Introduct ion

A sound bank ing sys tem i s a s ine qua non fo r

acce le ra t ing the p rocess o f economic deve lopment o f a

coun t ry . Banks and economic deve lopment a re in te r twined

and inseparab le to each o ther . In the words o f the fo rmer

Pr ime Min is te r Morar j i Desa i , “ the ro le o f commerc ia l banks

in economic deve lopment o f a coun t ry needs no emphas i s .

Bank ing , when proper ly o rgan ised , a ids and fac i l i t a tes the

g rowth of t rade and hence the na t iona l economy. ” 1

In Ind ia , though the money marke t i s s t i l l

charac te r i sed by the ex i s tence o f bo th the organ ised and the

unorgan ised segments , in s t i tu t ions in the o rgan is ed money

marke t have g rown s ign i f ican t ly and a re p lay ing an

increas ing ly impor tan t ro le . The unorg an ised sec to r ,

compr i s ing the money lenders and ind igenous bankers , ca te r s

to the c red i t needs o f a la rge number o f persons , espec ia l ly

in the coun t rys ide . Amongs t the ins t i tu t ions in the o rgan i sed

sec to r o f the money marke t , commerc ia l banks and

coopera t ive banks have been in ex i s t ence s ince the midd le

o f seven t ies . Thus , wi th the phenomenal geograph ica l

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expans ion o f the commerc ia l banks and the se t t ing up o f the

Reg iona l Rura l Banks [RRBs] dur ing the recen t pas t , the

o rgan i sed sec to r o f money marke t has pene t ra ted in to ru ra l

a reas as wel l . Bes ides the a fo resa id ins t i tu t ions , which

main ly se rve as sources o f shor t - t e rm cred i t to indus t ry ,

t r ade , commerce and agr icu l tu re , a var ie ty o f spec ia l i sed

f inanc ia l ins t i tu t ions have been se t up in the coun t ry to

ca te r to the spec i f ic needs o f indus t ry , ag r icu l tu re and

fo re ign t rade .

Amongs t the ban k ing ins t i tu t ions in the o rgan i sed

sec to r , the commerc ia l banks a re the o ldes t ins t i tu t ions

hav ing a wide ne twork o f b ranches , commanding u tmost

pub l ic conf idence and hav ing the l ion’s share in the to ta l

bank ing opera t ions . In i t i a l ly , they were es tab l i shed as

co rpora te bod ies wi th shareho ld ings by pr iva te ind iv idua ls ,

bu t subsequen t ly there has been a d r i f t towards S ta te

ownersh ip and con t ro l . Up to l a te s ix t ies , they were main ly

engaged in f inanc ing o rgan ised t rade , commerce and

indus t ry , bu t s ince then , they a re ac t ive ly par t i c ipa t ing in

f inanc ing agr icu l tu re , smal l bus inesses and smal l bor rowers

a l so .

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A s ign i f ican t fea tu re o f the p resen t day commerc ia l

bank ing in Ind ia i s the coex is tence o f bo th the S ta te o r

pub l ic sec to r and p r iva te sec to r in bank ing . Apar t f rom the

p r iva te and publ ic sec to r banks , the re ex i s t the fo re ign

commerc ia l banks , which a re b ranches o f the Jo in t S tock

Banks incorpora ted abroad . These banks , bes ides f inanc ing

the fo re ign t rade o f the coun t ry , under take bank ing bus iness

wi th in the coun t ry as wel l .

One o f the majo r func t ions o f commerc ia l banks i s

l end ing funds wi th o r wi thou t secur i ty . In fac t , th i s ac t iv i ty

i s the c rux o f bank ing . In te res t on loans and advances and

d i scoun t on b i l l s cons t i tu te about 85 percen t o f a bank’s

to ta l ea rn ings . In a deve lop ing economy, there i s a cons tan t

demand fo r c red i t by var ious sec to rs v iz . t r aders , indus t r ies ,

expor t s , ag r icu l tu re and the l ike . As the money , which i s

p rov ided as loans to bor rowers , i s pub l ic money , ex t ra ca re

and d i l igence i s requ i red on the par t o f the bankers in

p rov id ing the loans .

In the pre -na t iona l i sa t ion e ra , the commerc ia l banks

were in the hands o f a few b ig bus iness houses . These

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houses d id no t have any concern fo r the soc ie ty and p ro f i t

was the i r main ob jec t ive . Nat iona l i sa t ion o f four teen

commerc ia l banks in 1969 paved the way fo r mass banking

f rom c lass banking . Th is l ed to economic up l i f tmen t o f

h i ther to neg lec ted sec to rs such as co t tage and smal l - sca le

indus t r i es , marg ina l fa rmers , women and ch i ld ren and

t rad i t iona l and v i l l age en te rp r i ses , popu lar ly known as the

p r io r i ty sec to rs .

