bankingfinal bibliography (1)
TRANSCRIPT
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OBJECTIVES AND SCOPE OF THE PROJECT
The banking industry is one of the fastest growing industry in
India. It is a mirror image of the economy of the country. With the liberalization
of the economy, India has become the playground of major global banking
majors.
The major objectives of the study are as below:
To analyse how political, economical, socio-cultural, technological factors
affect this industry by PEST analysis.
To find out level of competition in Indian banking industry through using
porters five force model.
To find out driving forces and key success factors of the industry
To analyze various threats and opportunities for the industry
To focus on current trends and future of the industry.
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RESEARCH METHODOLOGY
We have done exploratory research and for that purpose we had
used secondary data.
We had collected this secondary data from various published
materials like newspapers, magazines, books etc and from Internet web sites.
From these various information and data we had done qualitative and
quantitative analysis to find out impact of various forces, effect of macro
environmental factors, major trends and future of the industry.
1.1: History of Indian banking
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A bankis a financial institution that provides banking and other
financial services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial supervision
authorities and provide rights to conduct the most fundamental banking services
such as accepting deposits and making loans. There are also financial institutions
that provide certain banking services without meeting the legal definition of a
bank, a so-called Non-bank. Banks are a subset of the financial services industry.
The word bank is derived from the Italian banca, which is
derived from German and means bench. The terms bankrupt and "broke" are
similarly derived from banca rotta, which refers to an out of business bank,
having its bench physically broken. Moneylenders in Northern Italy originally
did business in open areas, or big open rooms, with each lender working from
his own bench or table.
Typically, a bank generates profits from transaction fees on
financial services or the interest spread on resources it holds in trust for clients
while paying them interest on the asset. Development of banking industry in
India followed below stated steps.
Banking in India has its origin as early as the Vedic period. It is believed
that the transistion from money lending to banking must have occurred
even before Manu, the great Hindu Jurist, who has devoted a section of his
work to deposits and advances and laid down rules relating to rates of
interest.
Banking in India has an early origin where the indigenous bankers played a
very important role in lending money and financing foreign trade and
commerce. During the days of the East India Company, was the turn of the
agency houses to carry on the banking business. The General Bank of India
was first Joint Stock Bank to be established in the year 1786. The others
which followed were the Bank Hindustan and the Bengal Bank.
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In the first half of the 19th century the East India Company established
three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and
the Bank of Madras in 1843. These three banks also known as Presidency
banks were amalgamated in 1920 and a new bank, the Imperial Bank of
India was established in 1921. With the passing of the State Bank of India
Act in 1955 the undertaking of the Imperial Bank of India was taken by the
newly constituted State Bank of India.
The Reserve Bank of India which is the Central Bank was created in 1935
by passing Reserve Bank of India Act, 1934 which was followed up with
the Banking Regulations in 1949. These acts bestowed Reserve Bank of
India (RBI) with wide ranging powers for licensing, supervision and
control of banks. Considering the proliferation of weak banks, RBI
compulsorily merged many of them with stronger banks in 1969.
The three decades after nationalization saw a phenomenal expansion in the
geographical coverage and financial spread of the banking system in the
country. As certain rigidities and weaknesses were found to have developed
in the system, during the late eighties the Government of India felt that
these had to be addressed to enable the financial system to play its role in
ushering in a more efficient and competitive economy. Accordingly, a high-
level committee was set up on 14 August 1991 to examine all aspects
relating to the structure, organization, functions and procedures of the
financial system. Based on the recommendations of the Committee
(Chairman: Shri M. Narasimham), a comprehensive reform of the banking
system was introduced in 1992-93. The objective of the reform measures
was to ensure that the balance sheets of banks reflected their actual
financial health. One of the important measures related to income
recognition, asset classification and provisioning by banks, on the basis of
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objective criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has been
another important measure of the reforms process.
1.Comprises balance of expired loans, compensation and other bonds such
as National Rural Development Bonds and Capital Investment Bonds.
Annuity certificates are excluded.
2.These represent mainly non- negotiable non- interest bearing securities
issued to International Financial Institutions like International Monetary
Fund, International Bank for Reconstruction and Development and Asian
Development Bank.
3. At book value.
4.Comprises accruals under Small Savings Scheme, Provident Funds,
Special Deposits of Non- Government
In the post-nationalization era, no new private sector banks were allowed
to be set up. However, in 1993, in recognition of the need to introduce
greater competition which could lead to higher productivity and efficiency
of the banking system, new private sector banks wereallowed to be set up
in the Indian banking system. These new banks had to satisfy among
others, the following minimum requirements:
(i) It should be registered as a public limited company;
(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a
centre which does not have the headquarters of any other bank; and
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(v) The bank will be subject to prudential norms in respect of banking
operations, accounting and other policies as laid down by the RBI. It
will have to achieve capital adequacy of eight per cent from the very
beginning.
A high level Committee, under the Chairmanship of Shri M. Narasimham,
was constituted by the Government of India in December 1997 to review
the record of implementation of financial system reforms recommended by
the CFS in 1991 and chart the reforms necessary in the years ahead to make
the banking system stronger and better equipped to compete effectively in
international economic environment. The Committee has submitted its
report to the Government in April 1998. Some of the recommendations of
the Committee, on prudential accounting norms, particularly in the areas of
Capital Adequacy Ratio, Classification of Government guaranteed
advances, provisioning requirements on standard advances and more
disclosures in the Balance Sheets of banks have been accepted and
implemented. The other recommendations are under consideration.
The banking industry in India is in a midst of transformation, thanks to the
economic liberalization of the country, which has changed business
environment in the country. During the pre-liberalization period, the
industry was merely focusing on deposit mobilization and branch
expansion. But with liberalization, it found many of its advances under the
non-performing assets (NPA) list. More importantly, the sector has become
very competitive with the entry of many foreign and private sector banks.
The face of banking is changing rapidly. There is no doubt that banking
sector reforms have improved the profitability, productivity and efficiency
of banks, but in the days ahead banks will have to prepare themselves to
face new challenges.
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Indian Banking: Key Developments
1969 Government acquires ownership in major banks
Almost all banking operations in manual mode
Some banks had Unit record Machines of IBM for IBR &
Pay roll
1970- 1980 Unprecedented expansion in geographical coverage, staff,
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise in
transaction volumes -- Outsourcing of data processing to service bureaux begins
Back office systems only in Multinational (MNC) banks'
offices
1981- 1990 Regulator (read RBI) led IT introduction in Banks
Product level automation on stand alone PCs at branches
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(ALPMs)
In-house EDP infrastructure with Unix boxes, batch
processing in Cobol for MIS.
Mainframes in corporate office
1991-1995 Expansion slows down
Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential banking
norms entry of new private sector banks
Total Branch Automation (TBA) in Govt. owned and old
private banks begins
New private banks are set up with CBS/TBA form the start
1996-2000 New delivery channels like ATM, Phone banking and
Internet banking and convenience of any branch banking and
auto sweep products introduced by new private and MNC
banks
Retail banking in focus, proliferation of credit cards
Communication infrastructure improves and becomes cheap.
IDRBT sets up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respond
using intermediary technology, TBA implementation surges
ahead under fiat from Central Vigilance
Commission (CVC), Y2K threat consumes last two years
2000-2003
Alternate delivery channels find wide consumer acceptance IT Bill passed lending legal validity to electronic
transactions
Govt. owned banks and old private banks start implementing
CBSs, but initial attempts face problems
Banks enter insurance business launch debit cards
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1.2: CURRENT SCENARIO
The banking industry in India is in a midst of transformation,
thanks to the economic liberalization of the country, which has changed business
environment in the country. During the pre-liberalization period, the industry
was merely focusing on deposit mobilization and branch expansion. But with
liberalization, it found many of its advances under the non-performing assets
(NPA) list. More importantly, the sector has become very competitive with the
entry of many foreign and private sector banks. The face of banking is changing
rapidly. There is no doubt that banking sector reforms have improved the
profitability, productivity and efficiency of banks, but in the days ahead banks
will have to prepare themselves to face new challenges.
