INTRODUCTION

1.1 Overview
The world of banking has assumed a new dimension at dawn of the 21st century with the advent of tech banking, thereby lending the industry a stamp of universality. In general, banking may be classified as retail and corporate banking. Retail banking, which is designed to meet the requirement of individual customers and encourage their savings, includes payment of utility bills, consumer loans, credit cards, checking account and the like. Corporate banking, on the other hand, caters to the need of corporate customers like bills discounting, opening letters of credit, managing cash, etc. Metamorphic changes took place in the Indian financial system during the eighties and nineties consequent upon deregulation and liberalization of economic policies of the government. India began shaping up its economy and earmarked ambitious plan for economic growth. Consequently, a sea change in money and capital markets took place. Application of marketing concept in the banking sector was introduced to enhance the customer satisfaction the policy of privatization of banking services aims at encouraging the competition in banking sector and introduction of financial services. Consequently, services such as Demat, Internet banking, Portfolio Management, Venture capital, etc, came into existence to cater to the needs of public. An important agenda for every banker today is greater operational efficiency and customer satisfaction. The mew watchword for the bank is pretty ambitious: customer delight. The introduction to the marketing concept to banking sectors can be traced back to American Banking Association Conference of 1958. Banks marketing can be defined as the part of management activity, which seems to direct the flow of banking services profitability to the customers. The marketing concept basically requires that there should be thorough understanding of customer need and to learn about market it operates in. Further the market is segmented so as to understand the requirement of the customer at a profit to the banks.
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Definition of Bank:

The Oxford dictionary defines the Bank as, An establishment for the custody of money, which it pays out, on a customers order. According to Whitehead, A Bank is defined as an institution which collects surplus funds from the public, safeguards them, and makes them available to the true owner when required and also lends sums be their true owners to those who are in need of funds and can provide security.

Banking Company in India has been defined in the Banking Companies act 1949, One which transacts the business of banking which means the accepting, for the purpose of lending or investment of the deposits of money from the public, repayable on demand, or otherwise and withdraw able be cheque, draft, order or otherwise. The banking system is an integral subsystem of the financial system. It represents an important channel of collecting small savings form the households and lending it to the corporate sector. The Indian banking system has Reserve Bank of India (RBI) as the apex body for all matters relating to the banking system. It is the central Bank of India. It is also known as the Banker to All Other Banks.

Evolution of Indian Banking:

Ancient banking system of India constituted of indigenous bankers. They have been carrying on their age-old banking operations in different parts of the country under different names. The modern age of banking constitutes the fundamental basis of economic growth. The term Bank is being used since long time but there is no clear conception regarding its beginning. According to the viewpoint, in good old days. Italian money leaders were known as Banchi because they kept a special type of table to transact their business.

1.2 Growth of Banking Sector after Liberalization

The Indian financial sector comprises a large network of commercial banks, financial institutions, stock exchanges and a wide range of financial instruments. It has undergone a significant structural transformation since the initiation of financial liberalization in 1990s. Before financial liberalization, since mid 1960s till the early 1990, the Indian financial system was considered as an instrument of public finance (Agarwal, 2003). The evolution of Indian financial sector in the post independent period can be divided in to three distinct periods. During the first period (1947-68), the Reserve Bank of India (RBI) consolidated its role as the agency in charge of supervision and banking control (Sen & Vaidya, 1997). Till 1960s the neo-Keynesian perspective dominated, argued interest rates should be kept low in order to promote capital accumulation (Sen & Vaidya, 1997). During this period Indian financial sector was characterized by nationalization of banks, directed credit and administered interest rates (Lawrence & Longjam, 2003). The second period (1969 - mid 1980s), known as the period of financial repression. The financial repression started with the nationalization of 14 commercial banks in 1969. As a result interest rate controls, directed credit programmes, etc. increased in magnitude during this period (Sen & Vaidya, 1997 & Nair). The third period, mid 1980s onwards, is characterized by consolidation, diversification and liberalization. However a more comprehensive liberalization programme was initiated by the government of India during early 1990s.The impetus to financial sector reforms came with the submission of three influential reports by the Chakravarty Committee in 1985, the Vaghul in 1987 and the Narasimham Committee in 1991. But the recommendations of the Narasimham
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Committee provided the blueprint of the reforms, especially with regard to banks and other financial institutions. In 1991, the government of India initiated a comprehensive financial sector liberalization programme. The liberalization programme includes de-controlled interest rates, reduced reserve ratios and slowly reduced government control of banking operations while establishing a market regulatory framework (Lawrence & Longjam, 2003). The major objectives of the financial liberalization were to improve the overall performance of the Indian financial sector, to make the financial institutions more competent and more efficient. As mentioned earlier, the financial sector comprises commercial banks, stock exchanges and other financial institutions. However, Indian financial system continues to be a bank based financial system and the banking sector plays an important role as a resource mobiliser. It remains the principal source of resources for many households, small and medium enterprises and also caters the large industries. And also provides many other financial services. Underlining the importance of the banking sector, several banking sector specific reforms as a part of financial reforms were introduced to improve the performance of the Indian banking sector and to make the Indian banks more competent and efficient. Against this backdrop, the present paper intends to study the performance of the Indian banking sector in the post liberalization period. At the same time, it also aims to determine the cost efficiency of the Indian banks in context of financial liberalization.