“The concep t o f p r io r i ty sec to r came to be evo lved in

the l a te s ix t ies to focus a t t en t ion on the c red i t needs o f

ce r ta in neg lec t ed sec to rs o f the economy, par t i cu la r ly in the

ru ra l a reas to ensure adequa te c red i t f ac i l i t i e s to them. The

p r io r i ty sec to r covers ag r icu l tu re , smal l - sca le indus t ry ,

se t t ing up o f indus t r ia l es ta te s , road and wate r t ranspor t

opera to rs , r e ta i l t r ade , smal l bus iness , p ro fess iona ls and

se l f -employed persons , educa t ion , hous ing and consumpt ion

loans .”2 The components o f p r io r i ty sec to rs which are

e l ig ib le fo r loans f rom commerc ia l banks i s expressed in

d iagram No.1 .1

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“The f inanc ia l p r io r i t i es a re a imed a t acc e le ra ted

g rowth of the economy wi th soc ia l jus t i ce . I t a l so a imed a t

c rea t ing employment oppor tun i t i es to the mi l l ions o f peop le

in ru ra l and u rban a reas . Each sec to r i s in te r - l inked . Whi le

ag r icu l tu re and smal l sec to r p roduced goods , t ranspor t

l inked them wi th marke ts , r e ta i l ed smal l bus iness o f fe red

innumerab le ou t le t s , educa t ion improves the sk i l l s , hous ing

p rov ided she l te r s and expor t s b rough t in compet i t iveness

and qua l i ty to p roduc ts .”3

There was a fu r ther sh i f t in th i s d i rec t ion dur ing 1980

when ano ther s ix banks were na t iona l i sed . Unt i l 1991 , the

Ind ian Bank ing indus t ry was opera t ing in a h igh ly regu la ted

and p ro tec ted env i ronment . However , wi th the accep tance of

Naras imham Commit tee r ecommendat ions , compet i t ion has

been in jec ted in to the bank ing i ndus t ry . New Pr iva te sec to r

banks and fo re ign banks have been g ran ted l i censes wi th a

resu l tan t inc rease in the number o f p layers in the bank ing

sec to r .

P r io r to na t iona l i sa t ion and even a f te r na t iona l i sa t ion

un t i l the ea r ly n ine t ies , the commerc ia l bank ers were

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conservat ive in the i r approach and loans were p rov ided on ly

a f te r a lo t o f sc ru t iny . Before na t iona l i sa t ion , the banker

knew a l l h i s cus tomers persona l ly and was ab le to c lea r ly

de te rmine the c red ib i l i ty o f the cus tomers . There fo re , the re

was no t much need fo r the banker to worry regard ing

recovery o f dues . Af te r the l ibe ra l i sa t ion in 1991 , a number

o f p r iva te sec to r banks en te red in to the money marke t to

compete severe ly wi th the na t iona l i sed banks . The new

genera t ion p r iva te banks have brough t ab ou t a parad igm

sh i f t in se rv ice s tandards and se t new benchmarks in t e rms

o f app l ica t ion of t echnology , speed in the de l ivery o f

se rv ices , cho ices o f fe red to cus tomers in respec t o f de l ivery

channe ls , décor and b ranch ambience and a h igh o rder o f

marke t o r ien ta t ion . Th is resu l ted in p rov is ion o f loans to

anybody , anywhere and a t any t ime . The pub l ic sec to r banks

cou ld no t adopt the p recau t ious approach regard ing

p rov is ion o f loans fo l lowed in the ea r ly days because they

wi l l lo se the race . Apar t f rom th i s , the soc ie ta l bank ing

concep t imposed on the commerc ia l bankers a f te r

na t iona l i sa t ion in the form of p r io r i ty sec to r l end ing has

added more fue l to f i re . Due to these reasons , the re has been

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a phenomenal increase in the overdues o f bank c red i t .

Overdue mean s loans unpa id wi th in the s t ipu la ted t ime .

“The ra te o f recovery o f loans as aga ins t the i r demand

a lmos t s tands a t abou t 52 per cen t .”4

The p ropor t ion o f

overdues in bank c red i t i s inc reas ing cons iderab ly every

year . Thus , recovery o f overdues has become a Hercu lean

task fo r the banker and the very su rv iva l o f the commerc ia l

banks i s based on e f fec t ive recovery o f overdues .

