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India's Growing Banking Sector 

India's banking sector is booming at a great pace in spite of its relatively small size in comparison of its

counterparts in other leading economies. Indian banking sector has been found lucrative by eminent

 players from the international world. For e.g., In India, Citibank and Standard Chartered Bank has more

than half of all credit card receivables and personal loans, which has generated more than Rs. 200 crore of

 profit for both banks. In 2003, Oriental Bank of Commerce was listed by Forbes magazine in its 'Global

200 Best Companies' list. In 1990s, after a long gap of more than 20 years, the apex bank, Reserve Bank

of India (RBI) has issued licenses to 9 new private banks. In this, Times Bank got merged with the HDFC

Bank. The RBI also allowed Kotak Mahindra Finance Company to become a bank. These banks have

shown their edge over each others with the introduction of new products and technologies. Most of the

 banks paid their focus on the retail sector and provide internet banking, phone banking and mobile

 banking services to their customers and have cornered one of the largest segments of the India's banking

sector by targeting the India's growing middle income class. The Indian banking sector has seen a

 proliferation of new services which has shown an improvement in customer service.

What is a Bank? 

A banker or bank is a financial institution whose primary activity is to act as a payment agent for

customers and to borrow and lend money. In other words, an institution where one can place and borrow

money and take care of financial affairs.

Function of Banks 

·  Lending money to public (loans)

·  Transferring money from one place to another (Remittances)

·  Acting as trustees

·  Keeping valuables in safe custody

·  Government business

Types of Banks 

·  Public sector Banks

·  Private sector Banks·  Co-operative Bank

·  Development Bank/Financial institutions

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Reserve Bank of India 

RBI is the banker to banks — whether commercial, cooperative, or rural. The relationship is establishedonce the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934.

Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfillment

of the following conditions laid down in Section 42 (6) of the Act, as follows:

It must have paid-up capital and reserves of an aggregate value of not less than an amount specified

from time to time. It must satisfy RBI that its affairs are not being conducted in a manner detrimental to

the interests of its depositors.

Services Provided By a Bank  

·  Demat Account

·  Lockers

·  Cash Management

·  Insurance Product

·  Mutual Fund Product

·  Loans

·  ECS (Electronic clearance system)

·  Taxes

An Overview 

The country’s middle class accounts for over 320 million people. In correlation with the growth of the

economy, rising income levels, increased standard of living, and affordability of banking products are

 promising factors for continued expansion.

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The Indian banking Industry is in the middle of an IT revolution, focusing on the expansion of retail

and rural banking. Players are becoming increasingly customer-centric in their approach, which has

resulted in innovative methods of offering new banking products and services. Banks are now realizing

the importance of being a big player and are beginning to focus their attention on mergers and

acquisitions to take advantage of economies of scale and/or comply with Basel II regulation.

"Indian banking industry assets are expected to reach US$1 trillion by 2010 and are poised to receive a

greater infusion of foreign capital. The banking industry should focus on having a small number of

large players that can compete globally rather than having a large number of fragmented players."

History of Indian Banking Sector 

Without a sound and effective banking system in India it cannot have a healthy economy. The banking

system of India should not only be hassle free but it should be able to meet new challenges posed by the

technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its credit.

The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans

in India. In fact, Indian banking system has reached even to the remote corners of the country. This isone of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalization of 14 major private banks of India.

 Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for

withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank

transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a

 pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey

of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

·  Early phase from 1786 to 1969 of Indian Banks

·   Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

·   New phase of Indian Banking System with the advent of Indian Financial & Banking Sector

Reforms after 1991.

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To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Foundation Phase 

The General Bank of India was set up in the year 1786. Next were Bank of Hindustan and Bengal Bank.

The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of

Madras (1843) as independent units and called it Presidency Banks. These three banks were

amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders

 banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National

Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, 

Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between

1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and

activities of commercial banks, the Government of India came up with The Banking Companies Act,

1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.

23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in

India as the Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was

slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer.

Moreover, funds were largely given to traders.

Expansion Phase 

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it

nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural

and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969,

major process of nationalization was carried out. It was the effort of the then Prime Minister of India,

Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized.

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Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven

more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the

Country:

·  1949: Enactment of Banking Regulation Act.

