A PROJECT REPORT

ON

GROWTH OF PRIVATE SECTOR BANK IN INDIA

BACHELOR OF MANAGEMENT
STUDIES

SEMESTER-VI

ACADEMIC YEAR 2018-19

SUBMITTED BY
MR. RAJAT LUNIA

UNDER THE GUIDANCE OF

PROF. Dr. SHARYN BANGERA

ROLL NO: 67

SVKM`S USHA PRAVIN GANDHI COLLEGE OF ARTS, SCIENCE & COMMERCE

Bhakti Vedanta Swami Marg, Juhu Scheme,Vile Parle West,

Mumbai, Maharashtra (400056)

 
1  
 DECLARATION

I, Rajat Lunia Student of BMS hereby declare that the project for the GROWTH OF
PRIVATE SECTOR BANK IN INDIA titled.
Submitted by me for Semester-VI during the academic year 2018-2019, is based on
actual work carried out by me under the supervision of Prof. Dr.SHARYN BANGERA
I further state that this work is original and not submitted anywhere else for any
examination.

Signature of student

Dr. Sharyn Bangera

(internal guide)

 
2  
 CERTIFICATE

This is to certify that Mr Rajat Lunia has worked and duly completed his Project Work for the degree of
Bachelor of Management Studies under the Faculty of Commerce in the subject of FINANCE and his project is
entitled, “GROWTH OF PRIVATE SECTOR BANKS ” under my supervision. I further certify that the entire
work has been done by the learner under my guidance and that no part of it has been submitted previously for
any Degree or Diploma of any University. It is his own work and facts reported by his personal findings and
investigations.

_______________________ _______________________
(Internal guide) (Principal)
Dr. Sharyn Bangera Dr. Anju Kapoor

__________________ _____________________
(Course Coordinator) (External guide)
Prof Mayur Vyas

 
3  
 ACKNOWLEDGEMENT

The successful completion of project involved the contribution of time and efforts . The project would
never have been completed without the valuable help extended to us by the subject teacher and project
guide Prof. Dr .Sharyn Bangera

I would also like to thank all my friends to help me in this project work and giving their precious
time to me.

Last but not the least I would like to thank our parents for making us capable in doing this project and
giving their continuous support and guidance.

 
4  
 INDEX

S.NO TOPIC PAGE NO.

1. INTRODUCTION

1.2 BANKING IN INDIA

1.3 HISTORY OF BANKING IN INDIA

1.4 GROWTH IN PVT SECTOR

1.5 ADOPTION OF BANKING TECHNOLOGY

1.6 EXPANSION OF BANKING INFASTRUCTURE

1.7 POLICY ON NEW LICENSES

1.7.1 REGULATION BY RBI

1.7.2 GUIDELINES FOR ON TAP BANK LICENSE

1.8 TYPES OF BANKS

1.9 PRIVATE SECTOR BANKS

1.9.1 NEW TYPES OF PRIVATE SECTOR BANKS

1.10 HOW PRIVATE ARE PUBLIC SECTOR BANKS

1.11 GLOBALIZATION AND DEREGULATON

 
5  
1.12 IMPORTANCE OF PRIVATIZATION

1.13 ISSUES WITH PRIVATIZATION

1.14 DISADVANTAGES

1.15 BANKING INDUSTRY VISION

2 RESEARCH METHODOLOGY

3 LITERATURE REVIEW

4 DATA ANALYSIS AND INTERPRETATION

4.1 COMPARISION BETWEEN PVT AND PUBLIC

4.2 PRIVATE BANK STATISTICS

4.3 PRIVATE BANKS ROLE

4.4 PRIVATE BANKS IN RECENT YEARS

5 CONCLUSION AND SUGGESTION

6 BIBLIOGRAPHY

 
6  
CHAPTER 1

INTRODUCTION

 
7  
1.1 Introduction to Banking
Bank is defined in many ways by various authors in the book son economics and commerce. It is very difficult
to define a bank; because a bank performs multifarious functions may be defined in many ways according to
their functions. The evolution of different types of banks, each specializing in a particular field, gives emphasis
on each and every kind of bank. A general and comprehensive definition to cover all types of banking
institutions would be unscientific and probably impossible. Each type of bank should have its own definition,
explaining its specialized functions. Legislators have understood this difficulty and that is why the bill of
exchange Act 1882 (England) defines
“A bank includes a body of persons, whether incorporated or not, who carry on the business of banking”
From this definition it is clear to us that any institution, which performs the various banking functions, may be
termed as bank. But in practice it is found that many banking functions wary from time to time and country to
country. It is not possible on the part of a single bank to perform all the banking functions at a time. So there
originated numbers of specialized banks with the objective of performing one or more functions. As for
example, Central Bank, Commercial bank, Industrial Bank, Agricultural Bank, Co-operative Bank etc., are seen
in the practical field.
Dr. Herbert L. Hart has defined a banker as
“A banker is one who in the ordinary course of business honours cheques drawn upon him by persons for
whom he receives money on current account”
According to Sir John Paget
“No one and nobody corporate and otherwise can be a banker who does not (i) take deposit accounts (ii) take
current accounts (iii) issue and pay cheques drawn upon him(iv) collect cheques crossed and uncrossed for his
customers”
Hilton banking commission defines bank or banker in the following words:
“Every person, firm or company using in the description or its title, bank or banker or banking and accepting
deposits of money subject to withdrawal by cheque, draft or order”
In view of the above definitions, a simple and short definition can be given as
“Bank is an institution, which deals in money and credit”
According to this precise definition a bank accepts deposits from public and makes advances and loans to them.
In practice bank receives deposits of money in savings and current accounts at lower rate of interest or profit
and gives on credit to needy persons and businessmen at a higher rate of interest or profit. It also transfers
money for the clients from one city or country to another and also performs various other agency services for
earnings.

 
8  
1.2 Banking in India

Banking in India in the modern sense originated in the last decades of the 18th century. The first banks were
Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct.
The largest bank, and the oldest still in existence, is the State Bank of India, which originated in the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were
established under charters from the British East India Company. The three banks merged in 1921 to form
the Imperial Bank of India, which, upon India's independence, became the State in 1955. For many years the
presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was
established in 1935.
In 1969 the Indian government nationalized all the major banks that it did not already own and these have
remained under government ownership. They are run under a structure know as 'profit-making public sector
undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is
made up of four types of banks, as well as the PSUs and the state banks; they have been joined since the 1990s
by new private commercial banks and a number of foreign banks.
Banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in
rural India and to the poor still remains a challenge. The government has developed initiatives to address this
through the State Bank of India expanding its branch network and through the National Bank for Agriculture
and Rural Development with things like microfinance.
Indian Banking Industry currently employees 1,175,149 employees and has a total of 109,811 branches in India
and 171 branches abroad and manages an aggregate deposit of 67504.54 billion (US$1.1 trillion or
€820 billion) and bank credit of 52604.59 billion (US$880 billion or €640 billion). The net profit of the banks
operating in India was 1027.51 billion (US$17 billion or €12 billion) against a turnover of 9148.59
billion (US$150 billion or €110 billion) for the fiscal year 2012-13.

 
9  
1.3 History of banking in India

In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC). Later during the Maurya
dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to
pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we
understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in
large towns gave letters of credit to one another.

Colonial era
During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a private joint
stock association, then partnership. Its proprietors were the owners of the earlier Commercial Bank and the
Calcutta Bank, who by mutual consent created Union Bank to replace these two banks. In 1840 it established an
agency at Singapore, and closed the one at Mirzapore that it had opened in the previous year. Also in 1840 the
Bank revealed that it had been the subject of a fraud by the bank's accountant. Union Bank was incorporated in
1845 but failed in 1848, having been insolvent for some time and having used new money from depositors to
pay its dividends.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not
the first though. That honour belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of
Simla.

Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoird'Escompte de Paris opened a
branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French
possession, 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 centre.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It
failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the
present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability.
Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had
improved. Indians had established 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. The exchange banks,
 
10  
mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally
under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks.
This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are
like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The
Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian
community. A number of banks established then have survived to the present such as Bank of
India, Corporation Bank, Indian Bank,Bank of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi
district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four
nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina
Kannada district is known as "Cradle of Indian Banking".
During the First World War (1914–1918) through the end of the Second World War (1939–1945), and two
years thereafter until the independence of India were challenging for Indian banking. The years of the First
World War were turbulent, and it took its toll with 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
as indicated in the following table:

Number of banks Authorised Capital Paid-up Capital

Years
that failed ( Lakhs) ( Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1
1918 7 209

 
11  
Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralysing banking
activities for months. India's independence marked the end of a regime of the 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. This resulted into
greater involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on
1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI,
2005b).
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate,
control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened
without a license from the RBI, and no two banks could have common directors.

Nationalization in the 1960s

Despite the provisions, control and regulations of the Reserve Bank of India, banks in India except the State Bank of
India (SBI), continued to be owned and operated by private persons. By the 1960s, the Indian banking industry
had become an important tool to facilitate the development of the Indian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the nationalization of 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 in a paper entitled "Stray thoughts on Bank Nationalization."[7] The meeting
received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies
(Acquisition and Transfer of Undertakings) Ordinance, 1969') and nationalised the 14 largest commercial banks
with effect from the midnight of 19 July 1969. These banks contained 85 percent of bank deposits in the
country.[7] Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies
(Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.
A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the
nationalisation was to give the government more control of credit delivery. With the second dose of
nationalisation, the Government of India controlled around 91% of the banking business of India. Later on, in
the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger

 
12  
between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19.
After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate
of the Indian economy.

Liberalization in the 1990s

In the early 1990s, the then government embarked on a policy of liberalization, licensing a small number of
private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank
(the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, UTI Bank (since renamed Axis), ICICI Bank and HDFC Bank. This move, along with the rapid growth in
the economy of India, revitalised the banking sector in India, which has seen rapid growth with strong contribution
from all the three sectors of banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for foreign
direct investment, where all foreign investors in banks may be given voting rights which could exceed the
present cap of 10% at present. It has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4–6–4
method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new wave ushered in a modern outlook
and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People
demanded more from their banks and received more.

Current period
All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled
Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co-operative Banks. Scheduled
Commercial Banks in India are categorised into five different groups according to their ownership and/or nature
of operation. These bank groups are:
State Bank of India and its Associates
Nationalised Banks
Private Sector Banks
Foreign Banks
Regional Rural Banks.
In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalised Banks. Scheduled Co-
operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks.
By 2010, banking in India was generally fairly mature in terms of supply, product range and reach-even though
reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of
assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets

 
13  
relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government.
With the growth in the Indian economy expected to be strong for quite some time-especially in its services
sector-the demand for banking services, especially retail banking, mortgages and investment services are expected
to be strong. One may also expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a
private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private
sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks
would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in their loan
recovery efforts in connexion with housing, vehicle and personal loans. There are press reports that the banks'
loan recovery efforts have driven defaulting borrowers to suicide.

1.4 Growth in private sector

The banking sector comprises of 28 public sector banks with majority government ownership, 23 private banks
and 27 foreign banks. Private sector banks were barred from involvement in the banking market after the
nationalization of banks in 1969. Most important changes were implemented after 1990. First, the market was
opened up to private sector banks and foreign banks. Second, regulations governing the establishment of
branches were amended. Third, regulations relating to lending were eased. Fourth, public sector banks were
allowed to procure financial resources from the stock market up to 49% of their paid-up capital. The state of
affairs began to change after 2000.The government adopted a policy of converting development financial
institutions into banks, and ICICI became a bank in 2001, followed by IDBI in 2004. During this period, one
public sector bank and four private sector banks were established, and 16 foreign banks entered the market. In
March 1991, foreign banks had 151 branches. This had increased to 205 by March 2001, and to 295 by March
2009

Branch Expansion:
The country witnessed branch expansion in public sector banks, private sector banks and foreign banks in
absolute term during period 2010-2011.The table showed that the percentage share of SBI group registered a
growth of 3.5 during 2010-2011. The state owned banks of India registered an increase of 5.4 per cent during
2010-11. During 2010-11 India’s private sector banks, foreign banks and regional rural banks registered a
growth 3.6, 2.9 and 1.9. The non scheduled commercial banks registered a growth 10.4 per cent during 2010-
2011.all scheduled commercial banks registered a growth 5.5 per cent during 2010- 2011.

 
14  
Growth of Bank Deposits:
The resource mobilisation is an integral part of banking activity. The basic principle of branch expansion is to
tap deposit and culminate saving habit among the community .tapping of potential savings and uses them for a
productive purpose in particular is the main objective.

Growth of Advances:
The credit from the bank is an important input in the production function of the agriculture, industry, commerce
and allied productive activities for socio economic development of the country. The bank credits, its
development, composition and direction are equally important in realising the country’s various macroeconomic
goals. The channelization of bank credit in proper direction, otherwise, there will be the adverse effect on the
economy of the country.

Growth of Bank Investment:

The table showed that the percentage share of state bank of India and its associate banks registered a growth of
5.6 during 2010-2011. The nationalised banks of India registered an increase of 26.4 per cent during 2010-11.
During 2010-11 India’s public sector banks, old private sector banks, new private sector banks, private sector
banks and foreign banks registered a growth 19.0, 15.3, 15.6, 15.5 and 22.1 per cent during 2010-2011. The all
scheduled commercial banks registered a growth 18.6 per cent during 2010-2011

1.5 Adoption of banking technology

The IT revolution has had a great impact on the Indian banking system. The use of computers has led to the
introduction of online banking in India. The use of computers in the banking sector in India has increased many
fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's
market. Indian banks were finding it difficult to compete with the international banks in terms of customer
service, without the use of information technology.
The RBI set up a number of committees to define and co-ordinate banking technology. These have included:
In 1984 was formed the Committee on Mechanisation in the Banking Industry (1984) whose chairman was Dr.
C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee were
introducing MICR technology in all the banks in the metropolises in India. This provided for the use of
standardized cheque forms and encoders.
In 1988, the RBI set up the Committee on Computerisation in Banks (1988) headed by Dr. C Rangarajan. It
emphasized that settlement operation must be computerized in the clearing houses of RBI
in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further stated that there should be National

 
15  
Clearing of inter-city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made operational. It also
focused on computerisation of branches and increasing connectivity among branches through computers. It also
suggested modalities for implementing on-line banking. The committee submitted its reports in 1989 and
computerisation began from 1993 with the settlement between IBA and bank employees' associations.
In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in
the Banking Industry (1994) was set up under Chairman W S Saraf. It emphasized Electronic Funds Transfer (EFT)
system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be
set up in all branches of all those banks with more than 100 branches.
In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments
(1995) again emphasized EFT system.
Total numbers of ATMs installed in India by various banks as on end June 2012 is 99,218. The New Private
Sector Banks in India are having the largest numbers of ATMs, which is followed by off-site ATMs belonging
to SBI and its subsidiaries and then by Nationalised banks and Foreign banks. While on site is highest for the
Nationalised banks of India.

