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ABSTRACT
Face of Global Banking is undergoing a transition. Banking is now a global issue.
Reforms in the financial sector, covering banking, insurance, financial markets,
trade, taxation etc. have been a major catalyst in strengthening the fundamentals
of the Indian economy. The reform measures have brought about sweeping
changes in this critical sector of the Indian's economy. Banking in India is
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 the year 2007. The broad objective of the financial sector reform has
thus been to create a viable and efficient banking system. Improvements in the
growth rate can be effected through three, not necessarily mutually exclusive
channels: improving productivity of capital, through investments in human capital
and raising total factor productivity (TFP). Performance of the banking sector has
impact across the length and breadth of the economy. The major banking sector
reforms comprises of modifying the policy framework; improving the financial
soundness and credibility of banks; creating a competitive environment, and
strengthening of the institutional framework. The banking sector reform measures
to enhance efficiency and productivity through competition were initiated and
sequenced to create an enabling environment for banks to overcome the external
constraints which were related to administered structure of interest rates, high
levels of pre-emption in the form of reserve requirements, and credit allocation to
certain sectors.
An attempt has been made in this paper to provide a brief overview on
performance of the Banking Sector in India. It also includes a critical review of the
performance as well as impact of Banking Sector Reforms in India. It has also
covered the role and measures initiated by the Reserve Bank in India [RBI] in
order to implement the Banking Sector Reforms in India. The concluding remarks
are provided at the end.
*Dr. Parimal Vyas is a Professor& Head, Department of Commerce
including Business Administration, Faculty of Commerce, The M.S.
University of Baroda, Vadodara (Gujarat)- 390 002.Email:
parimalvyasmsu[at]yahoo.co.in, and *Ms. Bijal Zaveri is a Ph. D Scholar,
Department of Commerce including Business Administration, Faculty of
Commerce, The M.S. university of Baroda, Vadodara (Gujarat)- 390 002.
Email: bijalzaveri[at]rediffmail.com
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INTRODUCTION:
Globalization is a complex phenomenon and a process that is, perhaps, best
managed by public policies. Globalization has several dimensions arising out of
what may be called the consequential enhanced connectivity among people
across borders. While such enhanced connectivity is determined by three
fundamental factors, viz., technology, taste and public policy, cross-border
integration can have several aspects: cultural, social, political and economic.
There has been a significant progress towards globalization in the recent past
and policy-wise, there have been impressive initiatives, the extent to which
India is globalized is considerably at the lower end of the emerging economies.
Flexibility in product and factor markets play a part not only in capturing the
gains from financial sector reform but also more generally from globalization
(www.rbi.org.in). Face of Global Banking is undergoing a transition. Banking is
now a global issue. Since the early 1980s, bankers working together with
national policymakers and officials at such international financial institutions
(IFIs) as the World Bank and the International Monetary Fund (IMF) have
largely succeeded in deregulating the global banking system.
Reforms in the financial sector, covering Banking, Insurance, Financial
markets, Trade, taxation etc. have been a major catalyst in strengthening the
fundamentals of the Indian economy. (www.ifbi.com).The most significant
achievement of the financial sector reforms has been the marked improvement
in the financial health of commercial banks in terms of capital adequacy,
profitability and asset quality as also greater attention to risk management.
Further, deregulation has opened up new opportunities for banks to increase
revenues by diversifying into investment banking, insurance, credit cards,
depository services, mortgage financing, securitization, etc. At the same time,
liberalization has brought greater competition among banks, both domestic and
foreign, as well as competition from mutual funds, NBFCs (non-bank finance
companies), post office, etc. As banks benchmark themselves against global
standards, there has been a marked increase in disclosures and transparency
in bank balance sheets (www.bseIndia.com).
The face of banking is changing rapidly. The Indian banking system continues
to be dominated by Government banks, with public sector banks accounting for
three-quarters of total commercial banking assets.
The banking system is fragmented; with the exception of the State Bank of
India, no one bank holds more than ten percent of total system assets. The
combined assets of India’s five largest banks are less than the assets of the
largest Chinese bank (www.unpan1.un.org).
In most emerging markets, banks assets comprise well over 80 per cent of total
financial sector assets, whereas these figures are significantly lower in
developed economies. Another difference in the banking industry in developed
and emerging economies is the degree of internationalization of banking
operations.
A BRIEF REVIEW OF BANKING SECTOR IN INDIA:
The reform measures have brought about sweeping changes in this critical
sector of the Indian's economy. For the past three decades that is 1970 to 2000,
India's banking system has several outstanding achievements to its credit. It is
no longer restricted to only metropolitans or cosmopolitans in India.
(www.finance.Indiamart.com).In India, prior to nationalization, banking was
restricted mainly to the urban areas and neglected in the rural and semi-urban
areas.
By 1991, India's financial system was loaded with an inefficient and financially
unsound banking sector. Some of the reasons for this were viz. high reserve
requirements, administered interest rates, directed credit, lack of competition,
political interference and corruption. The Narasimham Committee Report (1991)
recommended several reform measures such as reduction of reserve
requirements, de-regulation of interest rates, introduction of prudential norms,
strengthening of bank supervision and improving the competitiveness of the
system. The second Narasimham Committee Report (1998) too focused on
issues like strengthening of the banking system, upgrading of technology and
human resource development (Ramasastri A.S. and Achamma Samuel, 2006).