Commercia l Banks -An Eagle ’s v iew

Banking system in India

Banks cons t i tu te an impor tan t segment o f the f inanc ia l

in f ras t ruc tu re o f any c oun t ry . They occupy an impor tan t

p lace in the na t ion’s economy. A bank ing ins t i tu t ion i s

ind i spensab le in a modern soc ie ty and i t p lays a p ivo ta l ro le

in the economic deve lopment o f a coun t ry .

The Ind ian money marke t exh ib i t s the para l le l

ex i s tence o f bo th the o rgan ised and the unorgan ised sec to rs .

The unorgan ised sec to r , compr i s ing the money lenders and

ind igenous bankers t akes ca re o f the c red i t requ i rements o f

a l a rge number o f persons , espec ia l ly in the coun t rys ide .

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Commerc ia l banks and coopera t ive banks cons t i tu te the

o rgan ised sec to r in the money marke t , wh ich has been

ex is t ing s ince the midd le o f seven t ies . The ins t i tu t ions in

the o rgan ised sec to r have g rown s ign i f ican t ly and a re

p lay ing an increas ing ly impor tan t ro le . The commerc ia l

bank , by means o f se t t ing up the Reg iona l Rura l Banks

[RRBs] dur ing the recen t pas t has pene t ra ted in to the ru ra l

a reas as wel l . Bes ides these ins t i tu t ions , which p rov ide

main ly shor t - t e rm cred i t to bus ines s , the re a re number o f

spec ia l i sed te rm lend ing ins t i tu t ions , which ca te r to the

long- te rm requ i rements o f indus t ry , ag r icu l tu re and fo re ign

t rade .

Indigenous banking in India

The Ind igenous Bank ing sys tem in Ind ia cons t i tu t ing

money lenders and ind igenous bankers has been in ex i s tence

f rom t imes immemor ia l . Accord ing to th e Ind ian Cen t ra l

Banking Enqu i ry Commit tee , “an ind igenous banker o r bank

i s an ind iv idua l o r f i rm rece iv ing depos i t s and dea l ing in

hund ies . Thus , accep tance o f depos i t s i s a necessary

prerequ is i t e fo r ca l l ing one an ind igenous banker .” 5 As

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such money lenders do no t accep t depos i t s f rom the pub l ic

and th is d i f fe ren t ia tes moneylenders f rom ind igenous

bankers . Such banks run by ind igenous bankers occupy an

impor tan t p lace in the Ind ian f inanc ia l sys tem. These

ind igenous bankers l end money , ac t as money chang ers and

f inance in te rna l t rade by means o f in te rna l b i l l o f exchange .

They run the i r bus iness as a f ami ly concern and p rov ide

loans wi th the i r own cap i ta l aga ins t secur i t i es such as go ld ,

j ewel le ry , l and , p romissory no tes , e tc . They a l so buy and

se l l r emi t tances and d i scoun t hundies . They usua l ly combine

bank ing wi th t rad ing and commiss ion bus iness . They

genera l ly dea l wi th ag r icu l tu r i s t s and smal l t r aders . “The

in te res t ra te cha rged by them i s h igher than the in te res t

charged by o ther bank ing ins t i tu t ions . ” 6

“Accord ing to the

Reserve Bank o f Ind ia , abou t 50 per cen t o f the in te rna l

t r ade i s f inanced by these ind igenous bankers .” 7

“The ind igenous bankers rece ive no bank ing educat ion

as such , though they rece ive p rac t ica l t ra in ing in the i r own

f i rms and the reby acqu i re r i ch exper ience . The i r opera t ions

a re s imp le and f ree f rom fo rmal i t i es and de lays . They do no t

have even f ixed work ing hours . They main ta in c lose

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persona l touch wi th the i r c l i en t s . They know the an tecedents

o f a l l the i r bor rowers and care fu l ly watch the i r f inanc ia l

pos i t ion a f te r accommodat ing them. They know the fami ly

h i s to ry of the peop le in the loca l i ty and unders tand whom to

accommodate and to what ex ten t . The i r accoun t ing and the i r

bus iness methods a re ex t remely s imple and moreover the i r

methods have been tes ted over a long per iod o f t ime .

The ind igenous bankers rece ive depos i t s f rom the

pub l ic and pay in te res t on them. The ra te o f in te res t var ie s

f rom 3 per cen t to 9 per cen t and depends upon cer ta in

fac to rs such as the amount o f depos i to rs , the cond i t ion o f

the marke t and even the i r persona l re la t ions wi th the

depos i to rs . However , they re ly p r imar i ly upon the i r own

cap i ta l and compara t ive ly to a very smal l ex ten t , upon the

depos i t s f rom the pub l ic . They do no t permi t wi thdrawals by

cheques . The wi thdrawals a re a s a ru le in cash . In t ime o f

necess i ty , ind igenous bankers supp lement the i r resources by

bor rowing f rom commerc ia l banks on demand p romissory

no tes o r by d i scoun t ing hund ies endorsed by them.