Table no. 1

Branches and ATMs of Scheduled Commercial Banks as on end March 2005

Bank type Number of branches On-site ATMs Off-site ATMs Total ATMs

Nationalised banks 33,627 3,205 1,567 4,772

State Bank of India 13,661 1,548 3,672 5,220

Old private sector banks 4,511 800 441 1,241

New private sector banks 1,685 1,883 3,729 5,612

Foreign banks 242 218 582 800

TOTAL 53,726 7,654 9,409 17,645

1.6 Expansion of Banking Infrastructure

 
16  
As per Census 2011, 58.7% households are availing banking services in the country. There are 102,343
branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953 (37%) bank branches are
in the rural areas and 27,219 (26%) in semi-urban areas, constituting 63% of the total numbers of branches in
semi-urban and rural areas of the country. However, a significant proportion of the households, especially in
rural areas, are still outside the formal fold of the banking system. To extend the reach of banking to those
outside the formal banking system, Government and Reserve Bank of India (RBI) are taking various initiatives
from time to time some of which are enumerated below:
Opening of Bank Branches: Government had issued detailed strategy and guidelines on Financial Inclusion in
October 2011, advising banks to open branches in all habitations of 5,000 or more population in under-banked
districts and 10,000 or more population in other districts. Out of 3,925 such identified villages/habitations,
branches have been opened in 3,402 villages/habitations (including 2,121 Ultra Small Branches) by end of
April, 2013.
Each household to have at least one bank account: Banks have been advised to ensure service area bank in rural
areas and banks assigned the responsibility in specific wards in urban area to ensure that every household has at
least one bank account.
Business Correspondent Model: With the objective of ensuring greater financial inclusion and increasing the
outreach of the banking sector, banks were permitted by RBI in 2006 to use the services of intermediaries in
providing financial and banking services through the use of Business Facilitators (BFs) and Business
Correspondents (BCs). Business correspondents are retail agents engaged by banks for providing banking
services at locations other than a bank branch/ATM. BCs and the BC Agents (BCAs) represent the bank
concerned and enable a bank to expand its outreach and offer limited range of banking services at low cost,
particularly where setting up a brick and mortar branch is not viable. BCs as agents of the banks, thus, are an
integral part of the business strategy for achieving greater financial inclusion. Banks had been permitted to
engage individuals/entities as BC like retired bank employees, retired teachers, retired government employees,
ex-servicemen, individual owners of kirana/medical/fair price shops, individual Public Call Office (PCO)
operators, agents of Small Savings Schemes of Government of India, insurance companies, etc. Further, since
September 2010, RBI had permitted banks to engage "for profit" companies registered under the Indian
Companies Act, 1956, excluding Non-Banking Financial Companies (NBFCs), as BCs in addition to
individuals/entities permitted earlier. According to the data maintained by RBI, as in December, 2012, there
were over 152,000 BCs deployed by Banks. During 2012-13, over 183.8 million transactions valued at 165
billion (US$2.8 billion) had been undertaken by BCs till December 2012.
Swabhimaan Campaign: Under "Swabhimaan" - the Financial Inclusion Campaign launched in February 2011,
banks had provided banking facilities by March, 2012 to over 74,000 habitations having population in excess of
2000 using various models and technologies including branchless banking through Business Correspondents

 
17  
Agents (BCAs). Further, in terms of Finance Minister's Budget Speech 2012-13, the "Swabhimaan" campaign
has been extended to habitations with population of more than 1,000 in North and to habitations which have
crossed population of 1,600 as per census 2001. About 40,000 such habitations have been identified to be
covered under the extended "Swabhimaan" campaign.
Setting up of Ultra Small Branches (USBs): Considering the need for close supervision and mentoring of the
Business Correspondent Agents (BCAs) by the respective banks and to ensure that a range of banking services
are available to the residents of such villages, Ultra Small Branches (USBs) are being set up in all villages
covered through BCAs under Financial Inclusion. A USB would comprise of a small area of 100 sq ft (9.3 m2) -
200 sq ft (19 m2) where the officer designated by the bank would be available with a laptop on pre-determined
days. While the cash services would be offered by the BCAs, the bank officer would offer other services,
undertake field verification and follow up on the banking transactions. The periodicity and duration of visits can
be progressively enhanced depending upon business potential in the area. A total of over 50,000 USBs have
been set up in the country by March, 2013.
Banking Facilities in Unbanked Blocks: All the 129 unbanked blocks (91 in North East States and 38 in other
States) identified in the country in July 2009, had been provided with banking facilities by March 2012, either
through Brick Mortar Branch or Business Correspondents or Mobile van. As a next step it has been advised to
cover all those blocks with BCA and Ultra Small Branch which have so far been covered by mobile van only.
USSD Based Mobile Banking: National Payments Corporation of India (NPCI) worked upon a "Common
USSD Platform" for all banks and telcos who wish to offer the facility of Mobile Banking using Unstructured
Supplementary Service Data (USSD) based Mobile Banking. The Department helped NPCI to get a common
USSD Code *99# for all telcos. More than 20 banks have joined the National Uniform USSD Platform (NUUP)
of NPCI and the product has been launched by NPCI with BSNL and MTNL. Other telcos are likely to join in
the near future. USSD based Mobile Banking offers basic Banking facilities like Money Transfer, Bill
Payments, Balance Enquiries, Merchant Payments etc. on a simple GSM based Mobile phone, without the need
to download application on a phone as required at present in the IMPS based Mobile Banking.

1.7 Policy on new licenses in banking sector

The Standing Committee on Finance (Chairperson: Mr. Yashwant Sinha) presented its report on “Policy on
New Licences in the Banking Sector” on October 18, 2013. It reviewed the performance of new banks and the
guidelines for setting up of new banks while keeping in mind the objective of financial inclusion. The key
observations and recommendations are mentioned below:

 
18  
•   The Standing Committee on Finance (Chairperson: Mr.YashwantSinha) presented its report on “Policy
on New Licences in the Banking Sector” on October 18, 2013. It reviewed the performance of new
banks and the guidelines for setting up of new banks while keeping in mind the objective of financial
inclusion. The key observations and recommendations are mentioned below:

•   Issue of licences for establishment of new banks: The Committee noted that the Narasimhan
Committee (1991) had recommended that the Reserve Bank of India (RBI) permit establishment of new
banks in the private sector. Following the recommendations, guidelines for licensing of new banks were
issued by RBI in 1993 and revised guidelines were issued in January 2001 and February 2013.

•   Out of the four banks established by individuals in 1993, just one has survived while three have either
voluntarily merged or have been compulsorily merged due to a decline in their financial health. The
Committeeopined that the 1993 guidelines may not have been adequate to check such decline in
financial health of the new banks.

•   Banking licences to large industrial houses: The Committee observed that the 2013 guidelines for
banking licences have permitted large industrial houses to apply for banking licenses, contrary to the
2001 guidelines. It disapproved of RBI’s reasoning for issuing licences to large industrial houses that:
(i) capital requirement can be easily provided by them, (ii) they had already been allowed entry into
other financial service sectors, and (iii) they have nurtured industrial growth in various highly regulated
sectors including telecom, power and highways. It stated that it would be prudent to keep industry and
banking separate since banking is a highly leveraged business involving public money and public
welfare. It expressed concern that industrial houses may not be geared to achieve the objectives of
financial inclusion.

•   Fit and proper criteria :At present, under the “fit and proper” criteria, entities applying for a banking
licence should have sound credentials and integrity, and should have a successful track record of 10
years. The Committee opined that a more precise, coherent and objective yardstick should be
formulated to assess the credentials of various applicants.

•   Paid up capital: The Committee recommended raising the minimum paid-up capital requirement for
new banks from the current Rs 500 crore to Rs 1000 crore. It opined that starting a bank with Rs 500
crore as capital could limit operations of the bank and that increasing the minimum requirement would
also screen out less serious players.

 
19  
 •   Lending norms: The Committee noted that there are no lending norms prescribed in the guidelines with
regard to lending to entities associated with the promoters of the banks. It expressed the need to have
clear guidelines regarding the same in order to prevent appropriation of funds to serve the interests of the
promoter group.

•   Financial inclusion: The 2013 guidelines require new banks to open at least 25% of their branches in
unbanked rural areas. The Committee noted that the existing private sector banks have less than 20% of
their branches in such areas. It recommended that RBI have a mechanism to incentivise expansion of
banking in unbanked rural areas. Further, it proposed that permission for opening new branches be
given in lots of four - three branches in urban areas and one in a rural area.

•   Issues related to applications: The Committee proposed that: (i) RBI execute screening and evaluation
of applicants in a transparent manner, (ii) RBI respond to applications promptly and inform rejected
candidates about the reason for the same within a stipulated time period, and (ii) there be a mechanism to
enable aggrieved applicants to seek review of decisions of RBI.