Banking in India is 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 the year 2007.India has 88 scheduled
commercial banks, 28 public sector banks that is with the Government of India
holding a stake, 29 private banks do not having Government stake; they may be
publicly listed and traded on stock exchanges, and 31 foreign banks. They have
a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75
per cent of total assets of the banking industry, with the private and foreign
banks holding 18.2 per cent and 6.5 per cent respectively (www.wikipedia.org).
Pension fund industry in India grew at a CAGR [Cumulative Aggregate Growth
Rate] of 122.44 per cent from 1999-2000 to 2006-2007. Rural and semi-urban
India is expected to account for 58.33 per cent of the insurance sector by 2010.
The ATM outlets in India increased at a CAGR of 53.99 per cent to reach 20,000
in 2006 from 2000. Rural and semi-urban centers account for 66 per cent of
total bank branches.
Indian Mutual Fund industry witnessed a growth of 49.88 per cent from May
2006 to May 2007, and higher growth is recorded in closed-ended schemes at
215.61 per cent. Increasing number of millionaires in India is increasing the
scope of Wealth Management Services. Bankable household India is expected to
grow at a CAGR of 28.10 per cent during 2007-2011.Banking sector investment
in Information Technology is expected grow at 18 per cent in 2007 from 2006
(www.the-infoshop.com).
BANKING SECTOR REFORMS IN INDIA: A CURSORY LOOK:
The objective of reforms in general is to accelerate the growth momentum of the
economy, defined in terms of per capita income. The broad objective of the
financial sector reform has thus been to create a viable and efficient banking
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system. Improvements in the growth rate can be effected through three, not
necessarily mutually exclusive channels: improving productivity of capital,
through investments in human capital and raising total factor productivity
(TFP). Performance of the banking sector has impact across the length and
breadth of the economy (www.rbi.org.in).
The major banking sector reforms comprises of modifying the policy framework;
improving the financial soundness and credibility of banks; creating a
competitive environment, and strengthening of the institutional framework. The
improvements in the policy framework are aimed at removing and reducing the
external constraints bearing on the profitability and functioning of commercial
banks. (www.rbi.org.in).
The banking sector reform measures to enhance efficiency and productivity
through competition were initiated and sequenced to create an enabling
environment for banks to overcome the external constraints which were related
to administered structure of interest rates, high levels of pre-emption in the
form of reserve requirements, and credit allocation to certain sectors. The policy
environment of public ownership must be recognized that the lion’s share of
financial intermediation was accounted for by the public sector during the prereform
period. Consolidation is a crucial feature of the reform process.
Impressive institutional and legal reforms have been executed. To illustrate, A
Board for Regulation and Supervision of Payment and Settlement Systems
(BPSS) has been set up to prescribe policies relating to the regulation and
supervision of all types of payment and settlement systems, setting up of
standards for existing and future systems, authorization of the payment and
settlement systems and determination of the criteria for membership to these
systems.
There have been a number of measures for enhancing the transparency and
disclosures standards. All cases of penalty imposed by the RBI on the banks as
also directions issued on specific matters, including those arising out of
inspection, are to be placed in the public domain to increase transparency in
the banking sector.
The regulatory framework and supervisory practices have joined with the best
practices. The minimum Capital to Risk Assets Ratio (CRAR) has been kept at
nine per cent, and the banks are required to maintain a separate Investment
Fluctuation Reserve (IFR) out of profits, towards interest rate risk, at five per
cent of their investment portfolio under the categories held for trading and
available for sale. It has prescribed prudential guidelines to encourage market
discipline with a focus on ensuring good governance through fit and proper
owners, directors and senior managers of the banks. The RBI has notified
detailed guidelines on ownership and governance in private sector banks
emphasizing diversified ownership. (www.bis.org).
Besides, research has also provided robust evidence supporting the view that
financial development contributes to economic growth. To illustrate, at the
cross-country level, various measures of financial development including
measures of financial sector assets, domestic credit to private sectors, and
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stock market capitalization are found to be positively related to economic
growth. At the firm level, firms in economies with deeper financial development
are able to obtain more external funds to faster growth. Financial repression
through statutory pre-emptions has been reduced, while stepping up prudential
regulations and interest rates have been progressively deregulated on both the
deposit and lending sides (www.rbi.org.in).
The financial sector in India has undergone significant liberalization in all the
four segments banking, non-banking finance, securities and insurance and
each of these sectors has grown significantly accompanied by a process of
restructuring among the market intermediaries. Entry of some of the bigger
banks into other financial segments like merchant banking, insurance, etc.
which has made them financial 'conglomerates'; emergence of several new
players with diversified presence across major segments and possibility of some
of the non-banking institutions in the financial sector acquiring large enough
proportions to have a total impact.
