74                13.28      13.42                11.85
         5                                                        1.35

The other incomes of the banks as a whole has come down a bit from 14.85% to 13.06%.
NABARD had the lowest other incomes in their total income followed by Allahabad Bank.


   CHART # 6.5.6

                             Operating Expenses / Total Income (%)
                                                           27.71                     28.79
                                                                           27.99 26.79
       30                  24.8 24.84                                                        24.29
            23.4                                   24.86
       25          21.47                20.4
       15                                      10.78

The operating expenses as a percentage of total income has come down from 26.4% to 23.04%.
This shows the improvement in the banks overall performance and optimal utilization of the
resources at their disposal.


   CHART # 6.5.7

                     Net Interest Income / Total Funds (%)

         4                                       3.45 3.62          3.78
                                                                           3.39 3.03
       3.5          2.88 2.79 2.71 2.71                                              3.07
         3                                                   2.46
         1                                0.69

SOURCE: Capitaline

The net interest income which shows the difference between the interest expended and the
interest earned by the bank. This as a percentage of total funds for year ending 2007 stands at
2.09% as compared to 3.01% the last year. Indian overseas bank had the highest the percentage
value which was 3.62%


   CHART # 6.5.8

                                Net Profit / Total funds (%)

                                                   1.47 1.43 1.15
       1.6           1.23                                         1.08
       1.4                  0.8 0.88 0.96                                 1 0.86
       1.2    0.67                          0.66                                 0.71

SOURCE: Capitaline

The net profit as a percentage of total funds has decreased and the aggregate average stands at
0.67%. Almost all the banks had a similar return on the total funds apart from a few which had a
return of more than one percent.


   CHART # 6.5.9

                                                   RONW (%)29.11
                       22.58         21.25 18.78                          20.23 18.68
                             12.45                                                   15.41 14.83
         20    11.44
         15                                        7.37
         10                                                        3.33

SOURCE: Capitaline

Return on net worth for the public sector stands at 11.44% which is slightly lower than the
previous year‟s figure of 13.59%. Among the commercial banks Indian Overseas Bank continues
to have the highest return on their net worth with a return of 29.11%, while the lowest was for
NABARD which was 3.33%

6.6 ANALYSIS OF 2007-08


   CHART # 6.6.1

             70.74 69.39           69.4        63.7170.22    68.13 70.5559.4473.46
       100              68.7273.58

SOURCE: Capitaline

The credit-deposit of the public sector banks as a whole is nearly the same as the previous year.
The major changes has taken place in Punjab National Bank‟s credit disbursement which has
gone up by almost 5%

       CHART # 6.6.2

                          Investment / Deposit (%)
       60   39.58                                   39.57                          39.36 38.22
       50        32.13 28.4628.6432.06                   34.27          34.35 32.38
       20                                                        9.15

SOURCE: Capitaline

The investment to deposit ratio has grown by almost 3% over the last year‟s figures. Indian Bank
investment to deposit has gone down by nearly 6% which is a huge drop in terms of the total
investment by the bank.


   CHART # 6.6.3

                                      Cash / Deposit (%)
            9.53                            10.4
       12                                             9.4 9.02           9.02 9.43
                   7.9          7.02 7.58                      8.11 6.86
       10                                                                                6.22
        8                 5.7

SOURCE: Capitaline

IDBI, Indian Bank and United Bank have a high cash to deposit ratio. This implies that a good
portion of their deposits are in the form of liquid cash which will service their customers who
have deposits with them.


   CHART # 6.6.4

                       Interest Expended / Interest Earned (%)
       100                                                            74.57
                  71.64           75.09
        80   60.79     66.89 65.77        61.33 66.37
                                                    57.6 63.73 61.2           59.35

SOURCE: Capitaline

Interest expended to interest earned for the public sector banks as whole stands at 60.79%. This
shows that approximately 61% of the interests earned by the banks are given away as interest to
the customers who have deposits with them.


   CHART # 6.6.5

                           Other Income / Total Income (%)
                                      18.16 18.94
       20                                                                 16.25 15.96
            14.1 14.1114.96 14.63 13.98                         12.62 12.44
       15                                        11.89

SOURCE: Capitaline

The other incomes of the banks have shown a slight increase. Indian bank and IDBI had the
highest share of other incomes among their total incomes. While NABARD had the lowest share
of incomes from non-core activities.


   CHART # 6.6.6

                             Operating Expenses / Total Income (%)
       30    24.3                                                   22.95 21.8221.26
                            21.27                22.04 19.39
       25           18.23        18.28
       20                                17.49
       15                                    10.96

SOURCE: Capitaline

The operating expenses as a percentage of the total income has somewhat remained the same at
the end of FY08. This implies that the banks have been operating at the same level of efficiency
as they were during the previous year.

        CHART # 6.6.7

                                 Net Interest Income / Total Funds (%)
                                                        3.16 2.91      3.13 3.08          3.03
            3.5            2.39 2.42 2.65 2.07                    2.58
              3                                                                    1.89
            1.5                                  0.57

SOURCE: Capitaline

The net interest income to the total funds has gone up to 2.93% from 2.01% last year. This shows
us that the amount of interest received by the banks have gone up. State Bank‟s figure has
remained constant during the year.