1.7.1 Regulations by Reserve Bank of India (RBI) to strengthen the Banking

Infrastructure
RBI has permitted domestic Scheduled Commercial Banks (excluding RRBs) to open branches in tier 2 to tier
6 cities (with population up to 99,999 as per census 2001) without the need to take permission from RBI in each
case, subject to reporting.
RBI has also permitted SCBs (excluding RRBs) to open branches in rural, semi-urban and urban centres in
North Eastern States and Sikkim without having the need to take permission from RBI in each case, subject to
reporting.
Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 to Tier 6 centres (with population up
to 99,999 as per Census 2001) without the need to take permission from RBI in each case, subject to reporting,
provided they fulfill the following conditions, as per the latest inspection report:
CRAR of at least 9%;
Net NPA less than 5%;
No default in CRR / SLR for the last year;
Net profit in the last financial year;
CBS compliant.
Domestic SCBs have been advised that while preparing their Annual Branch Expansion Plan (ABEP), they
should allocate at least 25% of the total number of branches proposed to be opened during the year in unbanked
 
20  
Tier 5 and Tier 6 centres i.e. (population up to 9,999) centres which do not have a brick and mortar structure of
any SCB for customer based banking transactions.
RRBs have also been advised to allocate at least 25% of the total number of branches proposed to be opened
during a year in unbanked rural (Tier 5 and Tier 6) Centres).
New private sector banks are required to ensure that at least 25% of their total branches are in semi-urban and
rural centres on an ongoing basis.

1.7.2 Guidelines for on tap bank licensing :

Reserve Bank of India had issued guidelines to set up two new commercial banks in India on February 22,
2013. The newly opened commercial banks in India are IDFC bank and Bandhan bank. IDFC Bank was
established on October 1, 2015 while Bandhan bank was established on December 23, 2014.

In this article, you will come to know about the guidelines to be followed by the promoters in order to set up
new private banks in India.

Guidelines to be followed by the Promoters of new Private Banks are;

1. A person / professional who is a native of India and has a 10 year experience in the banking and finance
sector as a senior officer; is eligible to apply for new private bank.

2. Entities / groups in the private sector that are ‘owned and controlled by residents’ must be financially sound
and should have a successful track record for at least 10 years. The total assets of such entity / group must be 50
billion or more.

3. Big industrial houses are not eligible to open a new private bank but are permitted to invest in the banks up to
10%.

4. The promoter / promoter group / NOFHC must have at least 40% stake in the bank's paid-up voting equity
capital, which must be locked in for 5 years from the date of commencement of business of the bank. However;
within a period of 15 years from the date of commencement of the business of the bank, the share of promoter /
promoter group / NOFHC shall be brought down to 15%.

5. The initial minimum paid-up voting equity capital for a bank shall be Rs.5 billion. It means, the bank shall
have a minimum net worth of Rs.5 billion at all times.

 
21  
6. If promoter/entity/group has total assets of Rs. 50 billion or more, the non-financial business of the group
does not account for 40% or more in terms of total assets/ gross income; is eligible to apply for new bank.

7. The Foreign Direct Investment (FDI) limit in the bank will be decided on the basis of the FDI Policy
implemented in the country. The promoter/promoter group of bank will have to keep a certain percentage of
shares with itself. At present, the limit of FDI in the banking sector is 75%. However, the central government is
mulling to make it 100%.

8. New bank will have to open at least 25% of their branches in non-bank rural areas.

9. Domestic scheduled commercial banks shall provide 40% of “Adjusted Net Bank Credit” to the Priority
Sector Lending.

10. The new bank has to list its shares in stock exchanges within 6 years from the date of commencement of the
business.

11. The board of the bank should have a majority of independent directors.

12. New bank must adhere to the provisions of the Banking Regulation Act, 1949 and the prudential norms
already exist.

13. The business plan submitted by the applicant/promoter should be realistic and feasible and address that how
the bank proposes to achieve financial inclusion in the country.

After reading the above guidelines; it can be concluded that RBI tried hard to ensure that the hard earned money
of the people be safe in the banks, financial inclusion can be promoted in the country and concentration of
economic power could not place in the country.

1.8 Types of Banks

Central bank
Development Bank
Investment Bank
Cooperative Credit Bank
Regional Rural Bank
Non Banking Financial Companies

 
22  
Central Bank
The money market that acts as the central monetary authority of the country, serving as the government bank as
well as the bankers’ bank is known as a central bank of the country. The main functions of central bank of a
country are functions of note issue, bankers to government, banker’s bank etc.The RBI as the central bank of the
country is the centre of the Indian financial and monetary system. It has been guiding, monitoring, and
regulating, controlling, and promoting destiny of the IFS. It is quite young compared with such central banks as
the Bank of England, Risks bank of Sweden, and the Federal Reserve Board of the U.S.
Main Functions of The Reserve bank of India
As the central banking authority of India, the reserve Bank of India performs the following traditional functions
of the central bank:
n   It provides currency and operates the clearing system for the government and banks.

n   It formulates and implements monetary and credit policies.

n   It functions as the government’s and banker’s bank

n   It supervises the operations of credit institutions.

n   It regulates foreign exchange transactions.

n   It moderates the fluctuations in the exchange value of the rupee.

In addition to the traditional functions of the central banking authority, the Reserve bank of India performs
several functions aimed at developing the Indian financial system:
n   It seeks to integrate the unorganized financial sector with the organized financial sector.

n   It encourages the extension of the commercial banking system in the rural areas.

n   It influences the allocation of credit.

n   It promotes the development of new institutions.

Development Banks
A development bank may be defined as a financial institution concerned with providing all types of financial
assistance to business units in the form of loans, underwriting, investment and guarantee operations and
promotional activities-economic development in general and industrial development in particular.A
development bank is basically a term lending institution. It is a multipurpose financial institution with a broad
development outlook. The concept of development banks in a post independence phenomenon in India. With the

 
23  
end of II World War there was an urgent need for speed industrial development in India. The usual agencies that
provided finance for large industries were inadequate. So the govt. of India came forward to set-up a series of
financial institution to provide funds to industries. The industrial finance corporation of India, the first
development bank was established in 1948. Subsequently many other institutions were set-up. Ex. IDBI, IFCI,
SIDBI etc.

Investment Banks
Financial intermediaries that acquire the savings of people and direct these funds into the business enterprises
seeking capital for the acquisition of plant and equipment and for holding inventories are called ‘investment
banks’.
Features:-Long term financing, Security, merchandiser, Security middlemen, Insurer, Underwriter
Functions: - Capital formation, Underwriting, Purchase of securities, Selling of securities, Advisory services,
Acting as dealer.

Cooperative Banking Sector

These banks play a vital role in mobilizing savings and stimulating agricultural investment.Co-operativecredit
institutions account for the second largest proportion of 44.6% of total institutional credit of Rs.3854000 corer
to agricultural and allied activities in the rural sector in 1998 to 99.

Types of Co-operative Banking sector

The co-operative sector is very much useful for rural people. The co-operative banking sector is divided into the
following categories.
State co-operative Banks
Central co-operative banks
Primary Agriculture Credit Societies

Non Banking Finance companies

According to RBI it means financial institutions which is a company and a non banking institution and which
has as its principal business the receiving of deposits under any schemes or arrangement or in any other manner
or lending in any manner.

Merchant Banks
Institution that render wide range of services such as the management of customer’s securities, portfolio
management, counseling, insurance, etc are called ‘Merchant Banks’.

 
24  
Functions: - Sponsoring issues, Loan syndication, Servicing of issues, Portfolio, management, arranging fixed
deposits, helps in merger& acquisition.

Commercial Banks
Commercial banks comprising public sector banks, foreign banks, and private sector banks represent the most
important financial intermediary in the Indian financial system.
The changes in banking structure and control have resulted dueto wider geographical spread and deeper
penetration of rural areas, higher mobilization of deposits, reallocation of bank credit to priority activities,
andlower operational autonomy for a bank management.
The largest commercial Banks in India, (SBI), was set up in 1955 when the Imperial Bank was nationalized and
merged with some banks of the princely states. In 1969, in one fell swoop, the fourteen largest privately –
owned commercial banks were nationalized. Subsequently, several other privately – owned commercial banks
were nationalized. As a result of these actions, public sector commercial banks, dominate the commercial
banking scene in the country.