The RBI has allowed Indian banks to augment their capital funds by issuing of
innovative perpetual debt instruments eligible for inclusion as Tier I capital;
debt capital instruments eligible for inclusion as Upper Tier II capital; perpetual
non-cumulative preference shares eligible for inclusion as Tier I capital and
redeemable cumulative preference shares eligible for inclusion as Tier II capital.
A number of banks have issued these instruments both in India and overseas
to shore up capital.
The various options available for reducing the element of pro-cyclicality include,
among others, adoption of objective methodologies for dynamic provisioning
requirements, as is being done by a few economies, by estimating the
requirements over a business cycle rather than a year on the basis of the
riskiness of the assets, establishment of a linkage between the prudential
capital requirements and through-the-cycle ratings instead of point-in-time
ratings and establishment of a flexible Loan-To-Value (LTV) ratio requirements.
An efficient credit information system has been suggested to enhance the
quality of credit decisions and in order to improve the asset quality of banks,
apart from facilitating faster credit delivery. A scheme for disclosure of
information regarding defaulting borrowers of banks and financial institutions
too has been introduced (www.rbi.org.in).
PERFORMANCE OF BANKING SECTOR & BANKING REFORMS OF INDIA:
Bank profitability levels in India have also trended upwards and gross profits
stood at 2.0 per cent during 2005-2006, 2.2 per cent during 2004-2005 and net
profits trending at around 1 per cent of assets. Available information suggests
that for developed countries, at end-2005, gross profit ratios were of the order
of 2.1 per cent for the US and 0.6 per cent for France
The extent of penetration of Indian banking system in country as measured by
the proportion of bank assets to GDP has increased from 50 per cent in the
second half of nineties to over 80 per cent a decade later. Operating expenses of
banks in India are also much more aligned to those prevailing internationally,
hovering around 2.1 per cent during 2004-2005 and 2005-2006.The proportion
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of net NPA to net worth, sometimes called the solvency ratio of public sector
banks has dropped from 57.9 per cent in 1998-1999 to 11.7 per cent in 2006-
2007 (www.eac.gov.in).
Indian banks record high growth in the second quarter of 2007-2008
As per ASSOCHAM Eco Pulse (AEP) Study, of the Scheduled Commercial
Banks (SCBs) have substantially increased their net profits with average rise of
30 per cent on the back of strong growth in deposits and fee based income in
the second quarter of the financial year 2007-2008. The ASSOCHAM Study on
`Banking Sector Performance in Second Quarter’ based on the quarterly
results declared by the 17 major scheduled commercial banks has revealed
that banks continued to maintain a strong momentum in both earnings growth
as well as growth across all its core businesses, such as treasury income, fee
based income and interest income. Major Scheduled Commercial Banks (SCBs)
saw a rise of about 23.82 per cent in its treasury income in Second Quarter of
the financial year 2007-2008. Fee based income of the banks registered a
robust growth of 40.80 per cent in while the interest income posted a growth of
35.48 per cent in the quarter ending September 2007.
Other banks, which saw significant profits, includes viz; Indian Bank (46.34 per
cent), followed by Union Bank (42.04 per cent), HDFC Bank (40.14 per cent),
State Bank of India (36.04 per cent), Centurion Bank of Punjab (33.76 per
cent), ICICI Bank (32.79 per cent), Vijaya Bank (23.80 per cent), Allahabad
Bank (14.17 per cent), IDBI Bank (12.23 per cent), ING Vysya Bank (11.09 per
cent), Canara Bank (11 per cent), Syndicate Bank (10.98 per cent), Punjab
National Bank (6.63 per cent) and Andhra Bank (3.26 per cent). The private
sector banks continue to have higher pace of growth in their bottom lines with
average 40 per cent growth as compared to 24 per cent growth recorded by
public sector banks. While Yes bank, HDFC Bank, Centurion Bank of Punjab
was the best performers in the private sector, Axis bank, Indian Bank, Union
Bank and State Bank of India remained at top among the PSBs.
The AEP study also revealed that the bank deposits have grown by 26 per cent
during the second quarter. Yes Bank (129 per cent), Centurian Bank of Punjab
(69 per cent), IDBI Bank (61 per cent) and HDFC Bank (43 per cent) has
registered maximum growth in their deposits.
(http://www.banknetIndiabanking/71116.htm).
An attempt has been made to outline in brief considering selected criteria
as follows.
(i) Performance Indicators:
The soundness parameters of the banking system have shown sustained
improvement. The asset quality of the Indian banking system has improved.
The NPAs of all SCBs, which stood at 15.7 per cent of gross advances and 7.0
per cent of total assets in 1995-1996, declined to 3.3 per cent of gross advances
and 1.9 per cent of total assets in 2005-2006.
The financial performance of SCBs had also improved during the past as
reflected in their profitability. The operating profit to assets ratio of SCBs, which
was 1.69 in 1995-1996, increased to 2.03 in 2005-2006 (Table 2). Net profit to
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assets of SCBs remained in the range of 0.47 to 1.13 during the period 1995-96
to 2005-2006 (www.rbi.org.in).
Several balance sheet and profitability indicators suggest that the Indian
banking sector indicators are moving towards global benchmarks.