   CHART # 6.6.8

                           Net Profit / Total funds (%)
                                                       1.6               1.47
                    1.31          1.26                       1.31 1.36
       1.6                                                                      1.14
       1.4                               0.91
       1.2   0.94          0.89                                                               0.86
         1                                      0.63                                   0.67

SOURCE: Capitaline

The net profit to total funds ratio has gone up and has reached a level of 1% returns of the total
funds of the banks. Punjab and Sind Bank had the highest percentage value while Allahabad
Bank and Indian Overseas Bank had a return value of 1.31%


   CHART # 6.6.9

                                            RONW (%)
                                27.58                 27.97          27.79
       30           24.56                     25.08
       25                           19.08                                19.58
       20                                                                        15.6215.41
            14.87       14.58
       15                               11.19

SOURCE: Capitaline

The return on net worth of all the banks put together has gone up to 14.87% from 11.44%.
Punjab and Sind Bank has seen the highest growth where their returns has gone up by almost
7%. Indian Overseas Bank overall had the highest RONW among all the banks under


Table # 6.7.1                       SALES AND PROFITS

Sr. No Abbreviation          Bank Name                  Sales (Crs)   Profit %

1        A                   ALLAHABAD BANK             7311.1        13.33

2        B                   BANK OF BARODA             13892.18      10.33

3        B1                  BANK OF INDIA              14472.15      13.88

4        C                   CANARA                     16509.05      9.47

5        I                   IDBI                       9800.3        7.44

6        I1                  INDIAN BANK                6354.53       15.88

7        I2                  INDIAN OVERSEAS BANK       9043.72       13.28

8        N                   NABARD                     5521.95       22.20

9        P1                  PUNJAB & SIND BANK         2574.28       14.85

10       P2                  PUNJAB NATIONAL BANK       16291.48      12.57

11       S                   STATE BANK OF INDIA        58437.42      11.5

12       U                   UNITED BANK                4247.41       7.5


      CHART # 6.7.1                 Profit % (High)




                                                                      B1                         2000
   60,000                                                                           A            Crores
   Crores                                                                  I2
Sales (High)                                                                        Sales (Low)





                                        Profit % (Low)

Quantitative mapping of 12 public sector Banks on the basis of sales revenue and profit as
a percentage of sales
We have done a quantitative mapping for the public sector banks that we have taken and the
factors are between sales and profit. The findings of the mapping go here as under.

   1) The X axis consists of sales as a measure and Y axis consists of profit of these banks as a
   2) Our consideration of lower limit as sales is Rs.2000crs and upper limit is Rs.60000crs.
       The lower limit of profit on sales is 0% and the upper limit is 25% sales.
   3) Almost all the banks has a turnover fall in the range between Rs.2500crs and Rs.16000crs
       with SBI being the only exception falling in the left side of the axis and that is the reason
       why most of the points are cluttered towards the right side of the axis.
   4) When we analyze the sales turnover of the banks under consideration, after SBI comes
       the Punjab National bank followed by Canara bank making the top three.
   5) The bottom three in terms of sales turnover is United bank, NABARD, Punjab national
       Sind bank.
   6) The most important analysis comes when we compare the profit of the banks. NABARD
       having the second lowest turnover has the highest profit because it concentrates only in
       providing loans regarding to agriculture.
   7) Although SBI has the highest number in terms of sales turnover they don‟t make enough
       margins because they cater to wide range of products (in terms of loans) and their target
       segment is huge and is not narrow like NABARD.
   8) The second in terms of profit margin is Indian bank and with Punjab Sind bank they
       make the top three in terms of profit.
   9) Although Canara bank has the second highest sales turnover, it is the third lowest in
       terms of profit because of the high percentage of operating expenses.
   10) IDBI and United Bank stand close to each other for the last place, but the startling fact is
       that although IDBI has twice the united bank‟s sales turnover, its interest expenses has
       eaten away the profit there by making it lowest in terms of profit percentage.


Sr. No Abbreviation       Bank Name              Total Assets(Crs)   NPA Ratio

1       A                 ALLAHABAD BANK         82943.52            .80

2       B                 BANK OF BARODA         179599.52           .47

3       B1                BANK OF INDIA          178860.23           .52

4       C                 CANARA                 180696.09           .84

5       I                 IDBI                   130867.47           1.30

6       I1                INDIAN BANK            70507.69            .24

7       I2                INDIAN OVERSEAS BANK   101859.74           .60

8       N                 NABARD                 98706.47            .023

9       P1                PUNJAB & SIND BANK     30949.20            .37

10      P2                PUNJAB NATIONAL BANK   199048.77           .64

11      S                 STATE BANK OF INDIA    722125.08           1.78

12      U                 UNITED BANK            54310.95            1.1

      Annual Report of NABARD

     CHART # 6.7.2
                                 NPA (High)



  7.5 Lac

                                                                 Total Assets (Low)
Total Assets (High)
                                                         C                     A





                                  NPA (Low)

Quantitative mapping for all the public sector banks on the basis of NPA (Non-Performing
Assets) and Total Assets
In this case we have a done quantitative analysis on total assets Vs NPA. The findings are here as

   1) We have taken the total assets of the banks in X axis with Rs.30000crs as the lower limit
         and Rs.7, 50,000crs as the upper limit. NPA (Non performing assets to total assets ratio)
         is taken in Y axis with 0% as the lower limit and 2% as the upper limit.
   2) When we observe the map, most of the points fall in the fourth quadrant, which specifies
         low NPA and a lower value of total assets.
   3) There are two banks in the first quadrant which specifies higher NPA with a lower value
         of assets. There is one bank which is an exception to all, SBI which has the highest value
         of total assets and a very high value of NPA.
   4) SBI, PNB and Canara bank stand in the top three and Punjab and Sind bank, united bank
         and Indian bank stand in the bottom three in terms of the total assets they possess.
   5) These three banks are the biggest public sector banks in terms of market cap in India,
         sales and that is one of the reasons why their assets base is huge.
   6) One more reason may be because of the customer base, the deposits that they have which
         may be used to procure assets in various investment portfolios.
   7) Coming to the NPA ratios, NABARD has the lowest NPA and surprisingly SBI has the
         highest NPA.
   8) NABARD since it mostly caters to agricultural based loans and since the return/the cash
         inflow is very high in this case, their NPA is noticeably very low. But SBI on the other
         hand, due to its very huge assets base and since it caters to all kinds of people with
         different loan packages has a very high NPA ratio.
   9) The other noticeable member in this map is IDBI, IDBI has a credit to deposit ratio of
         around 900% and that is the reason why their NPA is the second highest. United bank
         stands in the third place, although their asset base is small, their NPA is high because of
         bad risk management in credit disbursal.
   10) Indian bank and Punjab & Sind bank are the other PSB which form the bottom three in
         terms of NPA ratios.