For the first quarter ended June 2004, the banking sector recorded a bottom
line growth of 18% to Rs 4852.50 crore. Higher net interest income and
lower provisioning were the main reasons for the profit growth during the
quarter. However, the above results were achieved despite higher operating
expenses and a lower rise in non-interest income.
Among banks, public sector banks outperformed private sector banks by
registering a 20% rise in the net profit compared to an 11% growth reported
by private sector banks. This was mainly due to a higher rise in other
income (OI) and a lower increase in operating expenses by public sector
banks compared to a fall in OI and higher operating expenses by private
sector banks. However, at the net interest level, private sector banks
outperformed public sector banks by registering a growth of 36% compared
to a 14% rise reported by public sector banks. .
The net interest income of the overall banking sector during the quarter rose
17% to Rs 11962.53 crore, mainly due to low cost of funds. The interest
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earned rose 4% to Rs 29747.88 crore, contributed mainly by interest
income from core operations (i.e., lending). The interest expenses decreased
by 4% to Rs 17785.35 crore. The interest spread of most banks witnessed
an increase over the corresponding previous quarter, as the decline of yield
on lending was lower than the cost of funds. In the falling interest rate
scenario, the rate on deposits for most banks fell faster than advances.
Thus, interest expenses came down faster to protect profit.
The sound economic growth, soft interest rate regime, upward migration of
incomes and wider distribution to cover a larger proportion of the
population are expected to increase the demand for retail loans in a
significant manner. The retail credit as a percentage of GDP in India is only
around 5% as compared to levels of 30 - 50% in other Asian economies
and, therefore, offers significant growth opportunities. Also, favourable
demographic profile like 69% of the population estimated to be under 35
years and an increase in upper middle/high income households are to be the
main drivers for retail credit. In the medium term, stronger demand for
credit from the corporate sector is also expected consequent to the
resurgence of this sector. Earlier, banks were seeing lower credit offtake
from corporates because of weak business sentiments and lower credit
requirement due to improved operational efficiency
Also, most banks are aggressively augmenting their fee incomes and have
embarked upon cross selling of products. They are also focusing on fuller
utilization of their IT investments such as ATMs by entering into sharing
arrangement with other banks to earn extra OI. Many banks are hopeful of
effecting significant NPA recoveries due to the Securitisation Act.
Recoveries from NPAs, which have been provided for, add to OI.
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RBI's soft interest rate policy has helped increase the liquidity in the
market, however credit offtake has not exactly been robust. Going
forward, the scenario is set to change in favour of higher credit offtake
due to expected improvement in agricultural output on the back of
good monsoons as well as revival in the Indian industry. However the
same cannot be said for the interest rate regime. Higher inflation and
the prospect of the US raising interest rates may necessitate a hike in
interest rates in the domestic markets also. This may in turn curb the
growth of the credit in the economy. Hence while the growth in credit
may still be robust, a higher interest rate scenario may however limit
the potential.
While the new law regarding securitisation and foreclosure of assets
may take a while to bear any large benefits, currently the benefits of
increased power in the hands of the lender are making the borrowers to
come to the negotiating table. FY04 saw a scenario where the
borrowers were forced to negotiate with the lenders, which
consequently led to the borrowers returning some of the dues to the
lenders. Going forward the new law will bring about greater
accountability within the system and ensure that borrowers do not take
undue advantage of the system. Already an asset reconstruction
company has been set up by SBI in partnership with other institutions
like ICICI Bank and IDBI. If properly implemented, this new law may
lead to significant benefits for the banking sector as a whole.
Currently the banking sector in the country is strongly fragmented and
hence with further policy changes taking place in the sector,
consolidation is likely to take place at a faster rate. However this is
subject to the removal of the ceiling on voting rights will ensure that
private sector and foreign banks will be in a much better position to
carry out acquisitions in the banking sector. A hike in FDI capital
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limits in the sector would further go a long way in the process of
consolidation.
In terms of credit growth, going forward. India's core sector is
witnessing a revival of sorts. The manufacturing sector especially led
by steel and cement industries has shown significant improvement inFY04. We expect the trend to continue. Hence as corporate growth
picks up lending too is likely to see an up tick. Retail credit off-take is
expected to remain strong going forward with the housing finance
industry, the main contributor to credit off-take from this segment,
expected to grow between 20%-25% in the next 3-4 years.
2: STRUCTURE OF INDIAN BANKING INDUSTRY
Organized banking was active in India since the
establishment of the General Bank of India in 1786. After independence, the
Reserve Bank of India (RBI) was established as the central bank and in 1955, the
Imperial Bank of India, the biggest bank at the time, was taken over by the
government to form state-owned State Bank of India (SBI). RBI had undertakenan exercise to merge weak banks to strong banks and the total number of banks
thus reduced from 566 in 1951 to 85 in 1969.
With the objective of reaching out to masses and meeting
the credit needs of all sections of people, the government nationalized 14 large
banks in 1969 followed by another 6 banks in 1980. This period saw enormous
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growth in the number of branches and the banks branch network became wide
enough to reach the weakest sections of the society in a vast country like India.
Sibs network of 9033 domestic branches and 48 overseas offices is considered
to be one of the largest for any bank in the world.
The economic reforms unleashed by the government in earlynineties included banking sector too, to a significant extent. Entry of new private
sector banks was permitted under specific guidelines issued by RBI. A number
of liberalisation and de-regulation measures aimed at consolidation, efficiency,
productivity, asset quality, capital adequacy and profitability have been
introduced by the RBI to bring Indian banks in line with International best
practices. With a view to giving the state-owned banks operational flexibility
and functional autonomy, partial privatisation has been authorised as a first step,
enabling them to dilute the stake of the government to 51 per cent. The
government further proposed, in the Union Budget for the financial year 2000-
01, to reduce its holding in nationalised banks to a minimum of 33 per cent on a
case by case basis.
The banking system can be broadly classified as organized and
unorganized banking system. The unorganised banking system comprises ofmoneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc.
Whereas the organised banking system comprises of Scheduled Banks and Non-
Scheduled Banks that are permitted by RBI to undertake banking business.
Types of Banks
A. Scheduled Banks
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Scheduled commercial banks are those that come under the purview of the
Second Schedule of Reserve Bank of India (RBI) Act, 1934. The banks that are
included under this schedule are those that satisfy the criteria laid down vide
section 42 (6 of the Act).
1. The bank is dealing in banking business in India only.
2. The paid up capital and total funds of the bank should not be less than five
lakhs rupees.
3. It should convince RBI that its activities would not be against the interest of
investors.
4. The bank must be:
(a)State cooperative bank, or
(b)A company according to the definition of the companies Act1956, or
(c) An institution notified by the central government, or
(d)A corporation or a company incorporated by or under any law in
force in any place outside India.
Thus,
(I) Indian Commercial Banks
(II) Foreign Commercial Banks, and
(iii) State Cooperative Banks fulfilling the above condition are
considered as scheduled banks.
Moreover under the RBI Act section 42, the Central Government
has declared the following banks as scheduled banks.
(i) State Bank of India and its seven subsidiary banks,
(ii) Twenty nationalized banks, and
(iii) Urban Banks.
In June 1980 there were 149 scheduled banks which included
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(i) Public Sector Banks
(ii) Private sector Banks,
(iii) Foreign Exchange Banks and
(iv) State Cooperative Banks.