Functions of commercial banks

Saving mobilization
Special loans
Bills discount
Credit creation
Agencies function
General utility function

1.9 Private sector banks

The private sector banks in India are banks where the majority of the shares or equity are not held by the
government but by private share holders.
In 1969 all major banks were nationalised by the Indian government. However, since a change in government
policy in the 1990s, old and new private sector banks have re-emerged. The private sector banks are split into
two groups by financial regulators in India, old and new. The old private sector banks existed prior to
nationalisation in 1968 and kept their independence because they were either too small or specialist to be
included in nationalisation. The new private sector banks are those that have gained their banking license since
the change of policy in the 1990s.

The Nedungadi Bankwas the first private sector bank in India, founded in 1899 by Rao Bahadur T.M. Appu
Nedungadi in Kozhikode, Kerala.

 
25  
List of the old private sector banks in India
Name Year Established
1. City Union Bank 1904
2. Karur Vysya Bank 1916
3. Catholic Syrian Bank 1920
4. Tamilnad Mercantile Bank 1921
5. Nainital Bank (Wholly owned subsidiary of Bank Of Baroda) 1922
6. Karnataka Bank 1924
7. Lakshmi Vilas Bank 1926
8. Dhanlaxmi Bank 1927
9. South Indian Bank 1929
10. Federal Bank 1931
11. Jammu and Kashmir Bank 1938

List of the new private sector banks in India

Year
Name
established
1. DCB Bank 1930
2. ICICI Ban 1990
3. Axis Bank 1993
4. HDFC Bank 1994
5. IndusInd Bank 1994
6. Kotak Mahindra Bank 2001
7. Yes Bank 2004
8. IDFC Bank 2015
9. Bandhan Bank 2015

1.9.1New types of private sector banks

Small Finance Banks (SFBs)

•   They are niche banks that focus and serve the needs of a certain demographic segment of the population.
•   The objectives of setting up of small finance banks will be to further financial inclusion by (1) the
provision of savings vehicles (2) supply of credit to small business units; small and marginal

 
26  
 farmers; micro and small industries; and other unorganised sector entities, through high technology-low
cost operations.
•   SFBs was recommended by the Nachiket Mor committee on financial inclusion.

Scope of activities of SFBs

•   The small finance banks shall primarily undertake basic banking activities of acceptance of deposits and
lending to unserved and underserved sections including small business units, small and marginal farmers,
micro and small industries and unorganised sector entities.
•   There will not be any restriction in the area of operations of small finance banks.

Criteria for setting up SFBs

•   Individuals/professions with 10 years of experience in finance, Non-Banking Financial Companies

(NBFCs), micro finance companies, local area banks are eligible to set up SFBs.
•   The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
•   The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank
shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of
commencement of business of the bank.
•   The foreign shareholding in the small finance bank would be as per the Foreign Direct Investment (FDI)
policy for private sector banks as amended from time to time.
•   The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC)
to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.
•   SFBs have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as per RBI norms.
•   At least 50 per cent of its loan portfolio should constitute loans and advances of up to Rs. 25 lakh.

What can Small Finance Banks do?

•   Sell forex to customers.

•   Sell mutual funds, insurance and pensions.
•   Can convert into a full-fledged bank.

What Small Finance Banks can’t do?

•   Extend large loans.

 
27  
 •   Cannot float subsidiaries and deal in sophisticated products.

Payment Banks

•   The objectives of setting up of payments banks will be to further financial inclusion by providing (1)
small savings accounts (2) payments/remittance services to migrant labour workforce, low-income
households, small businesses, other unorganised sector entities and other users.
•   They will not lend to customers and will have to deploy their funds in government papers and bank
deposits.

Scope of activities

•   Acceptance of demand deposits-Payments bank will initially be restricted to holding a maximum balance
of Rs. 100,000 per individual customer.
•   Issuance of ATM/debit cards-Payments banks, however, cannot issue credit cards.
•   Payments and remittance services through various channels.
•   Business Correspondents (BC) of another bank, subject to the Reserve Bank guidelines on BCs.
•   Distribution of non-risk sharing simple financial products like mutual fund units and insurance products,
etc.
•   The payments bank cannot undertake lending activities.

Criteria for setting up Payment banks

•   Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals /
professionals; Non-Banking Finance Companies (NBFCs), corporate Business Correspondents (BCs),
mobile telephone companies, supermarket chains, companies, real sector cooperatives; that are owned and
controlled by residents; and public sector entities may apply to set up payments banks.
•   Promoter/promoter groups should be ‘fit and proper’ with a sound track record of professional experience
or run their businesses for at least a period of five years in order to be eligible to promote payments banks.
•   The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
•   Maintains minimum 75% of deposits in Government bond and maximum 25% deposits with other
scheduled commercial banks.
•   The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at
least be 40 per cent for the first five years from the commencement of its business.
•   The bank should have a high powered Customer Grievances Cell to handle customer complaints.
 
28  
 •   The operations of the bank should be fully networked and technology driven from the beginning,
conforming to generally accepted standards and norms.

What can Payment Banks do?

•   Offer internet banking, sell mutual funds, insurance and pensions.

•   Have business correspondents and ATMs.
•   Offer bill payment service for customers
•   They can enable transfers and remittances from a mobile phone.
•   They can offer forex services at charges lower than bank
•   They can provide forex cards to travellers, usable as debit or ATM card all over India.
•   They can also offer card acceptance mechanism to third parties such as “Apple Pay”.

What Payment Banks can’t do?

•   Offer credit cards

•   Extend loans
•   Handle cross-border remittances
•   Accept NRI deposits

1.10 How private are public banks?

Private shareholding ratio in Public Sector Banks

14 out of 26 public sector banks had private shareholding in the 40-49 per cent range by End-March 2012.

July 1, when the Reserve Bank of India entertains applications for the third round of private entry into banking,

marks the beginning of one more phase in banking liberalization in India. Central to that liberalization was the

reversal of the post-1969 policy in which banking was made a largely public preserve by the nationalization of the

major private banks. Till then, India’s major banks, other than the State Bank of India and its subsidiaries, were

directly or indirectly controlled by big business, resulting in the capture of a dominant share of the nation’s savings

 
29  
by large firms to the exclusion of small borrowers and the agricultural sector. Seizing the ownership of these banks

and bringing them into the public sector established social control. Some private banks remained, but they were

small domestic ones or foreign players with restricted operations. In the two decades that followed, India’s banking

sector, judged by behavior or social performance indicators, went through a dramatic transformation.

The period since 1993 has, however, seen the slow reversal of that policy, not merely through the grant of greater

space for foreign banks in India, but through the grant of licenses to 12 private players after two calls for

applications. But the current third round call for private entry is significant not merely because it carries the process

forward but because it allows for entry by domestic corporates in the form of entities and groups in the private sector

that are “owned and controlled by residents”. This has, as is to be expected, triggered speculation on the future of

Indian banking.

However, while change at the margin in terms of new private entrants has made a difference, the essential character

of the Indian banking sector seems largely influenced by the legacy that nationalization left

1.11 Globalization and deregulation

The financial reforms that were initiated in the early 90s and the globalization and liberalization measures brought in

a completely new operating environment to the banks those were till then operating in a highly protective milieu. The

private banks from the day one of their existence were totally computerized and networked banks as mandated by

RBI. The services like ATM, mobile banking, internet banking became popular and this was responsible to took way

the clientele from PSBs. So in order to cope with this PSBs approached Core Banking Solutions. The arrival of

private banks, foreign banks and measures of deregulation that encouraged the competition has led to a situation

where the survival of those who do not join the race will become difficult. Unless the state-of-art IT was introduced

as early as possible, winning new business and even holding on to the old one will become increasingly difficult.

 
30  
Private Banks have played a major role in the development of Indian Banking Industry. They have made banking

more efficient and customer friendly. In the process they have jolted Public Sector Banks out of complacency and f

forced them to become more competitive. A country wide survey has revealed that while the private banks have got a

tight grip on the purse strings of the salaried class and professionals in the country, a large majority of customers in

India still prefer time tested Public Sector Banks for services. With the entry of private players in India services and

products like:

•  Anywhere Banking

•  Telebanking

•  Internet Banking....are becoming buzzwords

Banks are trying to cope with the competition by:

•  Innovative and attractively packaged services to customers

The core issues faced by banks today are on the fronts of customer’s service expectations, cutting operational costs

and managing competition through technology.