·  1955: Nationalization of State Bank of India.

·  1959: Nationalization of SBI subsidiaries.

·  1961:  Insurance cover extended to deposits.

·  1969: Nationalization of 14 major banks.

·  1971: Creation of credit guarantee corporation.

·  1975: Creation of regional rural banks.

·  1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Consolidation Phase 

The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked

slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service,

credit management, staff productivity and profitability of banks. Measures were also taken to reduce the

structural constraints that obstructed the growth of money market.

Reforms Phase 

This phase has introduced many more products and facilities in the banking sector in its reforms

measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name

which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire system

 became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis

triggered by any external macroeconomics shock as other East Asian Countries suffered. This is

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all due to a flexible  exchange rate

regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and

their customers have limited  foreign exchange exposure.

STRUCTURE OF THE BANKING INDUSTRY 

According to the RBI definition, commercial banks which conduct the business of banking in India and

which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than

Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the

interest of their depositors, are eligible for inclusion in the Second Schedule to the Reserve Bank of India

Act, 1934, and when included are known as ‘Scheduled Commercial Banks’. Scheduled Commercial

Banks in India are categorized in five different groups according to their ownership and/or nature of

operation. These bank groups are (i) State Bank of India and its associates, (ii) Nationalised Banks, (iii)

Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks.

Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban

Cooperative Banks

There are 71,177 bank offices spread across the country, of which 43 % are located in rural areas, 22%

in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank

groups (as defined by RBI) functioning are State Bank of India and its seven associate banks, 19

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nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29

Foreign Banks.

Public Sector Banks in India 

Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were

nationalized on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd.,

was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914),

Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).

Oriental Bank of Commerce (OBC), a Government of India Undertaking offers Domestic, NRI and

Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District(UP) and Hanumangarh District (Rajasthan) disbursing small loans. This Public Sector Bank India has

implemented 14 point action plan for strengthening of credit delivery to women and has designated 5

 branches as specialized branches for women entrepreneurs.

The following are the list of Public Sector Banks in India 

·  Allahabad Bank

·  Andhra Bank

·  Bank of Baroda

·  Bank of India·  Bank of Maharashtra 

·  Canara Bank

·  Central Bank of India 

·  Corporation Bank

·  Dena Bank

·  Indian Bank  

·  Indian Overseas Bank  

·  Oriental Bank of Commerce 

·  Punjab & Sind Bank  

·  Punjab National Bank  ·  Syndicate Bank

·  UCO Bank

·  Union Bank of India

·  United Bank of India 

·  Vijaya Bank

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Private Sector Banks 

Private banking in India was practiced since the beginning of banking system in India. The first private

 bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest

growing Private Sector Bank in India. IDBI ranks the tenth largest development bank in the world as

Private Banks in India and has promoted a world class institution in India.

The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was

Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in

India as part of the RBI's liberalization of the Indian Banking Industry. It was incorporated in August

1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as

Scheduled Commercial Bank in January 1995.

ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride

of place for having the first branch inception in the year 1934. With successive years of patronage and

constantly setting new standards in banking, ING Vysya Bank has many credits to its account.

List of Private Banks in India 

·  Bank of Punja b

·  Bank of RajasthanCatholic Syrian Bank

·  Centurion Bank

·  City Union Bank  ·  Dhanalakshmi Bank

·  Development Credit Bank

·  Federal Bank

·  HDFC Bank

·  ICICI Bank

·  IDBI Bank  

·  IndusInd Bank  

·  ING Vysya Bank

·  Jammu & Kashmir Bank

·  Karnataka Bank·  Karur Vysya Bank  

·  Laxmi Vilas Bank  

·  South Indian Bank  

·  United Western Bank  

·  UTI Bank

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Banking Industry at a Glance 

Table 1: Indian Banking at a Glance 

Source: Reserve Bank of India 

Table 2: Number of Banks, Group Wise 

Source: Indian Banks’ Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd. 

Table 3: Group Wise: Comparative Average 

Source: Reserve Bank of India. 

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Table 4: Bank Groups: Key Indicators 

Source: Reserve Bank of India. 

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Major reforms initiatives 

Some of the major reform initiatives in the last decade that have changed the face of the Indian

 banking are:-

·  Interest Rate Deregulation-Interest rates on deposits and lending have been deregulated

with banks enjoying greater freedom to determine their rates.