A bank which wants to register its name as scheduled bank has to
apply to the Central Government. On receiving such application, the central
government orders RBI to investigate the banks accounts. If RBI gives
favorable reports, the central government sanctions its proposal, and the bank is
listed under schedule annexure II and is considered as a scheduled bank.
Some co-operative banks come under the category of scheduled
commercial banks though not all co-operative banks.
PUBLIC SECTOR BANKS
Public sector banks are those in which the Government of India or the RBI
is a majority shareholder. These banks include the State Bank of India
(SBI) and its subsidiaries, other nationalized banks, and Regional Rural
Banks (RRBs). Over 70% of the aggregate branches in India are those of
the public sector banks. Some of the leading banks in this segment include
Allahabad Bank, Canara Bank, Bank of Maharashtra, Central Bank of
India, Indian Overseas Bank, State Bank of India, State Bank of Patiala,
State Bank of Bikaner and Jaipur, State Bank of Travancore, Bank of
Baroda, Bank of India, Oriental Bank of Commerce, UCO Bank, Union
Bank of India, Dena Bank and Corporation Bank.
PRIVATE SECTOR BANKS
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Private Banks are essentially comprised of two types: OLD AND THE
NEW.
The OLD PRIVATE sector banks comprise those, which were operating
before Banking Nationalization Act was passed in 1969. On account of
their small size, and regional operations, these banks were not nationalized.
These banks face intense rivalry from the new private banks and the foreign
banks. The banks that are included in this segment include: Bank of
Madura Ltd. (now a part of ICICI Bank), Bharat Overseas Bank Ltd., Bank
of Rajasthan, Karnataka Bank Ltd., Lord Krishna Bank Ltd., The Catholic
Syrian Bank Ltd., The Dhanalakshmi Bank Ltd., The Federal Bank Ltd.,
The Jammu & Kashmir Bank Ltd., The Karur Vysya Bank Ltd., The
Lakshmi Vilas Bank Ltd., The Nedungadi Bank Ltd. and Vysya Bank.
The new private sector banks were established when the Banking
Regulation Act was amended in 1993. Financial institutions promoted
several of these banks. After the initial licenses, the RBI has granted no
more licenses. These banks are gearing up to face the foreign banks by
focusing on service and technology. Currently, these banks are on an
expansion spree, spreading into semi-urban areas and satellite towns. The
leading banks that are included in this segment include Bank of Punjab
Ltd., Centurion Bank Ltd., Global Trust Bank Ltd., HDFC Bank Ltd.,
ICICI Banking Corporation Ltd., IDBI Bank Ltd., IndusInd Bank Ltd. and
UTI Bank Ltd.
CO-OPERATIVE BANKS
Co-operative banks act as substitutes for moneylenders, and offer timely
and adequate short-term and long-term institutional credit at reasonable
rates of interest. Co-operative banks are relatively similar in terms of
functions to the other banks except for the following:
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(a)They are organized and managed on the principal of co-operation, self-
help, and mutual help.
(b)They operate under the rule of "one member, one vote".
(c) Operate on "no profit, no loss" basis.
(d) Co-operative bank conducts all the main banking functions of deposit
mobilization, supply of credit and provision of remittance facilities. Co-
operative banks offer limited banking products and are functionally
specialists in agriculture-related products, and even in providing
housing loans of late. Urban Co-operative Banks offer working capital
loans and term loans as well.
(e) Co-operative banks primarily operate in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs function in semi urban, urban, and
metropolitan areas too
.
(f) Co-operative banks are probably the first government sponsored,
government-supported, and government-subsidized financial
agency in India. They get financial and other aid from the
Reserve Bank of India NABARD, central government and state
governments. They are the "most favored" banking sector with
risk of nationalization.
(g) Co-operative banks normally concentrate on "high revenue" niche retail
segments.
DEVELOPMENT BANKS
Development banks are primarily intended to encourage industrial
development by providing adequate flow of funds to industrial projects. In
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other words, these institutions undertake the responsibility of aiding all-
round development in the countrys economy by promoting new industrial
projects, and providing financial assistance for the expansion,
diversification, and up gradation of the existing units. Development Banks
may be classified as All India development banks and Regional
development banks. While All India development banks include Industrial
Development Bank of India and Industrial Finance Corporation of India,
examples of Regional development banks include State Financial
Corporation and State Industrial Development Corporation.
B. NON-SCHEDULED BANKS:The banks, which are not included in the second schedule of RBI Act,
1934, are known as non-scheduled banks. Such banks total share capital is
less than five lakhs. These banks are not governed according to the RBI Act
and they receive no benefits from the RBI. These banks have no place in
the list of recognized banks of the RBI. These banks are not much trusted
by the people and they do not get handsome deposits. Since 1951 the
numbers of such banks have been gradually decreasing. In 1979 there were
only five non-scheduled banks.
Generally now days we found many cooperative banks which are
belongs to the non-schedule co-operative banks. Following are the types of
non-schedule banks they are work like the schedule banks but here
difference in its status and it not having the status of the schedule banks.
a. Deposits Banks
b. Cooperative Banks
c. Central Banks
d. Exchange Banks
e. Investment or Industrial Banks
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f. Land Development Banks
g. Savings Banks
(a) Deposits Banks:
Generally, banks which provide short-term loans to business and industrial
units and which mobilize savings of people as deposits are called deposit
banks. Deposit banks accept deposits from people, and provide short-term
advances. They provide overdraft and cash credit facilities to merchants. To
meet the long-term requirement of industrial units is not possible for these
banks. They accept three types of deposits- saving bank deposits, fixed
deposits and current account deposits. They accept these deposits which are
payable on demand or on short notice, and provide funds to trading and
commercial units for short durations.
(b) Cooperative Banks
Cooperative banks meet the short-term financial needs of farmers.
Agriculturists, petty farmers and artisans organize themselves on cooperative
principles and form cooperative societies and banks. Cooperative banks raise
funds through various means, besides receiving all kinds of deposits to make
them available as lendable funds to its members. In India developed
cooperative banks supply finance for agriculture and non-agriculture activities.
(c) Central Banks
A central bank is a special institution which controls and regulates the entire
banking structure of country. It also strives to maintain monetary stability of
the country. Central bank is also known as the apex bank of a country. Since it
functions in the best interest of the country and making profits is unknown to
it, it is entrusted the right it issue currency notes. No other bank is allowed this
right. It operates in close cooperation with the government of implementing
economic policies, thereby promoting economic development.
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(d) Exchange Banks:
There is a difference in financing of foreign trade and financing of internal
trade. Generally a person carrying on international trade requires foreign
currencies to meet his obligation. It is here that exchange banks play the role of
financing the dealer for setting transactions involved in foreign trade, there are
specialized banks for exchange business. In India, there is an Export-Import
Bank (EXIM).
(e) Investment or Industrial Banks:
Investment banks provide long-term credit to industries. They raise their funds
by way of share capital, debentures, and long-term deposits from the public.
They also raise funds by the issue of bonds for business operations and
government agencies. Usually they underwrite fresh issue of shares and
debentures of companies. Such banks also buy the entire issue of new
securities of public limited companies and try to get them subscribed at a
higher price by the public.
(f) Land Development Banks:
Land development banks were earlier known as land mortgage banks. In India,
there is limited number of such banks. There are special institutions providing
long-term loans to agricultures and farmers. They provide loans on security of
land and other immovable properties. They supply long-term funds for periods
exceeding six years. Agriculturists and farmers need such funds for making
permanent improvements to land and for buying farming machinery and
equipment.
(g) Savings Banks:
Savings Banks are specialized institutions, which encourage general public to
save something from their earnings. In other words such banks pool the small
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savings of middle and lower income sections of society. They are the banks in
the true sense of the term and their main aim is to promote and collect of the
public. Not only the depositors are given interest, but also they are allowed to
withdraw in times of need. The numbers of withdrawal are, however,
restricted. Separate savings banks are organized in various nations. The
government can also run a savings bank. In India the postal department runs
the postal saving bank all over the country. It is very popular in rural areas
where no branches where no branches of established commercial bank operate.