As India began the era of globalization, the banking industry which was till then dominated by public sector faced

enormous competition from private and foreign entrants. Customer attraction and retention proved to be a big

challenge and public sector banks had to look out for innovative ways to keep their customers from moving to the

nearby private or foreign bank, which were then offering better services with better quality and hospitality. In this

competitive and technology driven period, Public Sector Banks had to strive hard to attract, retain and enlarge their

customer banks and hence Customer Relationship Marketing became the buzzword.

With the entry of private banks in banking industry public sector banks faced tough competition. In order to survive

in competitive environment several changes were made by public sector banks in different aspects which include:

•  Automation i.e. massive computerization

 
31  
•  Core banking solutions

•  Business Extension i.e. integrating traditional banking service with

strategic tie ups like pension funds, insurance, advisory services etc.

Prior to deregulation the public sector banks of India had the choice of being indifferent to its customers as they were

operating in an almost monopoly market. However, with deregulation, liberalization and globalization, the

competition in Indian banking sector has grown so intense that banking services are almost available at door steps of

customers today. This forces the public sector banks of India to adapt and innovate to keep pace with the competition

from private sector and foreign banks. Thus public sector banks can no longer afford to lose their customers and it

thereby becomes mandatory for them to adopt CRM practices if they have to continue playing in the market.

1.12 Importance of privatization

Since 1979, many countries have embarked on the course of privatization which has changed the economic

landscape around the world. Privatization has spread to many industries, including those that had never been

privately owned. Privatization has transformed command economies in post-communist countries into decentralized

ones. It has changed the political balance of power in many societies and revolutionized global financial markets.

Yet, the intellectual debate on the benefits of privatization is far from over. The available research shows that the

impact of privatization on the privatized firms and on the economy and society depends on many variables including

political and economic institutions. There are significant complementarities between privatization and other reforms.

It also matters how privatization is structured and who the new owners are. In particular, there are substantial benefits

to opening up to foreign owners are. In particular, there are substantial benefits to opening up to foreign ownership.

Privatization is important due to the following reasons: -

1.   Improvement in efficiency: -The motive of private enterprises is to maximize profits. Therefore, they have to

improve efficiency and performance without the competitive forces.

 
32  
2. Raising Funds: -By selling government equity to private sector it is possible to raise funds for public investment.

2.   No political influence: - Once a public sector is privatized it becomes free from political, ministerial and

government intervention.

4. Quick Decisions: - In private sector organization quick decisions can be taken to respond to changing

circumstances.

5. Better Service to the customers: -The survival and growth of private sector enterprises depends on consumer

satisfaction. Therefore they try to provide better quality goods and services to their customers.

6. Quick remedial measures: -In private sector enterprises quick remedial measures must be taken to avoid wastages,

losses and to secure benefits from business opportunities. There is no scope for red tapism.

7. Easy to fix responsibility: -In private sector organization authorities, responsibilities and accountability are

generally fixed by the Board of Directors and corporate laws. Therefore, it is easy to fix the responsibility in the case

of failure in performance by any employee.

1.13 Issues with privatization

The act of privatizing public services comes with some points of contention. Opponents to privatization have pointed

out some concerns that arise with privatization. Issues that arise when privatization is considered are: -

1. Public Employees: -

One group who often opposes privatization is public employees. A major way private sector groups are able to

provide services for less is through the use of less or more efficient labor inputs. Public employees are also affected
 
33  
when services are outsourced. When a service is provided by a private firm, a governmental unit may not need to

keep people who previously provided those services on staff.

Often certain guarantees are put into place concerning public employees, concerning continued employment, and

salary level when these agreements are entered into. Another way public employee concerns are being dealt with is

through the use of open competition.

2. Transparency: -

Another problem often cited with privatization is the lack of transparency once services are provided by a private

sector group. Once public assets or services are transferred to the private sector, some of this transparency is often

lost. This problem can be avoided by mandating certain reporting criterion in the contract and employing public

oversight in the form of boards or authorities.

3. Ownership: -

Ownership issues can arise when deciding to privatize an asset. In many instances, a service is supported by

numerous public groups. For example, a mass transit district may be supported by government funding at the local,

state, and federal level. When deciding to privatize this service, which level of government should receive the

proceeds of the sale or lease?

Another ownership dilemma that can arise out this kind of situation is how to spend the proceeds.

4. Competition: -

Keeping competition within the privatization problem can be difficult when privatizing public assets. Competition

leads to more efficient operations and lower costs. Unfortunately, leases for toll roads, building operations, and other

large assets tend to be long term agreements. As such, the private sector group who initially wins the bid to own or

lease an asset will be the lessee for decades if not up to a century.

One way to fight this problem is to have contracts come up for bid more frequently. By having shorter length

contracts, the private contractor has more incentive to keep the quality of service at a high level as they would be
 
34  
more likely to retain the contract by doing so. Though this comes with its own problem as the upfront fee for shorter

length leases would be less than the long term lease of a revenue generating asset.

Benefits

Many reasons explain the movement by cities and states toward privatization to restructure and "right size"

government. Much of the impetus is the desire to inject competition into the delivery of state services in order to

provide services to citizens in a more-efficient and cost-effective manner. If structured appropriately and sufficiently

monitored, privatization can:

1.Save tax payer’s money: -

By applying a variety of privatization techniques to state services, infrastructure, facilities, enterprises, and land,

comprehensive state privatization programs can reduce program costs.

Over 100 studies have documented cost savings from contracting out services to the private sector. Cost savings vary

but average between 20 and 40 percent, depending on the service. For some services, such as prison construction and

operation, savings are generally less, while for others, such as asphalt resurfacing, savings are often greater.

Competitive bidding whenever possible and careful government oversight are crucial to sustained cost savings.

States can also realize large one-time windfalls from the sale or lease of state infrastructure and facilities. Moreover,

privatization can put an end to subsidies to previously government-run operations.

Privatization also creates a steady stream of new tax revenues from private contractors and corporations who pay

taxes and license fees, while state units do not.

2.Increase Flexibility: -

Privatization gives state officials greater flexibility to meet program needs. Officials can replace the private firm if it

isn't meeting contract standards, cut back on service, add to service during peak periods, or downsize as needed.

3.Improve Service Quality: -

 
35  
A number of surveys have indicated that public officials believed service quality was better after privatization. In a

survey of 89 municipalities conducted in 1980, for example, 63 percent of public officials responding reported better

services as a result of contracting out.

If competitive bidding is instituted for a service, service quality can improve even if the service is retained in-house.

The reason is simple: competition induces in-house and private service providers to provide quality services in order

to keep complaints down and keep the contract.

Service quality is not assured, however, by privatization. Contracts must be well-designed with performance

standards that create incentives for high quality service. Furthermore, diligent monitoring of the contractor's

performance through customer surveys and on-site inspections must also be performed by government in its

oversight role.

4. Increase Efficiency and Innovation: -

Private management can significantly lower operating costs through the use of more flexible personnel practices, job

categories, streamlined operating procedures, and simplified procurement.

Private ownership can stimulate innovation. Competition forces private firms to develop innovative, efficient

methods for providing goods and services in order to keep costs down and keep contracts. These incentives, for the

most part, do not exist in the public sector.

5.Allow Policymakers to Steer, Rather Than Row: -

Privatization allows state officials to spend less time managing personnel and maintaining equipment, thus allowing

more time to see that essential services are efficiently delivered.

6.Streamline And Downsize Government: -

Privatization is one tool to make bureaucracies smaller and more manageable. Large private corporations often sell

off assets that are underperforming or proving too difficult to manage efficiently. Under new owners and leaner

 
36  
management, such divisions often receive a new lease on life. Entrepreneurial governments can replicate this

experience.

7. Improved Maintenance :- Private owners are strongly motivated to keep up maintenance in order to preserve the

asset value of the investment in the facility. Public owners often defer maintenance due to political considerations,

increasing overall long-term costs.