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The c l ien t s o f the ind igenous bankers ge nera l ly cons i s t

o f the r io t s , smal l indus t r ia l i s t s and t raders . Genera l ly , they

f ind i t d i f f i cu l t to es tab l i sh d i rec t con tac t wi th the r io t s and

f inance them th rough loca l money lenders . They d i rec t ly dea l

wi th the smal l indus t r ia l i s t s and t raders . In th i s connec t ion ,

they per fo rm a l a rge number o f bank ing func t ions such as

buy ing and se l l ing , remi t tance , d i scoun t ing hundies and

g iv ing loans aga ins t s tock - in - t rade . They lend money on

p romissory no tes on the persona l secur i ty o f the borrower o r

on the mor tgag e o f l and , house , e tc . ” 8 “

The Bank ing

Commiss ion [1972] has po in ted ou t tha t they a re much

sough t a f te r because of the i r f l ex ib i l i ty , absence of

fo rmal i t i es and p romptness . The Commiss ion has a l so no ted

tha t “ i f they are l inked wi th the Reserve Bank, the ent ire

f inancia l sys tem in the country wi l l ge t s trengthened .” 9

Commercia l Banking System in India

“Amongst the bank ing ins t i tu t ions in the organ ised

sec to r , the commerc ia l banks a re the o ldes t ins t i tu t ions

hav ing a wide ne twork o f b ranches , commanding u tmost

pub l ic conf idence and hav ing the l ion’s share in the to ta l

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bank ing opera t ions . In i t i a l ly , p r iva te ind iv idua ls es tab l i shed

them as co rpora te bod ies wi th the i r shareho ld ings . Bu t

subsequen t ly , there has been a d r i f t towards S ta te ownersh ip

and con t ro l .” 1 0

Up to l a te s ix t ies , they were ma in ly engaged

in f inanc ing o rgan ised t rade , commerce and indus t ry , bu t

s ince then they a re ac t ive ly par t i c ipa t ing in f inanc ing

agr icu l tu re , smal l bus inesses and smal l bor rowers a l so .

Commerc ia l banks in Ind ia may b road ly be c lass i f i ed

based on two c r i t e r ia : [ i ] Ownersh ip and [ i i ] S ta tu to ry . On

the ownersh ip bas i s , the banks may be c lass i f i ed in to two

g roups , namely pub l ic sec to r commerc ia l banks and p r iva te

sec to r commerc ia l banks . On the s ta tu to ry bas i s , the banks

a re o f two types : Schedu led banks and non -schedu led banks .

[ i ] “Scheduled banks: Schedu led banks a re one which i s

reg i s te red in the Second schedu le under Sec t ion 42 [6 ] o f

the Reserve Bank o f Ind ia Act , 1934 . The fo l lowing

cond i t ions shou ld be fu l f i l l ed by a ban k fo r inc lus ion in the

schedu le :

[a ] The bank concerned mus t be ca r ry ing on a bus iness o f

bank ing in Ind ia .

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[b ] The bank mus t have a pa id -up cap i ta l and rese rves o f an

aggrega te va lue of no t l ess than Rs .5 l akhs .

[c ] I t mus t sa t i s fy the RBI tha t i t s a f fa i r s a re no t be ing

conduc ted in a manner de t r imen ta l to the in te res t o f the

depos i to r .” 1 1

“The schedu led banks have the fo l lowing ob l iga t ions :

[ i ] To main ta in an account wi th the Reserve Bank o f Ind ia

and to keep cash rese rve as p rescr ibed by the Reserve Ban k .

[ i i ] To submi t a week ly re tu rn abou t i t s f inanc ia l a f fa i r s to

the Reserve Bank .

[ i i i ] To keep accoun ts ready fo r per iod ica l inspec t ion by the

Reserve Bank and

[ iv ] To comply wi th d i rec t ions g iven by the Reserve Bank

f rom t ime to t ime . ” 1 2

Presen t ly , th e RBI has prescr ibed a min imum cap i ta l o f

Rs.100 c ro re for s ta r t ing a new commerc ia l bank . “The

schedu led commerc ia l banks have var ie ty of p r iv i leges l ike

re f inance fac i l i ty , cu r rency ches t fac i l i ty and they can

ob ta in f inance f rom the Reserve Bank o f Ind i a whi le in

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t emporary f inance d i f f i cu l ty .” 1 3