     NETWORK OF BRANCHES: The public sector banks have the highest number of
      branches in the country with SBI leading the pack with over ten thousand branches and
      also the second largest bank in the world in terms of their presence. The Public sector
      banks have a good presence in the rural areas which has helped in developing these areas.
     GOODWILL AMONG THE PEOPLE: The public sector banks have been around for
      a while now and Allahabad bank is one of the oldest banks in the country with over 140
      years of service. This has helped create a trust and goodwill among the people of the
      country because of their service and reliability and most importantly their back up by the
     UNIVERSAL BANKING: The public sector banks have started offering a number of
      services to their customers apart from the basic banking services of accepting deposits
      and lending loans. This includes investment banking, wealth management, private
      banking, insurance policies and merchant banking. It has become a financial supermarket
      wherein many financial services are available under one roof.
     LOW NPA: The public sector banks have a low NPA ratio as compared to the Private
      and Foreign banks. This is because of their good credit and risk team due to which the
      quality of the asset is considered top notch.
     INTERNATIONAL PRESENCE: The public sector banks have also ventured out into
      the foreign shores by opening up branches in key financial centers of the world. By this
      they have helped create a brand name outside India also. This also helped NRI‟s living
      abroad to invest and transfer money into the country at a much faster pace.
      sector banks have an excellent market share in terms of the assets and liabilities. They
      hold almost 75% of the portfolio. This is majorly because of their reach and the quality of
      service meted out by them.
      banks have helped create an indigenous entrepreneur class. They have created a special
      scheme which helps people in getting funds for their dream projects.

     OPERATING COST: The public sector banks have a high operating cost as their
      certain branches are over employed and have a low efficiency. The profit per employee
      and the contribution per employee is low as compared to the private and foreign banks.
      This has led to the surge of the operating costs of the banks.
     LACK OF TECHNOLOGY: Till date a portion of the Public sector banks are not
      computerized, they have to do with manual work of all the receipts and the vouchers.
      They are not even linked to the other branches of the bank. Due to this they are virtually
      not aware of the happenings out of their world.
     LABOUR PRODUCTIVITY: The labour productivity of the Public sector banks has a
      poor record. Since them being a government employee have no fear of being laid-off or
     GOVERNMENT POLICIES AND REGULATIONS: The public sector banks have a
      huge hierarchy, so all the major decisions have to follow this path which is time
      consuming and might also be a loss of opportunity. So in short they are inflexible in their
     TRADE UNION: There is a lot of unionism in the public sector banks. All the
      employees are governed by these unions. So any minor problems also might create a
      huge stir among the employees which would hamper the productivity of the bank.


     PENETRATION: though the PSBs have the advantage of high penetration in the rural
      areas, never the less the opportunities provided by these areas are immense.

     EFFECT OF RECESSION: the economic slowdown has hit all the sectors of the
      economies. The PSBs came forward to provide credit to diverse sectors while private
      banks and foreign banks stepped down due to rise in NPA (Non Performing Assets).

     INDIA’S GROWTH STORY: the last four fiscal years have observed an average
      growth of 9% (2004-07). India is the second fastest growing economy after China. She
      has attracted many players thereby surging strong competition wherein all banks are
      attempting to outperform each other.


     PRIVATE AND FOREIGN BANKS: The private and foreign banks are the main threat
      to the sustainability of the public sector banks. These banks have bought in
      competitiveness and technology which the public sector banks lacked.
      have not ventured much into hedging facility as compared to the foreign and private
      banks who have a considerate exposure in this front. This might cause the public sector
      banks to lose out on customers for non-availability of services.


                                         ECONOMICAL FACTORS
                                   1. KEY INTEREST RATES
                                   2. GROWTH OF THE INDIAN
       BASEL II NORMS                   RISE IN THE SAVINGS RATE
       IMF                              RISE IN THE FOREIGN TRADE

 3. COMMUNICATION                  2.PUBLICITY
                                   4. CORPORATE SOCIAL



The private and the foreign banks pose the biggest threat to the existence of the public sector
banks. These banks bring along with them new technology which enables them to offer a
plethora of services to the customers, which in turn maximizes their returns. The banks main
motive is to provide the best possible services to the consumers at the least possible prices.

The RBI guideline on the entrance of a foreign bank is scheduled to be changed in the near
future. This means that there would be a lot of new foreign banks entering the market. This could
prove lethal to the public sector banks if they don‟t cope up with the competition posed by these


A substitute is the one wherein a customer of one bank can easily shift to the services provided
by some other bank. This basically takes place when the services provided by the existing bank
are of a low quality of has deteriorated over time. The customers want maximum benefits from
their banks and usually want a bunch of services.


The bargaining power of the buyers i.e. in this case the customer of the bank is very high. There
are a number of banks in the market. So in order to retain the customers, the banks have to
innovate themselves with new products, new technology and new ways of customer service. If
any of the above fail, the customers would waste no time in moving out of their bank.


The bargaining power of the supplier i.e. the central bank of the country is the highest. All the
major policies regarding the banking supervision, the money flow, the liquidity in the market is
decided upon by the RBI in their Monetary policy. The banks can in no way disobey the rules
and regulations laid down by the RBI, they have to abide by it failing which the RBI can revoke
their banking license or pose some imposition on the banks.