PRIVATE SECTOR BANKS HAVING ANS UPPER HAND OVER PUBLIC SECTOR BANKS

1.14 DISADVANTAGES OF PRIVATIZATION

1. Privatization is expensive and generates a lot of income in fees for specialist advisers such as banks.

2. Public monopolies have been turned into private monopolies with too little competition, so consumers have

not benefited as much as had been hoped. This is the main reason why it has been necessary to create regulators

(OFWAT, OFGAS etc.). This is an important point. It partly depends on how the privatization took place. For

example, the railways were privatized in bit of a rush and there might have been other ways to do it so that more

competition was created. It partly depends on the market. Some markets are ‘natural monopolies’ where

competition is difficult. For example, it would be very wasteful and expensive to build two sets of track into
 
37  
Liverpool Street just to create some competition. Natural monopolies create a special justification for public

ownership in the general public interest.

3. The nationalized industries were sold off too quickly and too cheaply. With patience a better price could have

been had with more beneficial results on the government’s revenue. In almost all cases the share prices rose

sharply as soon as dealing began after privatization.

4. The privatized businesses have sold off or closed down unprofitable parts of the business (as businesses

normally do) and so services e.g. transport in rural areas have got worse.

5. Wider share ownership did not really happen as many small investors took their profits and didn’t buy

anything else.

1.15 BANKING INDUSTRY VISION 2025

Consequent to nationalization in 1969 and economic liberalization in 1991, banks in India are on fast track growth in

size, technology and deliverables to customers. Every aspect of banking will be transformed by new technology by

2025. Customer friendly products, delivery channels, relationship banking, dependency on IT systems and

competitive pricing would be the driving forces, but a pressure cooker atmosphere cannot be avoided.

The most successful institutions will be those that combine visionary technology and very competitive pricing with

strong relationships and brands built on trust with previous in-depth experience of the client business.

Banks would have adopted the following strategies to move to hi-tech banking as a necessity of e-commerce, e-

banking etc.

•  Identification of select branches from out of the entire spread of the branch network to provide innovative services.

•  In the scenario of severe competition and escalating expectation of the customers for newer products and improved

as well as alternative delivery channels, the nerve center of banking will be redefined.

 
38  
•  The key to survival of banks, therefore, is retention of customer Loyalty by providing value added services tailored

to their needs, using state-of-the-art technology, instead of relying on outdated practices.

•  With the identified select number of branches for creating hi-tech banking, an ideal centralized solution can be

considered. A countrywide network of computers could offer banking products to select corporate clients and high

net worth individuals.

•  Needless to say, flawless security and seem less integration of operations through untiring efforts of employees and

cohesive support from the management would be the key factors that will enable banks to make successful inroads

into enabled 'New Age' banking.

•  Once the centralized topography is put in place, the infrastructure required for banking and commerce'(with the

necessary security) can be built to provide state-of-the-art innovative services.

•  Flexi-work atmosphere with banking officials working out of their homes, without the need to go to offices, may be

put in place. Instead of intra bank cross country transfers, there may be interbank movement of senior officers in the

public sector domain, if at all it remains so.

•  Allocation of capital to each product/service and also borrower wise Capital allocation.

There are no way banks can remain lukewarm in their attitude and approach to hi-tech banking and yet hope to grow.

It is clearly a choice of either survival or extension, and that which survives would provide core commercial activity,

instead of providing just financial services. The internet would be the engine of the banking revolution in the decade

to come, and e-commerce its fuel. Business to Business (B2B) involving business organization as buyer and seller;

Business to Consumer (B2C) involving customization of business would all pave way for a radical change in the

banking habits of the Indian consumer. E-commerce through client and server and M-commerce through mobile

agent would fuel the change in banking requirements.

 
39  
 CHAPTER 2

RESEARCH

METHODOLOGY

 
40  
2.1 OBJECTIVES

The objectives of the study are :

1)   To study the growth of private sector banks in India.

2)   To analyse the regulatory changes affecting private sector banks in India.

3)   To determine the challenges and opportunities of private sector in India.

4)   To do a comparative analysis of public sector and private sector banks.

2.2 METHODOLOGY

Research is an art of scientific investigation. In other words research is a scientific and systematic search for
pertinent information on a specific topic. The logic behind taking research methodology into consideration is
that one can have knowledge regarding the method and procedure adopted for achievements of objective of the
project.
For this project secondary research has been done by collecting information from various books
, magazines, websites etc.

2.3 LIMITATIONS

1. The research has been done in a short period of time, due to time restraints.

2.Reliance on secondary data.

3.Cost constraints.

 
41  
CHAPTER 3

LITERATURE
REVIEW

 
42  
Literature review
Banks play a significant role in financing the economic needs of the country. To compete effectively in present
day competitive world, banks have been permitted to undertake new activities such as investment banking,
securities trading, insurance business, etc. The number of market players has increased as their entry barriers
have erased. The researchers and economists have recognized that the measurement of productivity and
profitability in banking is necessary to improve the financial soundness of banks. A large number of studies
have been conducted in the field of operational and financial performance of banks. A brief review of some of
these studies has been presented in this chapter.


Angadi and Devraj (1983) measured productivity of Indian banks for the period 1970-80. They took total
working funds (deposits and credits) as output indicator while establishment expenses as input indicator. They
calculated return per rupee of establishment expenses. The results indicated that the productivity of the banking
system as a whole witnessed a considerable decline during the years 1970-75. Between the years 1975 and
1978, the productivity improved but again in the year 1979 it declined. Among the bank-groups, the
productivity of public sector banks, which declined to 45.5 per cent in 1975 from 53.3 per cent in 1970
improved in 1977. However, it showed a sharp decline in 1980. The productivity of private sector banks, which
had been mostly lower than that of other bank- groups, showed an improvement in 1979. In the case of foreign
banks, the productivity was always higher than other bank-groups. They concluded that the rapid expansion in
rural and semi-urban commercial banks in the initial period of nationalization, without corresponding growth in
business of these offices, contributed to the deceleration in productivity of these banks.

Verghese (1983) evaluated the profits and profitability of Indian commercial banks during the period 1970 to
1979. He measured the profitability of commercial banks in terms of gross profit, net profit, operating margin,
gross yield on assets, spread and spread ratios. Trends of productivity in terms of average deposits per
employee, salaries and wages per unit of deposits and advances, share of establishment expenses in total current
operating expenses and net income per employee has also been calculated. The study revealed that gross profits
and net profits have shown an increasing trend while spread and spread related ratios declined over the study
period. Average assets per employee, average deposits, advances per employee, salaries and wages per
employee, and net income per employee have shown an increasing trend while share of establishment expenses
in the current operating expenses declined during the study period. The study analyzed an overall improvement
in employees’ productivity but it varied from year to year basis. The study found that the monetary policy
measures like interest rate changes, credit reserve ratios and statutory liquidity ratios have an impact on the
profits and profitability of banks.

Nayan (1985) conducted a study on the performance evaluation of commercial banks and presented a

 
43  
performance evaluation model on the basis of important quantifiable parameters of performance. The main
findings were that the present system of ranking the banks on the basis of aggregate deposits failed to reflect
their overall achievements. The existing system of performance budgeting is not suitable at branch level. On the
basis of all important and quantifiable parameters of performance, an integrated performance index needs to be
developed for evaluating the performance of commercial banks.

Ojha (1987) made international comparison with respect to productivity of banks between countries like India,
Iraq, Japan, United States of America, Britain, Australia, Brazil and Pakistan for the year 1985. The key
efficiency indicators used by him were: per employee assets, deposits, net interest and pre-tax profits as well as
percentage of pre-tax profits on assets. The results showed that Japan was the first in respect of assets per
employee, which was more than 63 times of the State Bank Group of India. Japan was also the top performer in
terms of deposits. United States of America showed the highest net interest income per employee and Iraq was
the top pre-tax profit earner. Brazil occupied the top position with respect to the pre-tax profits as

25

per cent of assets, India was at the bottom.

Nyong (1989) examined the impact of managerial effectiveness on profitability of Nigerian Banks. He had also
discussed the various other measures which affected the profitability of banking industry in Nigeria. For the
analysis purpose, a sample of 40 Nigerian banks including 27 retail banks and 13 wholesale banks has been
taken which were in existence in the year 1987. Cross-sectional data has been used along with questionnaires
and interviews. The study found that if banks employed strong motivation factor, then the bank employees’
which were having long 26 years of experience .