In urban areas, commercial bank handles savings business
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Table-1:
Structure of the Indian banking industry, March 31, 2004
Sr.
No.
Bank Group No. Of
Banks
Deposits Loans &
Advances
Net Profit
1. Public Sector Banks
Share Percentage
27
7.6 %
10796
76.8 %
5493
72.1 %
123
69.8 %
1. a State Bank Group
Share (per cent)
8
2.2 %
3910
27.8 %
1892
24.8 %
45
25.6 %
1. b Nationalised Banks
Share (per cent)
19
5.3 %
6886
49 %
3604
47.2 %
78
44.2 %
2. Private Sector Banks
Share (per cent)
30
8.4 %
2072
14.8 %
1389
18.2 %
30
16.8 %
2.a Old Private Sector Banks
Share (per cent)
21
5.9 %
914
6.5 %
494
5.3 %
12
7 %
2.b New Private Sector Banks
Share (per cent)
9
2.5 %
1158
8.3 %
895
11.9 %
17
9.8 %
3. Foreign Banks
Share (per cent)
36
10 %
693
4.3 %
522
6.8 %
18
10.4 %
4. Total Pvt Sector BanksShare (per cent) {2+3}
6618.5 %
276519.7 %
191125.1 %
4827.2 %
5. Total Comm. Banks
Share (per cent) {1+4}
93
26 %
13559
96.6 %
7405
97.1 %
171
97 %
6. Regional Rural Banks
Share (per cent)
264
74 %
483
3.4 %
218
2.9 %
5
3 %
7. Total of Banks
Share (per cent)
357
100 %
14042
100 %
7623
100 %
76
100 %
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DIFFERENT SERVICES PROVIDED BY BANKS IN INDIA
Account types & other Services
Personal Banking: Other Different Services
Deposit Scheme Gold Banking
__ Current Account NRI Banking
__ Saving Account International banking
__ Term Deposit Corporate Banking
(Other Deposit Scheme as per the cust. convince) SSI Banking
Personal Finance Small Business Finance
__ Housing Loan Development Banking
__ Car Loan Other Services
__ Educational Loan
__ Personal Loan
__ Festival Loan
__ Property Loan
__ Other Loans
(As per banks and its customer base)
Services
ATM Services
Credit Card Services
Internet Banking Services
Phone Banking ServicesLocker Services
PPF Services
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finance on following different ways to satisfy the financial needs of the
customers.
Following are the different ways through the bank give finance to its customers:
-Housing Loan, Car Loan, Personal Loan, Educational Loan, Festival Loan,
Property Loan and etc,
SERVICES:
In the globally competition time service is quite important for the any sector and
having in nature of service sector the services of the banking sector is also most
important part following are the services that providing by the banking sectors
various banks but it differ from the bank to banks.
ATM Services
Credit Card Services
Internet Banking Services
Phone Banking Services
Locker Services
PPF Services
OTHER DIFFERENT SERVICES (CORPORATE)
Large foreign banks, Public and Private sector banks provide
different services to their corporate customers. For carrying out their business
activity and through that services they provide financial support and facility also.
3: CUSTOMER RELATIONSHIP IN BANKING INDUSTRY
(Through new technology and product development)
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Liberalisation and de-regulation process initiated by the Indian
Government in early nineties has completely changed the face of the Indian
banking industry. The entry of new private sector banks with the state-of-the-art
technology and lean structures has forced the old private-sector and public
sector banks to respond to the new challenges with aggressive restructuring
measures. The past five years have seen the public sector banks rapidly
introducing new products and services, computerising and networking key
branches, rationalising manpower and launch a number of initiatives to improve
operating efficiencies. Are they on the right track? Are these strategies to
become leaner and meaner sufficient to gain a competitive advantage to survive
and grow in the long run? This article argues that while all the above measures
are no doubt necessary to survive, they are by no means sufficient. To survive
and thrive in the long run, banks need to pursue strategies that enable them to
develop resources that are inimitable, rare, durable and superior to competitors.
Current development in the banking industry which make it more
attractive and it push this Industry in the market place
Introduction of new products and services:
Many of the public sector banks launched an array of products and services,
especially on the retail front, to match the competition. Some of the new
products include debit cards, credit cards, international cards, special deposits,
sweep-in accounts, and demat accounts and any-where-banking. Some of the
new services include round-the-clock phone banking, Automated Teller
Machines (ATMs), inter-city, inter-branch banking, net-banking and bill
payment services. Many public sector banks have even launched their own asset
management companies to offer mutual fund services to their customers.
Computerisation and networking of branches:
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Banks invested aggressively in computerisation and networking of branches.
The oldest and the biggest bank, SBI, had computerised 3701 branches by
March 2004, constituting nearly 41 per cent of its total branches. Many of these
branches were also networked so that their customers could be offered any-
time, any-where banking services. The other public sector banks too embarked
on a similar computerisation drive.
Installation of ATM networks
All banks have made heavy investments in the installation of large networks of
ATMs. As of March 2004, SBI had a network of 1305 ATMs, Canara Bank had
282 ATMs, Corporation Bank had 475 ATMs to match the ATM network of
private sector banks such as HDFC Bank and ICICI Bank. ATMs proved a
tremendous success by reducing the load on branches significantly as, apart
from carrying out routine transactions such as cash withdrawal etc, customers
can avail such services as transfer of funds and payment of utility bills by
visiting any of the ATMs located conveniently.
4: OUTLOOK MONEY SURVEY
CUSTOMER FRIENDLY BANKS WITH DIFFERENT PARAMETER
Service with a smile: todays finicky banking customer will settle for
nothing less. Hes come to realize, somewhat belatedly, that he is king: he
demands that banks roll out not just world-class products and services, but a red
carpet as well. His choice of one entity over another as his principal bank is
determined by considerations of service quality rather than any other factor. He
wants competitive loan rates, yes, but he also wants his loan or credit card
application processed in double-quick time. He cherishes the convenience of
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impersonal Net banking, yes, but during his occasional visits to the branch, he
also wants the comfort of personalised, human interactions and facilities that
make his banking experience pleasurable. In short, he wants a financial house
that will more than just clear his cheques and update his passbook: he wants a
bank that caresand for more than just his custom. He wants a customer-friendly
bank.
So, do banks meet these heightened expectations? And
which are Indias most customer-friendly banks?
To find answers to these questions, Outlook Money commissioned
market research agency C fore to carry out a survey of bank customers in five
citiesDelhi, Mumbai, Chennai, Kolkata and Bangalore. The exhaustive survey,
carried out in early August, covered 5,127 customers of 24 short listed banks:
the 10 biggest nationalised banks and the 10 biggest Indian private banks (in
terms of deposit base) and the only four multinational banks that offer retail
banking services. For all the differences in their ownership, these 24 banks are
all competing in the metros for your custom, so its only fair to compare them
within a unified cluster; yet, when comparisons within their respective peer sets
throw up interesting patterns, well take note of them.
These, then, are the significant findings of the survey:
Indias most customer-friendly bank is ICICI Bank, which outperforms
even multinational banks on this count (Overall Rankings)
Ranking a close second is Citibank, which also tops the ranking of MNC
banks on the overall score
For an entity thats not highly visible, seventh-ranked UTI Bank fares
surprisingly well, breaking into the top 10 in all the six parameters on
which the banks were rated
Strikingly, but not surprisingly, no nationalised bank figures in the top 10
banks, ranked on the overall score; the most customer-friendly PSU bank,
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Bank of Baroda, kicks in at No. 12; even the two banks (ING Vysya Bank
and The South Indian Bank) that rank a joint 6th in the smaller universe of
private banks score more overall than the top-ranked PSU bank
State Bank of India, by far Indias largest bank, comes in a lowly 16th in
the overall rankings; even among the smaller universe of PSU banks, it
ranks only 5th, despite the fact that the survey methodology assigns some
weightage to size to acknowledge big banks problems in servicing a large
customer base.