·  Government equity in banks has been reduced and strong banks have been allowed to

access the capital market for raising additional capital.

·   New private sector banks have been set up and foreign banks permitted to expand their

operations in India including through subsidiaries.

·   New areas have been opened up for bank financing like- insurance, credit cards,

infrastructure financing, leasing, gold banking, besides of course investment banking,

asset management, factoring, etc.

·  Banks have specialized committees to measure and monitor various risks and have been

upgrading their risk management skills and systems.

·  Adoption of prudential norms in terms of capital adequacy, asset classification, income

recognition, provisioning, exposure limits, investment fluctuation reserve, etc.

Emergence of New Competitive Spirit in context of the customers 

Different economic reforms in the early 1990s have injected competition in the banking sector

with the entrant of many new private and foreign players. The RBI issued new bank licenses

with the motive of forming a new cohort of private players, which would ensure high level of

service to customers and ensure unprecedented growth of the India. The last half of the nineties

has witnessed the massive growth of the new private banking players, which has grown byapproximately 50% per year and by 2001, they hold more than 6% of assets and nearly 10% of

 profits.

Effect of New Technologies on Banks 

The Indian banking sector has seen an acceleration with the introduction of technological

transformation like ATMs, telephone banking, online banking, web based products, e-cheques,

call centers etc. Use of credit cards, debit cards has touched the sky of popularity. Even the old

 public sector banks are keeping themselves tune with the new technological changes. Like State

Bank of India (SBI) has set aside more than Rs 500 crore during its 3 years of time span for the

up gradation of its IT systems along with the computerization and networking of branches.

Presently, SBI has more than 3000 computerized branches and over 1000 new ATMs. Similarly,

United Bank of India (UTI) has started its computerization process in 1986 and so far it has

completed its

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computerization work of more than 774 branches. It has also set up 25 ATMs in throughout the

India and has signed agreement with other banks of the public sector for ATM sharing. In some

of its branches, it has already started doing tele-banking and mobile banking.

Banks and the Internet World 

Due to the advantages of inherent conveniences, 24x7 internet banking has proved to be an

attractive service for the customers. Transactions done through the internet cost relatively less as

compare to visit bank branch. Some banks also offer unique features of internet banking to their

customers. Like Punjab National Bank has come up with their new online payment service,

facilitating the online railway reservation. Notable features of the internet banking are -

·  Transfer of money to your account at the same bank's branch in another city.

·  Opening of a fixed deposit.

·  Issuing of a banker's cheque or a demand draft.·  Checking of bank balance.

·  Stopping the clearance of cheque.

·  Request for the cheque book.

·  Retail Sector Growth

Earlier the Indian mortgage market was minuscule- less than 1% of GDP. But after the

introduction of economic reforms by the government, tremendous development has been seen in

the mortgage market, getting an impetus from the declination of the interest rates. Many banks

like HDFC, SBI and ICICI has put the housing finance on their priority list. As per an estimate,India's mortgage assets have reached to nearly 2% of the India's GDP, Which could heightened

to the 20%. Credit card has emerged out as another important product of the personal finance

which is growing rapidly. Personal loan is another area which is growing rapidly. HDFC Bank is

quick enough in providing new products like car loans, personal loans, debit cards etc. The bank

is also engage in loan pricing in various innovative ways for building healthy customer

relationship.

Mergers & Acquisitions 

There has been in recent months a renewed interest in mergers and acquisitions in the banking

sector in view of the growing openness of the Indian financial system. The focal point of

interest is about the size of the banking firm.

The undercurrent of thinking is that the larger the bank the higher its competitiveness and

 better its prospects of survival. This argument implies that Indian banks are not in

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a position to compete for business internationally  —   in terms of funds mobilization, credit

disbursal, investments and rendering of financial services  —   essentially because of their

relatively small size. It is said that the only Indian bank that could compete internationally

would be the State Bank of India, that too if consolidated with some mergers.

In this background, one needs to know the why mergers and their impact. But the decisions about

mergers would require that a view be taken of the optimal number of banks in the country in the

context of the opening up of the financial sector for foreign banks to acquire, and amalgamate

with banks in the foreign bank category as well as with Indian banks. Before dealing with these

issues, let us have a bit of contemporary history of mergers in India.