Singh (1990) examined the trends and changes in productivity in Indian banking industry in relation to
employee productivity and branch productivity. The researcher used 17 indicators to analyze productivity trends
and these indicators were divided into three categories –Per employee indicators (labour productivity), per
branch indicators (branch productivity), and Financial ratios measuring productivity. The study period (1969-
85) was divided into four sub periods. Cross-sectional and inter-temporal analysis has been done on the basis of
various productivity indicators, and compound annual growth rate has also been calculated. In addition to the
comparison of growth rates of various indicators assessment of relative position performance has been made on
the basis of average T- scores and ranking based on it. Indian Bank and Indian Overseas Bank made the most
significant improvement. The bank which recorded the maximum deterioration was United Commercial Bank,
in terms of employee productivity. There was a notable slide down in the positions of Allahabad Bank, Bank of
Maharashtra and State Bank of Patiala. The researcher recommended that the role played by the structure of

 
44  
subsidiaries of State Bank of India in their relative poor performance needed to be examined. Kaur (1991)
studied the profits and profitability of 20 Public Sector Banks during the period 1976 to 1985. The researcher
employed trend analysis, ratio analysis and regression analysis for the study purpose taking 11 variables, which
reflected different dimensions of banks’ operations, and hence, affected the banks’ profitability. The study was
primarily based on the secondary data. The researcher was of the view that spread and burden were the two
main factors, which influenced the profitability of a bank. The other factors determining bank’s profitability
were credit policy, priority sector lending, massive geographical expansion, increasing establishment expenses,
low non-fund income, deposit mobilization, etc.

Nayar (1992) studied the profitability and profit planning of nationalized banks for the years 1970 to 1986.
Growth and trends in performance and profitability were analyzed in terms of three main ratios, i.e., return on
investment, deposit mobilization and profit margins. The study evaluated that in terms of deposits, advances to
priority sector and number of branches, Central Bank of India ranked first followed by Bank of India and Bank
of Baroda. The maximum compounded annual growth rate in terms of deposits was confined to the period 1976
to 1981 by all the banks except Central Bank of India. Indian Overseas Bank recorded maximum return on
investment followed by Central Bank and Bank of Baroda. Finally, she suggested the various measures to
improve the profitability of commercial banks which included acceleration of recovery process, mixture of
credit portfolio, control over volume, deposit mobilization, diversification of activities into non-traditional
banking business such as merchant banking and mutual funds.

Singh (1992) carried out a comprehensive study to analyze the trends in the productivity of the Indian banking
industry since nationalization of 14 major banks in 1969 till the year 1985. The State Bank of India and its

subsidiaries along with the banks nationalized in 1969 were considered for analysis.

 
45  
 CHAPTER 4
DATA ANALYSIS
AND
INTERPRETATION

 
46  
4.1Comparison between Private and Public Sector Banks:
The private sector banks introduced the concept of online banking in India. This was mostly because the private
banks were technologically well equipped. Online banking is extremely common today since you can sit
anywhere and go ahead with your banking transactions. You do not have to personally visit your bank. The
Private sector banks uses state of the art technology and fully computerized systems since the time they entered
the Indian market whereas the Public Sector Banks (PSB) are not. However despite the technological challenges
the public sector banks in India are still the preferred destinations for many as they are considered as safer
options for money deposit.

 
47  
4.2Private Bank Statistics:

Private Banks recorded growth of 20% in FY12 vs. 21.5% in FY11. The share of private banks in aggregate
deposits stood at 18%. Private Banks recorded decelerated growth in deposits of 17.1% in FY12 vs. 21.9%in
FY11. In terms of assets, aggregate loans and advances, private banks accounted for 19%.credit to industry and
services sector which accounts for more than two-thirds of total bank credit, experienced subdued growth. Since
deposits are the most important source of funds for banks, subdued growth of deposits translated into
decelerated bank credit growth. As a result, growth in advances for all bank groups registered slower growth in
FY12 compared to previous year. Private banks recorded decelerated growth of 21.2% in FY12 vs. 26.1% in
FY11.
As on Jan 2013, aggregate bank credit stood at Rs 50,427.9 bn. Total advances of private banks stood at Rs
9,928.6 bn. The credit-deposit (C-D) ratio was higher at 78.6% in FY12 against 76.5% in FY11. Private banks
C-D ratio (82.27%) in FY12. Private banks recorded an increase in Return on Assets (RoA) from 1.43% in
FY11 to 1.53% in FY12.

 
48  
4.3Private Banks Role:
The importance of private sector in Indian economy over the last 15 years has been tremendous. The opening up
of Indian economy has led to free inflow of Foreign Direct Investment (FDI) along with modern cutting edge
technology, which increased the importance of private sector in Indian economy considerably. Banks play a
major role in this. Private sector Indian banks have exhibited profitability improvements, better asset quality
trends, lower credit costs and healthy capital levels over the years.

 
49  
4.4Private Sector Banks in the Recent Few Years:
Private sector banks have managed to record better growth than their public sector counterparts in the past few
years, as the latter remain burdened with asset quality woes. Year 2015 has seen private sector banks wrest more
market share from public lenders.“Presently, the PSBs with a predominantly high share in infrastructure
financing are observed to be facing the highest amount of stress in their asset quality and profitability,” noted
the Financial Stability Report released by the Reserve Bank of India. In 2015, PSBs seemed to lag private banks
on asset quality, profitability, and credit growth, among others. For instance, the PSBs recorded the highest level
of stressed assets at 14.1 per cent, followed by private banks at 4.6 per cent, and foreign banks at 3.4 per cent.
Because of the pressure on asset quality, the PSBs have also been lending more cautiously, resulting in muted
credit growth for them.

Going ahead, the picture doesn’t seem too rosy for public sector banks as well. A research report by Brickwork
Ratings has estimated PSBs would have lost market share by two per cent in FY15, which has been gained by
the private sector banks. “If the current growth trend continues for another three years, by FY18, our estimate is
that PSBs’ share would have come down to 71 per cent (from 75 per cent in FY15) and the entire gain will be of
private banks.”

NPA AS A PERCENTAGE OF TOTAL ASSETS

 
50  
 CHAPTER 5

CONCLUSION

AND

SUGGESTION

 
51  
Suggestions for private sector banks:

• 24 hours banking should be introduced so as to facilitate the customers who don’t have time in day time or

week days.

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

• Should reduce the amount while opening a new saving bank account.

• Should maintain a proper recruitment policy like the PSU to attract genuine talent to work for the customers.

Rather than recruiting on internal recommendation they should follow the IBPS for recruitment to get better talent

and better services from their employees.

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

• Should advertise extensively regarding their operations and services to garner faith in them.

 
52  
Conclusion

T h e c u s t o m e r s n o w d a y s a r e n o t o n l y e x p o s e d o f w h a t t y p e o f s e r v i c e i s being provided

by banks in India but in the world as a whole. They expect m u c h m o r e t h a n z t o a c t u a l l y

w h a t c u s t o m e r s a r e r e q u i r i n g . E n t r i e s o f t h e p r i v a t e sector banks have made the competition

tougher. If a bank is not functioning properly it is being closed. So it is difficult to face these types conditions

.Here a simple philosophy can work that customers are God and we need to follow this to survive

and serve better. The banking sector is poised for explosive growth. In this, scenario, it is imperative

that banks adopt technology at an aggressive Pace, if they wish to remain competitive. Mani makes a case

for banks to out source their technology infrastructure requirement, thus enabling early adoption and

increased efficiencies. In the prevailing scenario, a number of banks have adopt a new deployment strategy of

infrastructure outsourcing, to lower the cost of service channels. A s a r e s u l t , o t h e r b a n k s t o o w i l l

n e e d t o a l i g n t h e i r r e i n v e n t e d b u s i n e s s models. The required changes at both the business and

technologye n o r m o u s . I n a h i g h l y c o m p e t i t i v e b a n k i n g m a r k e t s , e a r l y a d o p t e r s a r e profiting

from increased efficiencies.

 
53  
BIBLIOGRAPHY

•   www.scribd.com

•   www.shodhganga.com

•   www.wikipedia.com

•   www.economictimes.com

•   www.icici.com

•   www.sbi.com

 
54