It isnt as if the entire universe of PSU banks is uniformly insensitive to
customers expectations on service quality. Bank of Baroda aside, Indian
Overseas Bank, Syndicate Bank and, to a lesser extent, Canara Bank give
some of the pretentious private sector banks a run for their money.
Likewise, all MNCs are not all there in keeping their customers happy:
Standard Chartered not only lags its MNC peers on most counts, it ranks
16th on service quality in the overall rankings.
A more rigorous analysis of the banks ratings on some of these
parameters throws up interesting findings about how customer-friendly these
banks are.
Service Quality
This is an index of the core of what makes a bank customer-friendly: its overall
service standards, rated for ease of opening an account; how courteous,
accessible and knowledgeable its staff are; transaction time for services; how
innovative the bank is in introducing products and services; how proactively the
bank informs customers of changes in deposit rates or service charges; how
quickly it redresses grievances; how likely it is to retain customers; and how
probable it is that its customers will recommend the bank to others.
On this count, HSBC tops the 24-bank ranking, followed closely
by ABN Amro. In third place here is a dark horse, The South Indian Bank.
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HSBC scores fairly well on most of the sub-parametersexcept product and
service innovation. ABN Amro tops the MNC banks cluster on such customer-
friendly features as ease of opening account, transaction time for services,
product and service innovation (such as its attractive home loan product All
Smiles, which comes at 6.5 per cent fixed rate for the first two years, after which
the then-prevailing floating rate applies), promptness in keeping customers
informed, and its banking hours (10 am to 7 pm; no weekly holiday). The South
Indian Banks good showing here is a reflection of its capacity to own up to its
customers, small though that base is, and service them well. Much the same can
be said of Federal Bank, IndusInd Bank, Karur Vysya Bank and ING Vysya
Bank, all of which break into the Top 10.
Strikingly, ICICI Bank fares poorly on service quality, coming in
joint 12th (along with Bank of Rajasthan). Within its peer set of private banks, it
falters on such sub-parameters as ease of opening account, transaction time for
cash withdrawal, and promptness in keeping customers informed.
No nationalised bank makes it to the Top 10 on service quality,
but given the wide variance within this grouping, it seems unfair to hang all PSU
banks together. IOB and Syndicate Bank, for instance, fare well among peerPSUs on all the sub-parameters. On the other hand, Union Bank of India, Bank
of India, UCO Bank and SBI run each other close for the bottom rank. SBI is
last in line in respect of customer retention and customer recommendation. In
fact, SBIs abysmal scores on all service standard sub-parameters weigh down
its overall customer-friendliness ranking.
Branch facilities
Walk into any branch of a multinational or leading Indian private bank, and
youll believe youre in a plush country club. Many other banks, of course, have
miles to go in this sphere, but theres a growing realisation among them that
offering a pleasant banking ambiencewith comfortable seating, air-
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conditioning, restroom and drinking water facilitiesand easy, uncluttered access
to bank stationery makes for good business.
The rankings here hold no surprise: MNCs HSBC, Citibank, and
ABN Amro take the top three slots, and IndusInd Bank, the first Indian
commercial bank to secure ISO 9002 certification for all its branches, comes inat No. 4. House-proud PSU banks IOB and Syndicate Bank top the rankings
within their peer set, but fail to make it to the Top 10 overall. SBI scrapes the
bottom at rank 23.
ATM service
By automating the most common day-to-day banking transactionscash
withdrawal, cheque deposits and statement generationATMs have, in a sense,
liberated customers from time-wasting branch visits and surly staff. But how
often have you faced automated chaos: an ATM that whimsically rejects your
card or runs out of cash? How often have you felt an overwhelming urge to cut
up your ATM card into tiny slivers and post it along with a cheery letter that
says no, thank you.
Increasingly, however, banks are waking up to the merits of an
expansive, glitch-free ATM network. Theyre investing in technology (read
newer machines), so theyll be fewer card rejects. And theyre entering into tie -
ups with one another to share their ATM network (for a nominal fee, to be paid
by customers); which means you no longer have to bear the agony of having to
stand in overlong queues at your banks ATMs and gape at a state-of-the-art SBI
ATM nearby that forever seems empty.
ICICI Banks wide network of ATMs (1,790) gives it top
ranking among all 24 banks; likewise, SBIs ATM penetration (including many
in some of the remotest corners of Indiaand Indias first floating ATM, on a
Kerala backwater ferry!) gives it second rank on this parameter. And MNC
banks, which have far fewer ATMs, targeted sharply at their metropolitan
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customers, slip to the bottom. But remove the surveys weightage for ATM
reach, and judge banks only on how glitch-free their ATM service is, and a
vastly different picture emerges.
Cards Grievance redress
A lost credit card, a debit card billing for a transaction you never made: on
occasions like these, youre hurriedly working your banks helpline numbers
and want a sympathetic hearing, and a prompt response. These are also the times
when a banks grievance redress mechanism is tested. How quickly and well abank responds, and whether youre subject to an elaborate runaround and
paperwork are critical determinants of how customer-friendly it is.
Here too, the methodology assigns weightage to card
penetration. Consequently, ICICI Bank (2.4 million credit cards; 6 million debit
cards) is No. 1, followed by SBI and HDFC Bankeven though within the
universe of private banks HDFC Bank scores rather dismally on grievance
redress. Next in line are Bank of Baroda and Canara Bank, their high rankings
(even higher than Citibank, for instance) a testimony to the mass popularity of
Bobcards and Cancards. But when the weightage is removed, the rankings
change dramatically.
Loans Speed of disbursal
When youve identified your dream home and cant wait to move in, or when
youre eager to cash in on an early bird discount on new bookings, you want a
lender who cuts through the paperwork and processes your home loan in a trice.
This sub-parameter is a measure of how quickly a bank processes loan
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applications and disburses funds.
Here too, assigning weightage for the number of loan accounts,
the rankings hold few surprises: SBI tops, followed by Bank of Baroda, ICICI
Bank and HDFC Bank. Among MNC banks, ABN Amro emerges on top,
matching product innovation in this space with speedy disbursal; among privateIndian banks, HDFC Bank is No. 2, perhaps having learnt a thing or two from
HDFC, Indias largest home loan provider.
Phone/Net banking
Its somewhat ironic that a technology-driven service that has made banking farmore impersonal should now be seen as a pillar of customer-friendliness. But
with phone/Net banking, geography is well and truly history. True, it hasnt
acquired a critical mass of adherents: only 4 per cent of our survey respondents
avail of phone/Net banking services, against 80 per cent who avail of over-the-
counter banking services, and 63 per cent who use ATMs. Even so, 21 banks in
our surveyall but Karur Vysya Bank, Bank of Rajasthan and Karnataka Bank
offer these services: its a symptom of the fact that these are no longer
considered premium services, but are percolating down and becominga must-
have, pretty much like what happened to ATMs some years ago.
Predictably, new-age MNC and Indian private banks, whose
young, upwardly mobile customers are typical users of phone/Net banking,
claim this service space for themselves. Among private banks, HDFC Bank
leads its bigger rival ICICI Bank in this space. And among PSU banks, IOB,Syndicate Bank and Bank of Baroda are streets ahead of the others. IOB even
breaks into the Top 10 across all 24 banks on this parameter, ahead of new-age
banks like ING Vysya Bank and IndusInd Bank.