Mergers of banks took place in India in the 1960s under the direction of the Reserve Bank of

India. From 566 reporting commercial banks (of which non-scheduled banks were 474) at the

end of 1951, the number came down to 292 (of which 210 were non-scheduled) at end 1961, to

100 (27 non-scheduled) at the end of 1966; and to 85 (14 non-scheduled) by the end of 1969.

The number of bank offices increased sharply during this period: From 4151 in 1951 to 5012 in

1961, to 6593 in 1966 and to 9005 in 1969. The branch offices of scheduled commercial banks

increased over this period while those of non-scheduled commercial banks declined. Unviable

 banks were weeded out, as recommended by the Travancore-Cochin Banking Inquiry

Commission (1956). This meant either closure or amalgamation with other, relatively strong

 banks. This process was accelerated when two scheduled banks failed in 1960. The 1960episode was essentially an exercise for preserving banking stability.

Much of the general literature on mergers in banking relates to private banking. The

complexities involved in mergers of public sector banking are rarely discussed. In the early

1990s when the then National Bank of India was merged with Punjab National Bank, problems

of personnel integration cropped up. After this experiment, public sector bank mergers were not

contemplated. On the other hand, there were private banks mergers since about the late 1990s for

diverse reasons including building up financial strength, capturing larger portion of the growing

retail business and securing better regional presence.

Mergers of ICICI Bank and Bank of Madura, as well as HDFC Bank and Times Bank are

important examples. These mergers, mooted by the merging banks in the first instance and

approved by the authorities, were not entirely for reasons of banking stability as such.

There were also mergers of private banks with public sector banks, the prominent among them

 being the mergers of Benares State Bank with Bank of Baroda in 2002; Nedungadi Bank with

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Punjab National Bank in 2003; and, more recently, Global Trust Bank with Oriental Bank of

Commerce. But these mergers were at the initiative of the authorities, undertaken for preserving

 banking stability.

The merger of ICICI with ICICI Bank and the reverse merger of IDBI Bank with IDBI served

multiple objectives. First, the institutions were strengthened financially. Second, they helped to

avoid the complex processes of restructuring the weaker of the units and to foster financial

stability. Finally, they have opened the possibilities of actively promoting universal banking.

The above examples of mergers have been facilitated to a large extent by banking sector

reforms that helped relax some of the restrictions on asset portfolio distribution. Also, to an

extent the advances in information technology have given banks the incentive to consolidate to

scale up operations.

However, they are not meant, at least in the short term, to cut costs, improve efficiency or raise

 profits. Implied is the argument that efficiency and profits would be assured once the

economies of scale operate.

On the other hand, mergers could lead to charging of higher fees for the services rendered,

especially if there is no `effective' competition or if smaller banks exhibit `herd behaviour' in

imitating the bigger entities. This negative aspect of mergers may not, however, be as serious as

when mergers lead to loss of availability of or access to credit or to lower employment,

especially of female labour.

Unfortunately, there is little of published empirical literature on the impact of mergers in banking

in India. The general literature on the subject views the impact from two angles: One based on

accounting data and the other based on stock price reaction. Till almost the mid-1990s, studies in

the US suggested that mergers based on former did not lead to significant gains either in

efficiency or cost-saving.

More recently, however, empirical data supported the view that banks significantly improve their

 profit and operational efficiency following mergers. Studies that use stock market data did not

show gains from consolidation. They, in fact, suggested that bidders often suffer negative returns partly because of high offer prices and partly because markets revise downward their

expectations from the merger.In the present context of global financial market integration, Indian

 banks seeking international presence by exploiting the economies of scale and if possible of

scope is an appealing argument.

But this alone cannot be a good ground for consolidation. Banking stability is much more

important. What is also important is that it should not lower the number of banks to levels that

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destroy competition. The proposition that banks would be `too large to fail' is passé as the 1990s

financial crises experience shows. The question about the optimal number of banks in the

country, and the associated issues of their capital adequacy and their capacity to help

universalisation of banking are matters to be yet settled.There is no official view about the

optimal number of banks in a country. The Banking Commission recommended in 1972 that

national banks be reorganized into two or three all-India banks and six other entities, each

specializing in developing services in a broad region.