Indian Banking Sector: The Indian banking sector has been dominated by the public sector banks in terms of number and asset share. The banking sector comprises of 28 public sector banks with majority government ownership (Box -1), 23 private banks and 27 foreign banks. It can be seen (Figure: 1), that the number of public sector commercial banks has almost remained the same over last three decades. And in terms of asset share, the public sector banks constitute about 70 percent of the total commercial banking asset. But the point to be noted, the asset share of the public sector banks has gone down from about 90 percent in 1980 to about 68 percent in 2007. Even though the number of domestic private banks has declined since 1980s, the asset share of these banks has

gone up to about 20 percent in 2007. On the other hand, even though the number of foreign banks has gone up significantly, their asset share has not increased in that way. The total banking sector asset constitutes more than 91.8 percent of the GDP at the end of March 2008 and the commercial banking asset constitutes more than 95 percent of the total banking asset.

Since 1990s, there has been spectacular growth of the Indian banking sector. Several variables like total asset, total deposit, total credit and net profit has been analyzed to study the relative progress of the Indian banking sector. In terms of asset, all bank groups have recorded higher asset growth after the financial reforms. It can be seen that, during financial reforms the total asset of the Indian banking sector recorded higher growth and since 1999 total asset of the banking sector has grown significantly. During 1999, the total commercial bank asset was Rs. 6531.37 billion, which increased to Rs. 17854.76 billion in 2012. Total deposits of the commercial banks have gone up significantly since 1999. All bank groups recorded higher deposit especially after 1999. Total deposit of all banks increased to Rs. 13907.54 billion in 2012, which was Rs. 5283.27 billion in 1999.

The total advances of all commercial banks have gone up significantly over last five years. Since 2007, the total advances of all commercial banks have been more than double. In 2007 total advances were Rs. 4344.56 billion and increased to Rs. 10147.76 billion.

The net profit of the Indian commercial banks has gone up significantly over last 7 years. It has gone up from Rs. 43.64 billion in 2005 to Rs. 158.51 billion in 2012. The public sector banks and the domestic private banks witnessed manifold rise in net profit.

Performance of the Indian Banking Sector: Impact of Reform Management Performance The credit deposit ratio reflects the management performance of the banks. It can be seen after financial liberalization, most of the banks reported higher C-D ratio. The CD ratio is the highest in case of the foreign banks and lowest in case of the public sector banks. The over commercial banking sector witnessed an increase in the creditdeposit ratio. In 1980, the C-D ratio for all commercial banks was 63.32 percent, and increased to 73.46 percent in 2012. The investment deposit ratio has also increased, but marginally.

Asset Quality The asset quality reflects the structural soundness of the banking sector. The ratio of contingent liability shows, the foreign banks are more exposed to default, which implies the foreign banks provide most sophisticated services. It is because most of the foreign banks are concentrated in urban areas and mostly carter to large clients. The contingent liability to asset ratio of the total commercial banks shows, it has declined from 25 percent in 1980 to 16 percent in 2012. The foreign banks and the private banks are exposed to more losses in case of default and the public sector banks are less exposed to default. The ratio of investment in securities to assets indicates that banks invest about 20 to 30 percent in government securities in response to SLR. The public sector banks have higher percentage of investment in government securities and the foreign banks investment is the lowest. The public sector banks prefer to invest more in the government securities because; it is more liquid and the safest investment. Even after financial reforms the PSBss investment in government securities has gone up. The ratio of term loans to asset shows, over years it has increased to about 58 percent in 2012. The private banks have increased the term loans to about 70 percent and the public sector banks have been almost consistent about 30 percent on average till 2003 and thereafter witnessed a rapid increase in their term loans.