Even though the majority stake of the public sector banks are held by the government, there
exists a huge rivalry among them. All the banks aim at maximizing their share in the industry. So
the public sector banks not only compete with the private and foreign banks but also the public
sector banks.

7.4 Comparison of banks:

Globalization, deregulation and advances in information technology during last 12 years have
brought about significant changes in the operating environment for banks operating in India.
During this period a slew of financial sector reform measures aiming at increasing operational
efficiency of the banking sector as a whole, as well as of individual institutions are witnessed.
Policy makers have clearly recognized that inefficiency is the main factor contributing to the
high cost of banking services in India. In the process, a number of private sector banks
(classified as new private sector banks) were allowed to operate with latest technology and fully
automated systems akin to foreign banks. The public sector and the existing private sector banks
(old private sector banks) faced challenges in the form of competitive pressures and changing
customer demands both from foreign banks and new private sector banks. Most of the public
sector and old private sector banks (classified as traditional banks for the purpose of present
study) had their existence for more than a century with a number of legacy issues to tackle.
While the new private sector banks could adopt the best practices and implement latest
technology in their operations, the foreign banks acquired the practices and technology akin to
their host countries within the regulatory framework of India. Influenced by the varied practices
and culture of host countries, this segment of banks operating in India was found to be quite
heterogeneous in their operations and performance.

Faced with the threat of competition from the foreign and new private sector banks (classified as
modern banks), the traditional banks employed a number of measures to improve the operational
efficiency, meeting customer expectations and reduction of operating costs. These include going
for fully automated systems (Core Banking Solution based operations) preceded with business
process reengineering (BPR), offering VRS to its employees, training and retraining of staff,
lateral recruitment of specialists, emphasis on marketing, advertising, customer relationship
management and improving brand image, diversification of activities, introduction of electronic
based multiple service delivery channels, setting up of back offices and data centers, business
process outsourcing. Some of these banks have undergone restructuring exercise with the
involvement of international consulting agencies to adopt best international practices and remove
bottlenecks in their operations.

For achieving the operational efficiency, meeting customer expectations and other parameters of
banks‟ performance, the role of employees and their efficient utilization cannot be undermined. The
present study therefore compares the parameters of employees‟ productivity viz. “business per
employee” (BPE) and “profit per employee” (PPE) between the traditional banks and modern banks.
It also compares the parameters measuring employees‟ cost viz. “employee cost to operating
expenses”, “employee cost to total business” and “employee cost to total assets”. These ratios are
widely used in various studies to measure the employees‟ productivity as well as employees‟ cost.
The time series data on these parameters during 12 year period from 1997 to 2008 have been
analyzed to observe the trend and the impact of measures taken by traditional banks to face the
challenges posed by the modern banks.


The productivity of employees is crucial for the overall efficiency of the banks. A number of
measures have been taken by the banks to right size the employees for improving their
productivity. The efforts have been ably supported by business process reengineering and
technology implementation besides various measures taken for human resource development.

TABLE # 7.5.1

                        Employee Productivity Ratios

                                                                    (Rs. Lakhs)
Year*               Business Per Employee               Profit Per Employee
                          (Median)                            (Median)
                    Traditional          Modern        Traditional        Modern
                         Banks            Banks            Banks              Banks
1                            2                3                 4                 5
1997                     75.28            397.50             0.57              6.50
1998                     97.53            689.90             0.81              7.90
1999                    112.93            638.66             0.57              5.66
2000                    136.26            735.20             0.79              7.49
2001                    166.23            690.83             0.71              5.84
2002                    192.30            667.41             1.27              5.37
2003                    223.36            717.00             1.68              9.17
2004                    263.12            758.46             2.23             10.41
2005                    302.02            745.56             1.29              7.82
2006                    355.79            891.52             1.68              9.01
2007                    439.96            790.44             2.84             11.48
2008                    549.21           1216.76             3.87             17.74
* represents end of financial year

CHART #7.5.1


It may be observed from the above Table and Chart that the business per employee for traditional
banks is continuously improving during the period of 12 years under study. It has increased 7.29
times (Rs. 75.28 lakhs to Rs. 549.21 lakhs) from 1997 to 2008. In case of modern banks the
business per employee has increased only 3.06 times during the same period (less than half
compared to the increase for traditional banks). It has, however, marginally declined during
1999, 2001, 2002, 2005 and 2007 compared to the previous years in respect of modern banks.
The ratios of business per employee between modern and traditional banks have decreased
drastically from 5.28 times in 1997 to 2.21 times in 2008 indicating that the gap in business per
employee between modern banks and traditional banks is consistently reducing due to the efforts
made by the traditional banks. Table and Graph reveal that the profit per employee has increased
both for traditional and modern banks from 1997 to 2008. However, this increase has been
significantly higher for traditional banks (6.79 times) compared to modern banks (2.73 times)
during the period of 12 years under study. There has been decline of profit per employee during
1999, 2001and 2005 compared to the previous year both for traditional and modern banks
indicating effect of some external factors impacting profitability of banks during these years.

CHART # 7.5.2


     Table # 7.5.1 and chart # 7.5.2 reveal that the profit per employee has increased both for
traditional and modern banks from 1997 to 2008. However, this increase has been significantly
higher for traditional banks (6.79 times) compared to modern banks (2.73 times) during the
period of 12 years under study. There has been decline of profit per employee during 1999,
2001and 2005 comparatively.