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5: NEW MARKETING CHANNEL
New marketing channel is creating strong base for the banking
industry and it will help banks to push their products in the market places. New
private sector banks are used DSA level for pushing their products in the market
place so they appoint different team for different territory and those teams are
works for that area and make strong position in marketing of that banks.
Here, in this channel the cost of employee is variable because
generally appointment of team is based on their works. This team is work for
only marketing so it will help the bank in creating the strong position in the
market place also.
Banks are also involved in inventing new marketing and
distribution channels like E-banking, net banking and tele-banking. The next era
would be of all these. Now customers want services to be delivered at their
convenience. The first mover advantages will surely going to work. About 25%
of transactions are projected to be carried on through E-Banking by 2008
6: BANKING INDUSTRTY DOMINANT ECONOMIC FEATURES
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Market size: Banking industry market size is around Rs.14, 04,341 crore
deposits by 357 commercial banks.
Scope of competitive
rivalry:
There are 357 commercial banks in banking sector, which
includes domestic and foreign banks, and finance sector
also provides strong fight to the banking sector companies.
Market life cycle: In India it is in secondary stage and more and more chance
for growth
Market growth rate: The Indian government adopted the policy of liberalization
and it is since then that this sector has shown high annual
growth through various in various services like ATM, Net
Banking, Phone Banking and its growth rate is also
increasing from heavily from last 4-5year.
Number of companies
in industry:
Now a day around 357 commercial banks; among them 27
public sector banks, 30 private sector banks then 36 foreignbanks and remaining are co-operative banks, they
providing their service in this industry.
Customers: Entrepreneurs those who willing to invest in businesses
especially young and mature people and layman, those use
different banking services, are customers of banks.
Ease of entry/exit: Entry in Indian banking sector has become easy. Now
foreign banks are also allowed to carry on their business.
But exit is difficult due to large investment and government
rules & regulation. All players fight desperately to survive.
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Technology/innovation: Technology is main issue in global era and changes are
fast; biggest changes are occurring in products innovation
and new era technology like net-banking mobile banking or
ATM banking. Now a days all banks are concentrating on
technology related innovative products.
Degree of vertical
integration:
Here no question of degree of vertical integration but some
large banks provides different services so in those case the
degree of integration come in to light but it not effect so
much in this industrys basic service.
Product Characteristics: Homogeneous services by all banks little difference in
services offered.
Economies of scale: Moderate all companies have virtually equal
service cost due to rules and regulation of RBI but scale of
economies exists in new era services and marketing and
other integration work.
Learning and
experience effects:
Quite important factor because it decides various skills and
operational works also.
Capacity Utilization: Service efficiency is highest in private and in foreign banks
its around 70 to 80 percent but in public sector it is quite
low.
7: Porter's Five Forces Model of Competition
The nature of competition in an industry in large part determines
the content of strategy, especially business-level strategy. Based as it is on the
fundamental economics of the industry, the very profit potential of an industry is
determined by competitive interactions. Where these interactions are intense,
profits tend to be whittled away by the activities of competing. Where they are
mild and competitors appear docile, profit potential tends to be high. Yet a full
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understanding of the elements of competition within an industry is easy to
overlook and often difficult to comprehend.
Porter has identified five basic forces that collectively describe
the state of competition in an industry:
1. The intensity of rivalry among competitors
2. The threat of new entrants to the market
3. The amount of bargaining power possessed by the firm's/industry's
suppliers
4. The amount of bargaining power possessed by the firm's/industry's
customers
5. The extent that substitute products present a threat to a
firm's/industry's products
These forces assist in identifying the presence or absence of
potential high returns. The weaker are Porter's five forces, the greater is the
opportunity for firms in an industry to experience superior profitability. More
generally, understanding how these forces affect competition within an industry
allows the strategist to identify the most advantageous strategic position.
The actors within an industry on whom these forces exert
pressure are, respectively, the industry's competing firms themselves, potential
new entrants to the industry's markets, suppliers (vendors), customers, and
makers of substitute products.
Obviously, the starting point for conducting an analysis of the
five forces of competition is to identify all the competitors, potential new
entrants, major suppliers, the demographics of customers, and makers of and
nature of substitute products. Competitors would not only have to be identified,
but various distinguishing data about the industry would also have to be
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specified. For each competitor this data would include market share, product line
differences/similarities, market segments served, price/quality relationships
represented by products, growth/decline trends, financial strength differences,
and any other information that will help describe the industry.
Porters FIVE-FORCE analysis for Indian banking industry
BARGAINING POWER OF
SUPPLIERS-Low supplier bargaining power
-Few alternatives available
-Subject to RBI Rules and Regulations
-Not concentrated
-Forward integration-Nature of suppliers
THREAT OF NEWENTRANT
-Low barriers to entry
-Government policies are
supportive
-Globalization and
liberalisation policy
-High exit barriers
INDUSTRY RIVARLY
Intense competition
Many private, public,
Co-operative, foreignbanks
THREAT OF
SUBSTITUTES
High threat from substitutes
Like
Mutual funds,
T-bills,
Government securities
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RIVALRY AMONG THE INDUSTRY
Rivalry in banking industry is very high. There are so many
private, public, co-operative and non-financial institutions operating in the
industry. They are fighting for same customers. Due to government liberalisation
and globalization policy, banking sector became open for everybody. So, newer
and newer private and foreign firms are opening their branches in India. This has
intensified the competition. The no. of factors have contributed to increase
rivalry those are:
1.A large no. Of banks
There are so many banks and non-financial institutions fighting for same pie,which has intensified competition.
2.High market growth rate
India is seen as one of the biggest market place and growth rate in Indian
banking industry is also very high. This has ignited the competition.
BARGAINING POWER OF
CUSTOMERS
-High bargaining power
-Low switching cost
-Large no. of alternatives-Homogeneous service by banks
-Full information available with customers
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3.low switching cost
Customer switching cost is very low. They can easily switch from one bank to
another bank and very little loyalty exists.
4.indifferentiate services
Almost every bank provides similar services. No differentiation exists. Every
bank tries to copy each other services and technology, which increases the level
of competition.
5.high fixed cost
6.High exit barrier
High exist barriers humiliate banks to earn profit and retain customers by
providing world-class services.
7. Low government regulations:
There are low regulation exist to start a new business due LPG policy adopted
by India. So, sector is open for everybody.
BARGAINING POWER OF SUPPLIERS
Suppliers of banks are depositors. These are those people who
have excess money and prefer regular income and safety. In banking industry
Suppliers have low bargaining power. Following are the reasons for low
bargaining power of suppliers.
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1.Nature of suppliers
Suppliers of banks are generally those people who prefer low risk and those who
need regular income and safety as well. Bank is best place for them to deposit
their surplus money. They believe that banks are very safe than other investment
alternatives. So, they do not consider other alternatives very seriously, which
lower their bargaining power.
2.few alternatives
Suppliers are risk averters and want regular income. So, they have few
alternatives available with them to invest like Treasury bills, government bonds.
So, few alternatives lower their bargaining power.
3.RBI Rules and Regulations
Banks are subject to RBI rules and regulations. Banks have to behave in the way
that RBI wants. So, RBI takes all decisions relating to interest rates. This reduces
suppliers bargaining power.
4. Suppliers are not concentrated
Banking industrys suppliers are not concentrated. There are numerous suppliers
with negligible portion to offer. So, this reduces their bargaining power. If they
were concentrated then they can bargain with banks or can collectively invest in
other no-risky projects.
5.Forward integration
Forward integration is possible like mutual funds, but only few people now
about this. Only educated people can forwardly integrate where as large no. Of
suppliers are unaware about these alternatives.
BARGAINING POWER OF CUSTOMERS
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Customers of the banks are those who take loans, advances and
use services of banks. Customers have high bargaining power. Following are the
reasons for high bargaining power of customers.