Profitability Profitability can be measured with two indicators; Return on Asset (ROA) and the Return on Equity (ROE). The return on asset is defined as the ratio of net profit to average asset. It can be seen that, after financial reforms the banks are more profitable. The foreign banks are more profitable than the domestic private banks and the public sector banks. After financial liberalization, the private and the foreign banks recorded higher rate of return on asset. During the early phase of reforms, the return on asset was negative. But after that it increased from -0.89 percent in 1994 to 1 percent in 2012. Return on equity can be taken as proxy to measure profitability. The private banks are more consistent since 1990s in terms of the return on equity, where as the foreign banks have been the most inconsistent. During early 1990s the return on equity of the foreign banks was about 132 percent and in 2012 it is about 16 percent. The public sector banks are performing better with 16.14 percent return on equity.

Concentration The Indian banking sector is dominated by the public sector banks. However, with the initiation of financial liberalization, several private and foreign banks started functioning, which ushered in competition in the Indian banking sector. Even the share of public sector banks in total asset, deposit and credit has declined; still they dominate the Indian banking sector.

The Concept of Efficiency The efficiency of the banking sector can be decomposed in to scale efficiency, scope efficiency, pure technical efficiency and allocative efficiency (Chen, 2001). The bank is said to have scale efficiency, when it operates in the range of constant returns to scale and have scope efficiency, when it operates in different diversified locations. Maximizing output from a given level of input is called technical efficiency and when a bank chooses the revenue maximizing mix of output, the allocative efficiency

occurs (Chen, 2001). According to Berger, the most important origin of the cost problems in banking is the X-efficiency, which is the differences in the managerial ability to control cost for a given level of production (as discussed in Chen, 2001). The Xefficiency includes both the technical and allocative efficiency. The Xefficiency can be estimated in four ways. These are the Data Envelopment Analysis (DEA), the Stochastic Frontier Approach (SFA), the Thick Frontier Approach (TFA) and the Distribution Free Approach (DFA) (Chen, 2001).

REVIEW OF LITERATURE
2.1 Introduction 2.2 Review of Literature

2.3 Statement of the Problem

After liberalization there was drastic change in Indian Economy, specially the financial sector due to various reforms implemented by Indian Government. This research work would be mainly focusing on the growth history of the Banking Industry and the comparative study of growth in Public, Private & Foreign Banks with respect to their Profits.

2.4 Scope of the Study 2.5 Objective of the Problem 2.6 Hypothesis 2.7 Operational Definitions of Concepts

2.8 Methodology 2.9 Limitation of the Study 2.10 Chapter Scheme

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PROFILE OF INDUSTRY

4.1 An Indian Overview

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SUMMARY OF FINDINGS, CONCLUSIONS & RECOMMENDATIONS

5.1 Findings
The study finds there has been significant change in the performance of the banking sector after the initiation of financial liberalization in India. Being a bank based financial system; the banking performance has an obvious impact on the economy. Using RBI data from the Statistical Tables Relating to Banks in India data base, the study finds there has been significant transformation in the structure of the banking sector. The relative importance of the public sector banks has been declining which results in the emergence of the domestic private sector banks and more foreign banks. The asset, the deposit and the credit share shows the share of public sector has been declining and the share of the private banks going up, which implies declining concentration and increasing competition. The indicators of profitability demonstrate, all bank groups recorded an increase in the rate of profit and the foreign banks are found to be the more profitable in comparison to the domestic private banks and the public sector banks. The X-efficiency results show that there has been no significant change in the level of efficiency of the public sector banks. There has been marginal decline in the efficiency of the public sector banks in the post reform period. An analysis of the post reform period shows, the domestic private banks are becoming more efficient. However, taking the post reform period as a whole the study found that the public sector banks are more efficient than the private and the foreign banks. And the foreign banks seem to be the least efficient banks in India.

5.2 Conclusions 5.3 Suggestion 5.4 Implications

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