This was not pursued. But there is need for intense research on the issue, before one takes a

 judgmental view about the number of Indian banks that could have international presence and

could compete for international banking business. While such a view would obviously be based

on their financial strength, that by itself would not be enough.

Good internal governance mechanisms and transparency practices need to be also in place.

Besides the authorities should resist the temptation of taking a proactive stance in determining

which Indian bank should have international presence. Instead they should allow banks to growinto international entities on their own internal dynamic impulses.

The issue however could become complex if foreign banks are allowed to buy out Indian banks.

The RBI has done well to be transparent by going in for public views on ownership and

governance. One only hopes that political considerations do not influence the final view on the

matter.

State Bank of India 

Company Profile of SBI: 

State Bank of India (SBI) is India's largest commercial bank. SBI has a vast domestic network of

over 9000 branches (approximately 14% of all bank branches) and commands one-fifth of

deposits and loans of all scheduled commercial banks in India.

The State Bank Group includes a network of eight banking subsidiaries and several non-banking

subsidiaries offering merchant banking services, fund management, factoring services, primary

dealership in government securities, credit cards and insurance.

The eight banking subsidiaries are: 

·  State Bank of Bikaner and Jaipur (SBBJ)·  State Bank of Hyderabad (SBH)

·  State Bank of India (SBI)

·  State Bank of Indore (SBIR)

·  State Bank of Mysore (SBM)

·  State Bank of Patiala (SBP)

·  State Bank of Saurashtra (SBS)·  State Bank of Travancore (SBT)

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Exceeds Expectations: 

(Rs crore)  April-June  % Change 

2008  2009 

Interest income 20224.08 24641.11 21.84

Other income 3523.35 8491.59 141.01

Total income 23747.43 33132.70 39.52

Interest paid 13509.96 17524.15 29.71

Total expenses 18578.47 28238.18 51.99

Operating profit 5168.96 4894.52 (5.31)

 Non-tax provisions 2640.28 394.40 (85.06)

 Net profit 1640.92 2758.53 68.11

Gross NPA 10827.81 15318.29 41.47

 Net NPA 6298.44 8402.48 33.41

Gross NPA % of advances 2.42 2.79

 Net NPA % of advances 1.42 1.55

 NPA data is for SBI standalone Source: SBI

The bank’s net interest income was affected due to a rise in interest payments that went up 38.5

 per cent due the deposit mobilization under the 1,000 day scheme, under which the bank was

 paying 10.5 per cent interest in October. The scheme had resulted in a mop up of around Rs

1,000 crore on a daily basis for a few months.

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Feature of banking sector development

1. Dealing in Money 

Bank is a financial institution which deals with other people's money i.e. money given bydepositors.

2. Individual / Firm / Company 

A bank may be a person, firm or a company. A banking company means a company which

is in the business of banking.

3. Acceptance of Deposit 

A bank accepts money from the people in the form of deposits which are usually repayableon demand or after the expiry of a fixed period. It gives safety to the deposits of itscustomers. It also acts as a custodian of funds of its customers.

4. Giving Advances 

A bank lends out money in the form of loans to those who require it for different purposes.

5. Payment and Withdrawal 

A bank provides easy payment and withdrawal facility to its customers in the form ofcheques and drafts, It also brings bank money in circulation. This money is in the form ofcheques, drafts, etc.

6. Agency and Utility Services 

A bank provides various banking facilities to its customers. They include general utilityservices and agency services.

7. Profit and Service Orientation 

A bank is a profit seeking institution having service oriented approach.

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8. Ever increasing Functions 

Banking is an evolutionary concept. There is continuous expansion and diversification asregards the functions, services and activities of a bank.

9. Connecting Link  

A bank acts as a connecting link between borrowers and lenders of money. Banks collectmoney from those who have surplus money and give the same to those who are in need ofmoney.

10. Banking Business 

A bank's main activity should be to do business of banking which should not be subsidiaryto any other business.

11. Name Identity 

A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money.

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Advantages of Banking sector growthThe benefits or advantages of universal banking are:-

  Investors' Trust : Universal banks hold stakes (equity shares) of many companies.These companies can easily get other investors to invest in their business. This is because other investors have full confidence and faith in the Universal banks. Theyknow that the Universal banks will closely watch all the activities of the companiesin which they hold a stake

  Economics of Scale : Universal banking results in economic efficiency. That is, itresults in lower costs, higher output and better products and services. In India, RBIis in favour of universal banking because it results in economies of scale.