The Employees‟ Cost Ratios which are represented by “employee cost to operating expenses”,
“employee cost to total business‟‟ and “employee cost to total assets” are based on the wage bill
data of individual banks. Banks have been treating them as critical factors for improving
profitability and trying to minimize them in relation to operating expenses, total business and total
assets. The employees‟ cost in relation to these variables for the 12 years period under study in
respect of traditional and modern banks is presented in Table 2 and Charts II-A, II-B and II-C below.
(Detailed bank group-wise data on these parameters is also given in annex B)

From Table and the Graph it may be observed that the employee cost as a ratio of operating
expenses in respect of traditional banks remained more or less constant from 1997 to 2002 and
thereafter got reduced gradually. In case of modern banks, the ratio fluctuated within a narrow range

and reduced marginally up to the year 2006 before showing upward trend during 2007 & 2008.
The employee cost to operating expenses for traditional banks remained more than double of
modern banks till 2006, however, this ratio decreased significantly during 2007 & 2008 (1.77 and
1.65 times respectively), indicating that efforts made by the traditional banks to reduce the wage
bills in relation to operating cost made an impact during recent period.


Year                Employee Cost to              Employee Cost to              Employee Cost to
                  Operating Expenses                Total Business                Total Assets
                Traditional        Modern Traditional            Modern Traditional            Modern
                      Banks          Banks          Banks          Banks          Banks          Banks
1                          2               3              4                5            6               7

1997                   71.78          30.41            1.45           0.57           2.05           0.81

1998                   72.20          29.52            1.33           0.55           1.90           0.78
1999                   71.81          27.64            1.34           0.63           1.88           0.79
2000                   72.28          30.07            1.30           0.63           1.80           0.75
2001                   74.23          27.79            1.30           0.63           1.98           0.69
2002                   71.52          29.36            1.15           0.63           1.62           0.55
2003                   70.13          26.49            1.09           0.63           1.57           0.60
2004                   68.42          26.96            1.04           0.64           1.49           0.62
2005                   66.92          27.39            0.99           1.23           1.39           0.64
2006                   65.26          30.43            0.95           1.14           1.35           0.69
2007                   60.99          34.35            0.79           0.80           1.13           0.87
2008                   58.63          35.53            0.68           0.88           0.96           0.92

As regards employee cost to total business, it has been consistently reducing for the traditional
banks from 1.45 per cent in 1997 to 0.68 per cent in 2008. On the other hand, it has been increasing
for modern banks in a very narrow range from 0.57 per cent to 0.64 per cent up to 2004, thereafter
increased drastically to 1.23 per cent in 2005 and again reduced to 0.88 per cent in 2008. Employee
cost to total business in respect of modern banks, which remained significantly lower compared
to traditional banks up to 2004, overtook the traditional banks for last 4 years of the study period.

This trend clearly indicates that the traditional banks have reached to the level where they can very
well compete with the modern banks as regards to the marginal cost of expanding new business
(deposits plus advances)

CHART # 7.5.3


CHART # 7.5.4


It may be observed from Table 7.5.2 above and the Charts 7.5.3 and 7.5.4 that the gaps between
modern and traditional banks on all employee cost ratios have been coming down consistently
from 1997 to 2008. The percentage reduction was highest (129 per cent) in case of employee
cost to total business, which has drastically come down and assumed negative value from 2005
to 2008. The gap between traditional and modern banks in respect of employee cost to total
assets reduced significantly from 43.41 in 1997 to 2.13 in 2008 (95.09 per cent reduction). In the
case of employee productivity ratios, business per employee, the gap between traditional and
modern banks reduced significantly from 68.15 in 1997 to 2$9.86 in 2008 (56.18 per cent). The
gap in respect of profit per employee between traditional and modern banks was reduced from
83.84 to 64.18 (23.45 per cent) during the same period. However, the gap in absolute terms as at
end March 2008 is still high in respect of business per employee (29.86), profit per employee
(64.18) and employee cost to operating expenses (24.53). Thus, the traditional banks have to
continue to take further steps to improve their productivity and cost reduction efforts for
competing with the modern banks. It will be interesting to monitor the trend of gap indices by
the banks in future to get an idea about the existing gaps between modern and traditional banks.


While comparing the 12 year‟s data from 1997 to 2008 on productivity factors viz. „Business per
Employee‟ (BPE) and „Profit per Employee‟ (PPE) and employee cost factors viz. „Employee
Cost to total Business‟, „Employee Cost to total Assets‟ and „Employee Cost to Operating
Expenses‟ it was observed that the performance of the modern banks (foreign and new private
sector banks) was much superior than the traditional banks (public sector and old private sector
banks). However, the gap between the performance of modern and traditional banks on all the
five variables has shown a decreasing trend, which has significantly reduced during the period.

The impact of measures taken by traditional banks to meet the challenges from modern banks to
improve operational efficiency has resulted in improved performance of traditional banks on all
the factors studied. However, the performance of the traditional banks is still quite below
compared to the modern banks on these variables except on „Employee Cost to total Business‟ in
which the traditional banks have surpassed the modern banks during recent period i.e from 2005 to

The traditional banks are still to resolve a number of legacy issues related to people and processes
for improving the productivity and reducing cost in order to compete with the modern banks.

It is interesting to observe the reduction in the gap due to improved performance of traditional
banks. This gap is likely to be further reduced in future due to certain measures taken by the
traditional banks recently. However, the trend has to be closely monitored to come to a firm

The employee cost to total assets in respect of traditional banks also consistently reduced from
1997 (2.05 per cent) to 2008 (0.96 per cent) with the exception of 2001, where it has marginally
increased from the previous year. Employee cost to total assets in respect of modern banks also
reduced marginally during the period of 12 years from 0.81 per cent in 1997 to 0.69 per cent in
2006 and increased thereafter to the level of 0.92 per cent in 2008.