1. Large no. Of alternatives
Customers have very large no. of alternatives. There are so many banks, which
fight for same pie. There are many non-financial institutions like ICICI, HDFC,
IFCI etc., which has also jumped into these business. There are foreign banks,
private banks, cooperative banks and development banks together with the
specialized financial companies that provide finance to customers. These all
increase preferences for customers.
2.low switching cost
Cost of switching from one bank to another is low. Banks are also providing zero
balance account and other types of facilities. They are free to select any banks
service. Switching costs are becoming lower with Internet Banking gaining
momentum and as a result consumers loyalties are harder to retain.
3.undiffernciated service
Banks provide merely similar services. There is no much difference in services
provided by different banks. So, bargaining power of customers increases. They
cannot be charged for differentiation.
4.Full information about the market
Customers have full information about the market due to globalization and
digitization consumers have become advance and sophisticated. They are aware
with each market conditions. So, banks have to be more competitive and
customer friendly to serve them.
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THREAT OF NEW ENTRANT
Barriers to an entry in banking industry no longer exist. So, lots
of private and foreign banks are entering in the market. Competitors can come
from any industry to disintermediate banks. Product differentiation is very
difficult for banks and exit is difficult. So, every bank strives to survive in highly
competitive market. So, we see intense competition and mergers and acquisition.
Government policies are supportive to start a new bank. There
are less statutory requirements needed to start a new venture. Every bank tries to
achieve economies of scale through use of technology and selecting and training
manpower.
THREAT OF SUBSTITUTES
Competition from the non-banking financial sector is increasing
rapidly. Sony and Software giants such as Microsoft are attempting to replace
the banks as intermediaries. The threat of substitute products is very high. These
new products include credit unions and investment houses. One feature of using
an investment house is that the fees that the investment house charges are tax
deductible,where as a bank it is considered a personal expense, which are not
tax deductible. The rate of return with using investment houses is greater than a
bank. There are other substitutes as well for banks like mutual funds, stocks
(shares), government securities, debentures, gold, real estate etc. so, there is a
high threat fro substitute.
Conclusion:
Indian banking sector is one of the highly competitive sectors where high growth
rate and high degree of competition exist. Low entry barriers and high exit
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barriers ignites competition in this industry. Every bank strives to survive in the
shadow of these barriers. There are so many substitutes available with customers
and they have high bargaining power where as suppliers i.e. depositors have low
power in their hands.
8: KEY SUCCESS FACTORS
An industrys key success factors are those things that most
affect industry members ability to prosper, competencies, competitive
capabilities and business outcomes that spell the difference between profit and
loss and ultimately, between competitive success or failure.
With increasing number of players in the banking industry, the
following are some of the key success factors. .
1. Access to technology
2. Computerization
3. Low employee cost
4. Management of NPAs
5. Transparency of public disclosure and best practices
6. Diversified products
1. COMPUTERISATION AND ACCESS TO NEW TECHNOLOGYA sound and effective banking system is the backbone of an economy. The
economy of a country can function smoothly and without many hassles if the
banking system backing it is not only flexible but also capable of meeting the
new challenges posed by the technology and other external as well as internal
factors. The importance and role of information technology for achieving this
benign objective cannot be undermined. There is an urgent need for not only
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technology up gradation but also its integration with the general way of
functioning of banks to give them an rim in respect of services provided to
the customers, better housekeeping, optimizing the use of funds and building
up of management information system for decision making. The technology
has the potential to change methods of marketing, advertising, designing,
pricing and distributing financial products and services and cost savings in
the form of an electronic, self-service product-delivery channel. The
technology holds the key to the future success of Indian Banks. Thus,
Internet Banking is the need of the hour, which cannot be lost sight of
except at the cost of elimination from the competition. The existence of
Internet banking also becomes inevitable due to the standards required to be
matched at the international level. Thus, the domestic as well as the
international standards mandates the adoption of Internet banking at the
earliest possible moment
Within the banks, their IT strategy has taken different forms.
While quite a few banks have moved towards core banking, other banks have
adopted different models. However, there seems to convergence on the type
of services which are offered - like internet banking, anytime, anywhere
banking, telebanking, remote access, multi city chequing facilities etc. Some
of the banks have scaled up further by setting up call center facilities. Banks
have also gone for sharing of their technological infrastructure, as in the case
of ATM networks. With gradual scaling up, public sector banks are expected
to gain competitive advantages arising out of their vast branch network and
large customer base.
2. GREATEST ASSETS HUMAN RESOURCE (low cost per employee)
To achieve the service excellence and in order to succeed in a market place
where competition is fierce, banks need to focus on yet another area - People.
Bank is harnessing its human resources to keep up the efficiency levels by
adopting people-centric policies. It is well realized that human assets are
hidden assets and we are nurturing this capital to maximize the competency
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levels. The Bank has created enabling environment to bring out the best from
its people through a process of strong training system to hone the skills in the
areas of marketing and technology.
Strategies to make the employee more productive
Reward, recognition and incentives to employee who perform will send the
right signal, ensuring job satisfaction, boosting and employee morale and
building employee commitment.
Identify and outsource non-strategic work, leaving employees free to
concentrate on core banking activities especially high value added
activities.
To keep employee skills updated the training systems of banks need to be
revamped to train employees at every level as well as location of branch.
Raising the skill bar at entry level to ensure that people with requisite skills
get into banks.
Actively encourage physical fitness in employees banks can organize on-
going basis stress management programmes, yoga etc.
To make people grow and realize their productivity, therefore a
big push is needed to unleash their potential. Past efforts to measure
employee productivity have focused on business narrowly defined as deposits
plus advances. However, the parameters need to be expanded to reflect the
contribution of non-fund based activities also. But ultimately, employee
motivation is critical because a committed employee is a productive
employee
3. MANAGEMENT OF NPAS
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Non Performing Assets are disease for Indian banks. The size of the NPA
portfolio in the Indian Banking industry is around Rs.1,00,000 crore which is
nearly 6% of Indias GDP. However due to the active steps taken by the
regulatory authorities and the banks, the gross NPA level has been reduced.
To ensure long-term profitability, banks have to manage NPAs effectively by
adopting the many techniques.
4. TRANSPARENCY OF PUBLIC DISCLOSURE AND BEST PRACTICES
There is an increasing movement worldwide towards building a safe and
sound banking system backed by a strong supervisory/regulatory regime in
accordance with the core principles for effective banking supervision. The
banking industry in the new millennium will also have to ensure greater
transparency and disclosure in their financial statements for the information
of market players, investors, depositors and rating agencies. Such disclosures
would enable the users of that information to accurately assess the bank's
financial condition, performance, and business activities, risk profile and
management practices. Processes of transparency and market disclosure of
critical information describing the risk profile, capital structure and capital
adequacy are assuming increasing importance in the emerging environment.
Besides making banks more accountable and responsive to better-informed
investors, these processes enable banks to strike the right balance between
risks and rewards and to improve the access to market. Improvements in
market discipline also call for greater coordination between banks and
regulators. Efforts have also been made to set up a Credit Information Bureau
to collect and share information on borrowers and improve the creditappraisal of banks and financial institutions within the ambit of the existing
legislation.
5. DIVERSIFIED PRODUCTS(The innovation imperative)
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Successful innovation is crucial to the competitive edge of all businesses. But
it is particularly important for banking and finance companies. Innovation,
which transcends invention, represents the point of convergence of invention
and insight. Strategic factors to devise effective responses to innovation
challenges include quick response to identified customer needs, product
quality, short cycle times for product development, developing marketing and
technical capabilities, extensive training, rewards and recognition of
performance.