  Resource Utilisation : Universal banks use their client's resources as per the client'sability to take a risk. If the client has a high risk taking capacity then the universal bank will advise him to make risky investments and not safe investments. Similarly,clients with a low risk taking capacity are advised to make safe investments. Today,

universal banks invest their client's money in different types of Mutual funds andalso directly into the share market. They also do equity research. So, they can alsomanage their client's portfolios (different investments) profitably.

  Profitable Diversification : Universal banks diversify their activities. So, they canuse the same financial experts to provide different financial services. This saves costfor the universal bank. Even the day-to-day expenses will be saved because allfinancial services are provided under one roof, i.e. in the same office.

  Easy Marketing  : The universal banks can easily market (sell) all their financial products and services through their many branches. They can ask their existingclients to buy their other products and services. This requires less marketing efforts because of their well-established brand name. For e.g. ICICI may ask their existing bank account holders in all their branches, to take house loans, insurance, to buytheir Mutual funds, etc. This is done very easily because they use one brand name(ICICI) for all their financial products and services.

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  ne-stop Shopping  : Universal banking offers all financial products and services

under one roof. One-stop shopping saves a lot of time and transaction costs. It alsoincreases the speed or flow of work. So, one-stop shopping gives benefits to both banks and their clients.

Disadvantages of Banking sector growth

1.  Different Rules and Regulations : Universal banking offers all financial productsand services under one roof. However, all these products and services have tofollow different rules and regulations. This creates many problems. For e.g. MutualFunds, Insurance, Home Loans, etc. have to follow different sets of rules andregulation

2.  s, but they are provided by the same bank.

3.  Effect of failure on Banking System  : Universal banking is done by very large banks. If these huge banks fail, then it will have a very big and bad effect on the banking system and the confidence of the public. For e.g. Recently, LehmanBrothers a very large universal bank failed. It had very bad effects in the USA,Europe and even in India.

4.  Monopoly  : Universal banks are very large. So, they can easily get monopoly power in the market. This will have many harmful effects on the other banks and the public. This is also harmful to economic development of the country.

5.  Conflict of Interest: Combining commercial and investment banking can result inconflict of interest. That is, Commercial banking versus Investment banking. Some banks may give more importance to one type of banking and give less importance tothe other type of banking. However, this does not make commercial sense.

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Case Study: State Bank of India, World's Largest

Centralized Core Processing Implementation Analyst Author: Robert Hunt 

Senior Research Director, Retail Banking Feb 2009 

Reference # V58:06R  

TowerGroup Take-Aways 

·  The State Bank of India (SBI), the largest and oldest bank in India, hadcomputerized its branches in the 1990s, but it was losing market share to private-sector banks that had implemented more modern centralized core processing systems.

·  To remain competitive with its private-sector counterparts, in 2002, SBI began

the largest implementation of a centralized core system ever undertaken in the

 banking industry.

·  The State Bank of India selected Tata Consultancy Services to customize the

software, implement the new core system, and provide ongoing operational supportfor its centralized information technology.

·  Although SBI initially planned to convert only 3,300 of its branches, it was so

successful that it expanded the project to include all of the more than 14,600 SBI and

affiliate bank branches.

·  The State Bank of India has achieved its goal of offering its full range of products andservices to all its branches and customers, spreading economic growth to rural areasand providing financial inclusion for all of India's citizens.

Report Coverage 

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The implementation of the Tata Consultancy Services (TCS) BaNCS Core Banking at the

State Bank of India (SBI) and its affiliate banks represents the largest centralized core

system implementaion ever undertaken. The overall effort included the conversion of

approximately 140 million accounts held at 14,600 domestic branches of SBI and its

affiliate banks. This TowerGroup Research Note is a case study that overviews the history

of the State Bank of India and details the effort to modernize the bank's core processingsystems. It also identifies the drivers to modernization, the critical success factors, and the

conversion methodology. For a broader overview of the Indian core systems market, see

TowerGroup Research Note V47:13R,  Looking for   State-of-the-Art Core Banking? Try

 India.