  1) Develop mechanisms for identifying anchor banks-strong and solvent institutions
  2) Layout out blue-print for the sector
  3) Encourage market driven consolidation
  4) Create 4-5 global sized institutions, 6-8 national champions
  5) Reduce government participation in the sector; create holding company; introduce
        concept of golden shares
  6) Give public sector banks more operational freedom and access to talent
  7) Increase level of foreign participation to ~20% of banking assets


         Ability to attract talent at entry and senior levels through appropriate compensation
         Ability to consequence manage non-performance
         Ability to reward and accelerate track of high performers
         Ability   to   affect    personnel   related   changes      without   interference   from
         Ability to appoint partners without getting constraint by CVC guidelines
         Freedom from CAG Audit
         Ability to reconstitute boards
         Allow consolidation of PSU with PSU and private banks. This will also be
          accompanied by ability to leverage synergies through
         Reduction in staff
         Elimination of overlapping branches
         Synergies captured through structural changes in organisation

   1) Rapidly implement IT and operations initiatives
Close the technology gap with the private sector banks, Restructure operating platforms by
centralizing and outsourcing operations, Redesign processes to match competition on TATs,
productivity, error rates and cost of operations.

   2) Build sales and marketing capabilities
Re-focus the efforts of core strengths, branch network and staff, on sales, Convert to a sales and
marketing led organization, Proactively target emerging mass affluent and affluent segments.

   3) Strengthen Risk management
Strengthen risk management skills to enable Basel II compliance, Risk modeling, Review and
collections, IT support.

   4) Build human capital
Focus on reskilling employees to shift attention to sales and marketing, and infusing specialist
skills through external recruiting (e.g., in treasury, cash management), Comprehensive change in
mindsets and behavior.

   5) Prepare for local consolidation
Pro-actively build skills in acquisition and post-merger management to enable effective play in
the process of local consolidation.

   6) Socialdevelopment
Offer market based incentives for under-penetrated segments e.g., subsidy auctions, creation of
credit guarantee corporation, Remove rural branch restrictions, Remove directed lending ,Ensure
insurance provisioning on loans to urban and rural poor, Reimburse banks the admin cost for
rural banking to allow lower interest rates charged to customers.

    7) Unified Regulator
Improve regulations for STCBs, RRBs, MFIs, NBFCs and remove regulatory arbitrage, Move to
a coordinated regulator model , Separate central bank and regulator roles ,New unified Financial
Services Modernization Act to bring together, under a single umbrella, all aspects of financial
services on the lines of legislations in US and UK.

    8) Corporate governance
RBI to guide Indian banks towards adopting international standards in corporate, governance,
Improve corporate governance primarily by increasing board independence and accountability,
Enhance corporate governance norms, Institute penalty for weak corporate governance,Ensure
independence by appointing directors appointed on the recommendation of a nomination
committee based on clearly defined and transparent criteria.

    9) Supporting Infrastructure
Accelerate credit bureau and payment infrastructure, Support creation of industry utilities for
processing e.g., Symcorin Canada, Amend banking regulations to enable formation of holding
company to own governments shareholding in PSB‟s and their other financial service ,Address
loopholes in SARFAESI to ensure banks get a fair hearing, Implement recommendations of Patel
Committee for development of primary and secondary debt market
    10) Labour reforms
Push labor reforms, support re-skilling of employees, Greater flexibility in surplus labourand
freedom to link compensation with performance.

    11) Real sector reforms
Real economy reforms required to complement financial system reforms–Product market
reforms: Elimination of reservation of products for SSI, removal of licensing requirements,
reduced duties and unrestricted FDI, Land market reforms: Fast-track courts to settle land market
disputes, computerize land records and cut stamp duties, State ownership: Transfer management
of productive/commercial assets to the private sector; contract out the construction and
management of new infrastructure.


   1) The Indian economy with a GDP growth rate of around 3.4% in 1950 has grown at a rate
      of 7.3% in 2006 and 9% in 2007.
   2) The working percent of total population has grown from around 62% in 2000, and is
      predicted to grow at a rate of 68% by 2040.
   3) The average household disposable income has increased from Rs.8000 pan India in 1985
      to Rs.12000 in 2010 to Rs.32000 in 2025.
   4) As a result of growing income Share of incomes of the middle class and globals will rise
      from less than 30% today to more than 80% by 2025
   5) As per the current plans the govt plans to spend around 600bn from 2007-12 in key areas
      roads,railways, airports etc
   6) Indian companies are now aggresively establishing global foot prints, Indian companies
      now are can invest equal to 300% on net worth on automatic approvals.This is due to
      easy access of capital due to decline in interest rates coupled with liberal lending
      policies adopted by banks.
   7) Similarly MNC s are also actively seeking the Indian opportunity, the number of M&A
      has increased from 416 in 2002, to 1226 in 2007.

  1) Provide the new products demanded
  2) Create infrastructure for new channel access
  3) Provide financial advice
  4) Build stronger relationships
  5) Leverage new technologies for customer value management
  6) Capture fully the banking potential in the mass affluent and upwards to Serve across
     product categories and to raise standards to match urban customers
  7) Create a new model to reach the unbanked, to use the savings as much as to lending, use
     new technology which does not need physical presence, to forge a useful partnership with
     foreign companies and to have new methods of managing channels.

8) Fund infrastructure growth pegged at excess of US$600 billion in the next 5 years
   through variety of instruments
9) To Provide cost efficient credit and services to the large and mid corporate sector and to
   provide credit at the right time in the right quantum.To have Trade intermediation
   services (factoring, forfaiting, structured finance), Hedging services (interest rates, fx,
   commodities),Investment/      Surplus    management      products   (structured   products),
   Transaction intermediation services (local and global)
10) To provide capital raising and advisory services, options for equity raising, to have DCM
   as a viable substitute to credit, M&A/ PE advisory to large and mid corporate (help
   Indian corporates in their quest to go global.
11) Go beyond credit and increase the transaction services, to provide PE advisory to SMEs,
   To concentrate on relationship management
12) Creation of a model which combines institutional skills and local touchpoints is critical
13) Shift mindset from treating SME as priority sector to being „business.