Innovation is a key driver of growth that surprises and delights
the customer with new, differentiated and relevant benefits. This is not a
clich but a defining characteristic of the modern corporate saga.
This can be substantiated by innovation within a global
framework. Indian banks will be able to weather the competition provided
they are relevant to consumers in terms of technology, quality, reliability,
pricing, performance and support. As the convergence of the ICE
(information, communication) technologies, "technological evangelization"
and narrowing of the "digital gap" are significant instruments of the growth
escalation process; integration of technology and business is required.
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PEST ANALYSIS
9: PEST ANALYSIS
The PEST analysis considers the broad external environment
facing the business organization. It is an outward looking analysis. The PEST
analysis attempts to answer the question: What broad determinants are going to
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affect the macro environment in which the firm will be competing, over the next
five (or more) years? The PEST analysis is so-called, because it is an acronym
for the four categories into which the analyst will try and include all of the
relevant factors and trends: Political, Economic, Social, and Technological.
Like any model, the PEST model is a simplification; the choiceof Political, Economic, Social, and Technological factors may strike you as
arbitrary. You may be right. However, these categories are as adequate as any in
attempting to put a form to the myriad trends, developments, events and
causations that will assist or hinder the firm as it attempts to breach the Gap
between where its is now, and where it ultimately wants to be.
.
9.1 : Political-legal factors
1.Government policy and budget:
Government affects the performance of banking sector most by legislature and
framing policies. Government through its budget affects the banking activities.
The much-needed reforms in the banking sector have transformed the sector
drastically in the last few years. Falling interest rates as well as strengthening of
the hands of banks (Securitisation Act) have changed the dynamics of the Indian
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continued.
BUDGET IMPACT:
1. As per the common minimum program (CMP), the budget has focused a
lot on the need to improve credit to the agriculture sector and banks will
be at the forefront of disbursing credit. Vagaries of monsoons impact the
agriculture sector heavily and banks are vulnerable if monsoon fails. Also,
the RBI has released new guidelines for banks with regards to agricultural
lending. However, it is too early to ascertain the impact. The impact of
these initiatives by the government will only be apparent over the long-term.
2. Banks are likely to benefit from increased lending to the infrastructure
sector. This will come about in two ways i.e. direct equity participation
and indirectly (corporates borrowing for expanding capacity). While this
would provide an impetus to core advances of banks, the quality of such
advances is likely to be better. In this light, there is relatively less NPA
risk.
3. Reforms in the banking sector in the form of amendments to the
Securitisation Act may strengthen the backbone of the financial sector.
4. A hike in the FDI in the insurance sector is likely to significantly raise
investments in the nascent insurance sector. Domestic banks like ICICI
Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with
international insurance majors will be able to infuse more capital into their
insurance business. In the future, there may be an opportunity for these
domestic banks to unlock value from such investments as well.
BUDGET OVER THE YEARS:
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BUDGET 2001-02:
Reduction in dividend tax to 10% from 20%.
Cut in small savings rates 1-1.5%
Limit for TDS on deposits reduced to Rs 2,500 from the current Rs
10,000.
Abolishment of banking service recruitment board
BUDGET 2002-03:
Cut in most administered interest rates by 0.5% (by 50 basis points)
from March 1, 2002.
Setting up of Asset Reconstruction Company by June 2002.
Banks are now allowed to deduct 7.5% of their total income against
provisions made by them for bad and doubtful debts.
Banks are given option to deduct up to 10% of their non-performing
assets (NPAs) falling in the category of loss or doubtful assets from
total income.
Bill on the banking sector reforms is to be introduced in Parliament.
Foreign banks permitted to operate in India with fully owned branches
after the specific permission of RBI.
BUDGET 2004-05: The FDI limit in private sector banks has been raised to 74% from the
existing 49%.
The SBI will have to lend at lower rates to the agricultural sector as
well as SSIs. SBI will now offer loans in the range 2% above its Prime
Lending Rate (PLR) or 2% below its PLR.
Tax exemption on interest on housing loans maintained at Rs 150,000
per year.
The government has agreed to buy back older government borrowing
with high interest rates from banks.
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Reduction in the interest rates on all small savings schemes by 1%.
POSITIVE IMPACT OF BUDGET ON BANKING INDUSTRY:
1. Securitisation Act fillip - Improved asset quality
2. VRS push - PSU banks like SBI, BOB and BOI after having successfully
implementing VRS schemes, have become much more streamlined and
efficient. This is likely to result not only in higher cash flow in the future, but
also long term benefits like improvement in efficiency levels.
3. Retail segment driver - Low interest rates have led to a dramatic growth in
credit off take from the retail segment. And this has helped banks to weather a
weak industrial credit offtake scenario. Going forward, with the revival in the
industrial sector ands robust volumes in the retail segment, banks are in a good
position to tap this expected demand.
4. Government proactive ness - The government may take a second look at the
issue of FDI limits and voting right limits in the private sector banks. If the
policy is further amended in the form of higher FSDI limits and a removal of
voting right ceiling of 10%, then we may see further consolidation among
private sector banks.
5. Improved asset quality - Most of the public sector banks that have been ridden
by huge NPAs in the past have been able to restructure and provides
aggressively for their NPAs in the last 2-3 years. This has helped these banks
to significantly improve their asset quality and they are now in a much better
position to tap the emerging opportunities in the domestic market.
NEGATIVE IMPACT OF BUDGET ON BANKING INDUSTRY:
1. Agri lending concerns - The government has announced measures to boost
lending to the agricultural sector and banks will have to be at the forefront of
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this scheme and this means that they will have to significantly increase their
exposure to this segment. With the unpredictability of the monsoons a reality
in the country and lack of proper irrigation facilities, lending to the agri sector
is fraught with risks and going forwards banks may witness a higher rate of
defaults in this sector.
2. Lack of policy clarity - Although the government has increased the FDI limit
to 49%, it is not yet clear that whether FDI limit includes FII limit also. Also
the limit for state run banks still stands at 20%. This will limit the scope of
consolidation in this sector and consequently the benefits of scale to the
various participants. Also the new government has indicated that there will be
no sell off of stake in public sector banks in the country. Thus further limiting
the scope of consolidation in the sector.
3. Interest rate dampener - The Indian economy is witnessing rising inflationary
pressure and this has the potential to curtail the credit growth in the economy.
As inflation inches close to the 6% mark, the Reserve Bank of India (RBI)
may be forced to hike interest rates and this may prohibit potential borrowers
from borrowing. A hike in interest rates may have a bigger impact on the high
growth retail segment, which has a higher sensitivity to rising interest rates.
Thus to that extent banks may witness a slowdown in credit offtake.
2.GOVERNMENT LAWS AND REGULATIONS:
There are so many laws enacted by government of India to regulate banking
activity. The RBI was established under Reserve Bank Of India Act 1934. RBI
regulates the banking activities in India. Other than this there are other laws like
Reserve Bank of India Act, 1934.
National Bank for Agriculture and Rural Development (NABARD) Act
1981
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Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act 2002 (for management of NPA).
Banking Regulation Act, 1949
The Recovery of Debts Due to Banks and Financial Institutions Act was
enacted in 1993 to provide for the establishment of Tribunals for
expeditious adjudication and recovery of debts due to banks and Fis
Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961
Draft Bill on Credit Information Bureau Regulation.
Bank Deposit Insurance Corporation Bill.
Draft Bill on Government Securities.
Bills under Consideration of the Parliament
Financial Companies Regulations Bill, 2000.
Banking Regulation (Amendment) Bill, 2003.
Banking Regulation (Amendment) and Miscellaneous Provisions Bill,
2003.
3.MONETARY POLICY
Another policy that impact most is RBIs monetary policy. This policy is meant
to regulate activities of banking in India. It controls the flow of money in the
country. In its recent policy RBI has retained its stance regard