Background 

The State Bank of India is the oldest and largest bank in India, with more than $250 billion

(USD) in assets. It is the second-largest bank in the world in number of branches; it

opened its 10,000th branch in 2008. The bank has 84 international branches located in 32

countries and approximately 8,500 ATMs. Additionally, SBI has controlling or complete

interest in a number of affiliate banks, resulting in the availability of banking services at

more than 14,600 branches and nearly 10,000 ATMs.

SBI traces its heritage to the 1806 formation of the Bank of Calcutta. The bank was

renamed the Bank of Bengal in 1809 and operated as one of the three premier

"presidency" banks (the presidency banks had the exclusive rights to manage and circulate

currency and were provided capital to establish branch networks). In 1921, the

government consolidated the three presidency banks into the Imperial Bank of India. The

Imperial Bank of India continued until 1955, when India's

© 2002 - 2009 The Tower Group, Inc. May not be reproduced by any means withoutexpress permission. All rights reserved. TowerGroup is a wholly owned subsidiary ofMasterCard Worldwide and operates as a separate business entity with complete editorialindependence. MasterCard Worldwideis not responsible for and does not necessarily endorse any opinions, statements, or other content presented by TowerGroup. 

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central bank, the Reserve Bank of India, acquired the majority interest in the bank and c

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hanged its name to the State Bank of India (SBI).

In 1959, the Indian government passed the State Bank of India Act, resulting in the

acquisition (majority shareholding) of eight state-affiliated banks and the creation of

the State Bank of India Group (SBI Group). The SBI itself is now majority owned by

the Indian government, which purchased the shares held by the Reserve Bank of India.

The State Bank of India and its affiliate banks are profiled in Exhibit 1.

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Given the success of the initial project and SBI's desire to offer new products to all of its

customers, a new IT plan was created that would encompass all branches. TCS and the bank would have to demonstrate the capability to process 100 million accounts in a single

 processing environment.

TCS and HP then conducted another scalability test in September 2006 to determine if the

system could process SBI's entire base of 100 million accounts (excluding the affiliate

 banks, which use a separate processing environment) with sustained peak online

throughput of 1,500 transactions per second. They conducted the test at HP Labs in

Cupertino, California, using two 32-CPU HP 9000 Superdome application servers and

two 32-processor Itanium Core HP Integrity servers for the database. The test achieved a

sustained peak real-time transaction rate of more than 1,575 transactions per second,

meeting the projected processing demands of SBI. Additionally, batch tests were run for

 both deposits and loan account processing. The month-end batch process for loans

required 1 hour and 5 minutes, and deposit processing was completed in 2 hours and 27

minutes. These benchmarks were audited by Ernst & Young, and the test results are

highlighted in Exhibit 3.

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Exhibit 3 State Bank of India Scalability Test of TCS BaNCS System for Full Branch ConversionSource: Tata Consultancy Services (TCS) 

Based on the successful scalability test, SBI decided to convert the approximately 6,700

remaining SBI branches to the BaNCS system. The conversion of the remaining branches

 began in June 2006, with the stated goal of completing the conversion by year-end 2008.

Utilizing the assembly line conversion approach established in the initial phase, the bank

converted 1,400 of these branches by March 2007.

© 2002 - 2009 The Tower Group, Inc. May not be reproduced byany means without express permission. All rights reserved. 

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Because the conversion methodology and BaNCS system were thoroughly proven and stable,

the assembly line conversion approach allowed the bank to complete the conversion ahead of

schedule. Between April 2007 and March 2008 (the bank's fiscal year end), SBI converted

4,600 branches to the new system. The remaining branches were converted between April and

July 2008.

Critical Success Factors Large-scale core systems implementations are typically the most costly and risky IT projects

undertaken by banks. Failures of core systems projects are not uncommon at large banks and

result in both financial impact and lost business opportunities. Further, failed projects lead

other banks to delay needed core systems replacements because they measure the risk of failure

against the potential benefits of a new system.

TowerGroup believes that several critical factors contributed to the success of the SBI

core implementation effort:

·  Senior management commitment. The project was driven by the chairman of SBI, whomet every  month with the information technology (IT) and the business sector heads. The

chairman monitored the overall status and ensured that sufficient resources were allocated to

the

 project. TCS senior managers were thoroughly committed to the project as well and periodically

met with the SBI chairman to review the project status.