Issues for PSU banks- Talent, ownership and operational issues

  1) Talent:- Unable to attract entry level talent due to rigid recruitment policies, Slower
      growth to middle and senior management path is another main reason, Lower
      compensation/no ESOPs which talks about the poor performance culture in public sector
      banks. Perceived lack of operating freedom because of a very rigid structure. Union issues,
      unions play a major role in public sector banks.

  2) Operational issues: - Fear of accountability is one of the most important factors in any
      decision making, Accountability to government restricts decision making, CVC guidelines
      adherence issues for Eg: central vigilance commission and adherence to their rules in
      procurement and purchase, CAG (comptroller and auditor general) Audit.

  3) Ownership:- Government ownership floor at 51% restricts ability to raise capital, PSB has
      a fair share in Priority sector, minority lending, Bankers to government.


All the economies suffered severely on the hands of the looming recession. Our economy was no
exception to it, as the GDP growth rate dipped from an average of 9 % to approx. of 7% (2008-
09). Talking about the banking sector of India they have come out relatively unscathed. The
reasons can be attributed to strong financial fundamentals, strict vigil on risk appetite and firm
monetary guidelines, Indian banks have proved among the most resilient and sound banking
institutions in the world. Since public sector banks have conservative norms and regulations it has
not shown much decline

But there has been considerable divergence in the performance of the various banking
institutions in the country as also among the public, private and foreign banks operating in India.
Going by the performance for the calendar year 2008, Indian public sector banks have not only
been able to weather the storm of global recession but have been able to moderate its impact on
the Indian economy as well, compared to its peers among the foreign and private banks.

According to the figures put by RBI, the performance of PSBs was more than the market
expectation while the assets and liabilities of both foreign and private sector banks dipped during
the corresponding period last year. The PSBs emerged as forerunner in terms of deposits and
lending to the diverse sectors of the Indian economy.

RBI had set the an indicative target of 24% of credit off take for the banks to check slowdown
and spur demands, but major public sector banks (PSBs) could target a growth of 20% only. The
situation is just reverse of the situation prevailing one year back when the banks were targeting
25% of credit growth while RBI wanted them to limit themselves at 20%


                                          DEPOSIT (%)            CREDIT (%)

                                  2007         2008           2007         2008
         Public Sector Banks      24.2         24.2          19.8       28.6

         Foreign Banks            34.1         12.1          30.7       16.9

         Private Sector Banks     26.9         13.4          24.2       11.8

        Note: annual percentage growth as on January 4, 2008, and January 2, 2009


Change in Target Market:

      In December 2008, IDBI Bank put on air a new television commercial designed by
       Ogilvy & Mather. It showed two boys, initially scared, playing football with a baby
       elephant. “Not just for the big boys,” said the tagline. Complimenting it was a radio
       commercial which ended with the line “IDBI Bank — chote, bade, sabke liye (big and
       small, for everyone).”
      PSB‟s in retail banking, found that awareness about its products and services were low.
       The percentage of a fund based banking (i.e. term-lending institutions) was hard to shed.
       Hence, a series of brand new campaign were launched to spread awareness.
      In the face of global banks under financial strain and a strategic revamp in the marketing
       campaign, several companies and individuals have moved from private banks to state-
       owned banks such as IDBI Bank.
      Service offer   like internet banking and personalized cheque books., loan proposals
       evaluations within stipulated period using processing centers and back offices, special
       teams to sell customized products to high net-worth clients and introducing cutting-edge
       technology (e.g. State Bank of India, India‟s largest bank, has introduced two-faced
       ATMs) is increasingly decreasing the Point of Difference and creating differentiation
       from the clutter.
      Global consultants like McKinsey, Boston Consulting Group and IBM have been hired to
       advise the banks on their makeover. Most banks have launched high-decibel campaigns
       to tom-tom their new look and feel and shed “the father’s bank, with their fuddy-duddy
       looks” image.
      Research showed that the clientele the banks were attracting were intrinsic with its image.
       While 70 per cent of the country‟s population was under 35 years of age, the client
       profile of state-owned banks was: 45 years, socio-economic category B&C and
       essentially male. “The young customer required a brand pull to make a conscious choice.
       Clearly, these banks were missing out on a large client base.

      There has been an evolution in the organizational strategies. The management has been
       trying to involve the union and staffs as much as possible, as it lowers the resistance to
       any new ideas and increases idea generation and commitment.

   TABLE # 9.1

Source: www.businessline\banking\Public sector banks-A brand new mould.htm

Technological leap

The banks realized that if they have to survive, they will have to adopt modern technology. State
Bank of India was amongst the first to focus on technology and a team is constantly at work to
innovate in an attempt to lower costs. So, the bank has now introduced two-faced ATMs, which
will increase efficiency.

Technology will not just help them reach out to young customers better but also help them cut
costs and improve efficiency. Here‟s how the economics work. While a transaction at a branch

costs around Rs 50, one at an ATM works out to Rs 18. Transactions through the Internet are
even cheaper at around Rs 10 each.

As a result, banks like State Bank of India want 50 per cent of the transactions from non-branch
channels such as ATMs, net banking and mobile phones.

New strategies

The biggest problem state-owned banks faced were the service meted out to customers at the
branches. Therefore customer focused teams and customized product offering were introduced.
State Bank of India started with a specific focus on the corporate sector. Three groups were set
up to deal with small and medium enterprises, large companies and mid-sized companies. Result:
The Tata‟s are back to banking with the bank for its overseas acquisitions. The funding-related
decisions for Tata Steel‟s acquisition of Corus were cleared in 10 minutes flat.