·  Staffing and empowerment of project team. The core banking team consisted of the

 bank's managing director of IT acting as team head and 75 business and IT people selected by

the bank. TCS also staffed the project with approximately 300 IT professionals trained on the

BaNCS system. Importantly, the SBI business people were viewed not just as contributors to a

key project but as future bank leaders. This team reported to the SBI chairman and was

empowered with all decision-making authority.

·  Ownership by business heads. The regional business line heads were responsible for the  

success of conversion of their respective branches and reported the status to the chairman.

Thus, the business heads' objectives were aligned with those of the project team.

·  Focus on training. SBI used its network of 58 training centers across India to train 

employees on the new system. TCS personnel first educated approximately 100 SBI

 professional trainers, who then trained 100,000 SBI employees at the centers; the

remaining employees trained at their respective job sites.

Benefits of New Core Systems Implementation 

The new core system has resulted in benefits throughout the bank for both the customers and

the employees of SBI. For example, the new core banking system has allowed the bank to

redesign processes. It established 400 regional processing centers for all metro and urban

 branches that have assumed functions previously performed in the individual branches. The

 bank recently reported that business per employee increased by 250% over the last five years.

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The bank has achieved its goal of offering its full range of products and services to its

rural branches. It delivers economic growth to the rural areas and offers financial

inclusion for all of India's citizens.

Implementation of the TCS BaNCS system has provided the bank with the ability to

consolidate the affiliate banks into SBI. In fact, the bank recently completed the consolidationof State Bank of Saurashtra into SBI.

The bank has reversed the trend of customer attrition and is now gaining new market share.

Completion of the core conversion project has also allowed the bank to undertake several new

initiatives to further improve service and support future growth. These initiatives include the

deployment of more than 3,000 rural sales staff, redesign of over 2,200 branches in the last

fiscal year, opening of more than 1,000 new branches, establishment of a call center, and an

active plan

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to migrate customers to electronic delivery channels. The improvement in productivity

and growth of business for the SBI Group is reflected in Exhibit 4.

Exhibit 4 Selected Business Results for State Bank of India Group (2002 – 07)Source: State Bank of India Group 

conclusion

The implementation of the Tata Consultancy Services (TCS) BaNCS system at the State

Bank of India (SBI) represents the largest core systems project ever undertaken. The

success of this project should encourage other large banks to begin projects to modernize

their core systems.

The use of a UNIX-based platform to process more than 100 million accounts daily

demonstrates that tier 1 banks can use a mainframe alternative for their core processing.

Although TowerGroup expects that the majority of these banks will continue to rely on

the IBM mainframe for core processing, they can fully consider the benefits of utilizing a

UNIX-based platform.

SBI's achievement demonstrates that attention to critical factors is crucial in implementing

new core systems. The bank's senior management commitment, business line involvement, project team staffing and empowerment, and extensive employee training were all key

contributors to the success of the project. Management also recognized the need for a

 proven systems integrator that possessed in-depth expertise in both business and

technology.

Core systems modernization has allowed the State Bank of India to centralize computer

 processing and operations functions, offer new banking products to all the citizens of

India, reverse a trend of customer attrition, and consolidate its affiliate banks.

Additionally, the bank can now further expand its product offerings and improve customer

service.

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BIBLIOGRAPHY

Books:

1.  Malhotra N.K., (2005), Marketing Research- An applied orientation, New Delhi,

Prentice Hall of India Private Ltd 

2.  Shaw Robert, Merrick David (2005), Marketing Payback, Financial Times/Prentice

Hall Books. 

3.  Kothari, C.R, New age publication, Research methodology, second edition 2009.

Websites & Search Engine:

1.  http://www.slideshare.net/nusantara99/pnbbank

2.  http://en.wikipedia.org/pnbbank/ecommerce

3.  http://www.financialexpress.com/news/sbi bank  

4.  http://www.google/economic times/bank news.

Magazines & Publications:

1.  Economics and Business Facts for you (aug 2013)

2.  India page of HT paper (june. 27,2013)

3.  The Business world (april 2013)

News paper:

1. Economics times.

2. Times of India.