In addition, the state-owned banks started focusing on new areas of business, ranging from
wealth management to private equity. For instance, till a few years ago, only 3 per cent of State
Bank of India‟s customers belonged to mass affluent class. So, the country‟s largest bank set
about getting more business from the creamy layer. Now, it is training wealth managers to deal
with high net-worth individuals and tailor products according to their needs.

Bank of Baroda has opened its gen-next branches in cities such as Pune, Hyderabad and
Bangalore to attract the young information technology professionals. These new-age branches
are a fusion of hi-tech banking and self-service.

Similarly, State Bank of India under its business process re-engineering programme has
renovated several of its branches providing a 300-square feet area for 24/7, dedicated lounges
with access to ATM, internet banking, phone banking and enabling other kind of hi-tech

Canara Bank has plans to set up self-service centers in the lobby of select branches where
customers can also avail the help of the bank‟s staff if required or access the bank‟s network with
the help of self service kiosks, ATMs and telephones.

Reaching out

Bank of Baroda was the first public sector bank to go for an image makeover. The bank was
close to completing 100 years when it felt the need to redefine itself for the first time in 2005. It
was losing market share, was unable to attract new customers or diversify its service offerings. It
undertook research to understand what should be the course of action to attract this new segment
of customers. The makeover exercise took almost an year.

The bank identified issues with its process and services. It underwent organization restructuring,
installed state-of-the-art technology, changed its logo, made new promises and made the
ambience at its branches more dignified and plush. Additionally, it put in place new service
offerings such as retail loan factory, SME loan factory and strengthened its sales team across the
country, training 15,000 employees.

Union Bank of India completely re-engineered its processes and services with the engagement of
Boston Consulting Group and IBM to meet the demands of young customers who are exposed to
global banking standards. It then engaged Mudra to tell the world about these changes.

Everything, right from its bold new red and blue logo to its commercials, “sharing and fulfilling
people‟s goals and dreams”, brought to the fore the wide-sweeping changes that the bank has
implemented, while sill reminding customers that the brand has a heritage to which it remains
rooted. This has rubbed off on the employees too.

Take Indian Bank. The 96-year-old bank has just turned some executives into marketing officers
at most of its 1,300 branches. To boost its selling efforts it pulled in 265 MBA students to market
the bank's products during their summer training.

In the 1990s, the banking sector in India saw greater emphasis being placed on technology and
innovation. Banks began to use technology to provide better quality of services at greater speed.
Internet banking and mobile banking made it convenient for customers to do their banking from
geographically diverse places. Banks also sharpened their focus on rural markets and introduced
a variety of services geared to the special needs of their rural customers. Banking activities also
transcended their traditional scope and new concepts like personal banking, retailing and banc
assurance were introduced. The sector was also moving rapidly towards universal banking and
electronic transactions, which were expected to change the way banking would be perceived in
the future.


       Technology For Value Creation
       Internet Banking
       Mobile Banking
       Payment Systems
       Benefits of Technology in Banking


       Micro Finance and Self Help Groups


       Personal Banking
       Retail Banking
       NRI Services
       Bancassurance
       Any Branch Banking


     Universal Banks
     Smart Cards
     Financial Markets

10.2 future of the Indian Banking Sector

As we have seen different mergers in public sector banks there is high probability of more
mergers. The government has long been looking at the possibility of either merging the SBI's
subsidiaries with it. The merger would help SBI consolidate its position as the country's biggest
bank and widen the gap with its nearest rival ICICI Bank. The mergers will also enable State
Bank to scale up its business in terms of footprint, manpower and resources. Even Central banks
plan to consolidate its different branches. Such mergers help in:
• Accelerated growth by expanding in existing market and entering into new.
• Enhanced profitability through efficiency.
• Financial benefits like developing cash surplus, enhancing debt capacity etc.
• Increasing market power like market share, bargaining power, technological advancement,
pricing etc.

We have also seen that many commercial banks like notably State Bank of India, Bank of
Baroda, Bank of India, Union Bank and Allahabad Bank have worked within these constraints to
computerize operations, improve the brand image and enter new businesses. Such moves show
high degree of profitability and stability in the Indian economy.


The banking industry in India seems to be unaffected from the global financial crises which
started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks
across developed economies, banks in India seems to be on the strong fundamental base and
seems to be well insulated from the financial turbulence emerging from the western economies.
The Indian banking industry is well placed as compare to their banking industries western
counterparts which are depending upon government bailout and stimulus packages.

The strong economic growth in the past, low defaulter ratio, absence of complex financial
products, regular intervention by central bank, proactive adjustment of monetary policy and so
called close banking culture has favored the banking industry in India in recent global financial

Although there will no impact on the Indian banking system similar to that in west but the banks
in India will adopt for more of defensive approach in credit disbursal in coming period. In order
to safe guard their interest; banks will follow stringent norms for credit disbursal. There will be
more focus on analyzing borrower financial health rather than capability.


The Indian banking industry is still evolving and has a long way to go before it reaches to the
stage where the banking industry of the developed nations is. The Indian economies has seen a
lot of buzz of late with many companies setting up their base here in the country or are investing
in the stock market of the country, thereby getting in a lot of foreign currency in the country,
which in turn is boosting up the GDP of the nation. This means that the banks have to be up to
the mark round the clock in terms of their technology and the quality of customer service.

The study reveals that the traditional variables and their relations with the profitability changes
with the increase in competition and the maturity of the market. The public sector banks that
always have been tagged as the late comers have to shed this tag and have to come up with
innovative ways to achieve what they are out for. The initiatives have to come up within the
industry and should help them come a long way by achieving high performance instead of a
mediocre performance with blame on social causes.

The risk taking appetite of these public sector banks have to increase manifolds because of the
ever increasing need for credit in the market. This would test the banks endurance and they will
have to prove their existence or in the near future merge into a larger organization. This could
prove to be a strategic move and a competitive advantage for the industry in the future.