“Scheduled Banks may be

c lass i f i ed in to two g roups : Ind ian Schedu led Banks and

Fore ign schedu led banks . The Ind ian Schedu led Banks a re

those , which have the i r r eg i s te red o f f ices in Ind ia and a re

reg i s te red in the second schedu le o f the Reserve Bank o f

Ind ia . As aga ins t th i s , fo re ign schedu led banks compr i se

those commerc ia l banks which a re reg i s te red in the sa id

schedu le bu t have the i r reg i s te red o f f ices ou ts ide Ind ia .” 1 4

[ i i ] “Non - scheduled bank: A non-schedu led bank i s one

which i s no t inc luded in the Second schedu le o f the RBI

Act , 1934 . Such banks a re main ly engaged in money -

lend ing , d i scount ing and co l lec t ing b i l l s and do severa l

agency se rv ices . They have no re f inance and red iscoun t ing

fac i l i t i e s f rom the Reserve Bank o f Ind ia .” 1 5

The above

in fo rmat ion i s dep ic ted in a char t No . 1 .2 as fo l lows:

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Evolut ion o f Publ ic sector banking through bank

nat iona l i sa t ion

Publ ic sector banks came in to ex i s tence due to the

impac t o f na t iona l i sa t ion . The g rowth o f pu b l ic sec to r in

bank ing took p lace in four s tages :

[ i ] “Nat iona l i sa t ion s ta r ted in 1948 , one year a f te r

Independence , when the Cen t ra l Bank o f the coun t ry , the

Reserve Bank o f Ind ia [RBI] , was b rough t under

Government ownersh ip .” 1 6

[ i i ] Na t iona l i sa t ion o f Imper ia l Bank o f Ind ia in 1955 and

i t s seven assoc ia te banks in 1959 -60 .

[ i i i ] Na t iona l i sa t ion o f the four teen majo r commerc ia l banks

in 1969 .

[ iv ] Nat iona l i sa t ion o f s ix more commerc ia l banks in 1980 .

The p ioneer ing a t t empt o f in t roduc ing pub l ic sec to r

bank ing in Ind ia was made on 1s t

Ju ly , 1955 by the

Government o f Ind ia when i t na t iona l i sed the Imper ia l Bank

o f Ind ia and conver ted i t in to the S ta te Bank o f Ind ia [SBI] .

La te r on , dur ing 1959 -60 , seven of the subs id ia r ies o f SBI

[Append ix A] were a l so na t iona l i sed to fo rm the SBI g roup .

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Subsequen t ly , on 19t h

Ju ly , 1969 , four teen majo r Ind ian

schedu led banks [wi th depos i t s o f over Rs .50 c ro res ] were

na t iona l i sed by the Government wi th the ob jec t ive o f

deve lop ing the economy in conformi ty wi th na t iona l

p r io r i t i es . F ina l ly , on 15t h

Apr i l 1980 , the Government

na t iona l i sed s ix more schedu led banks each wi th depos i t s o f

Rs .200 c ro re o r above . Thus , f rom 1980 onwards

Government came to own twen ty -e igh t banks inc lud ing the

SBI and seven subs id ia r ies . Subsequen t t o the merger o f the

New Bank o f Ind ia wi th the Pun jab Nat iona l Bank in

Sep tember 1993 , the to ta l number o f pub l ic sec to r banks

came down to twen ty seven .

Nat iona l i sa t ion o f commerc ia l banks a l t e red the

ownersh ip pa t te rn in favour o f pub l ic sec to r and p rov i ded

wide- rang ing powers to the Government to in f luence the

bank ing po l icy and o r ien ta t ion . At the t ime o f

na t iona l i sa t ion , the soc io -economic ob jec t ives were

exp l ic i t ly l a id down and the banks were asked to con t r ibu te

to the max imum poss ib le ex ten t towards economic and

soc ia l deve lopment o f the coun t ry . I t was rea l i sed tha t the

t rad i t iona l bank ing e th ics were no t compat ib le wi th the

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needs o f economic deve lopment and tha t ba lanced

deve lopment was no t poss ib le wi thou t s t reng then ing the

ho ld o f commerc ia l bank s in the backward and neg lec ted

a reas .

P r io r to na t ional i sa t ion and even a f te r independence ,

the bank ing sec to r remained in p r iva te hands . Large

indus t r ies who had the i r con t ro l in the management o f the

banks were u t i l i s ing major por t ion o f f inanc ia l resou rces o f

the banking sys tem fo r the i r persona l development and as a

resu l t , l ow pr io r i ty was accorded to p r io r i ty sec to rs . The

main purpose o f na t iona l i sa t ion o f commerc ia l banks was to

make them as an ins t rument o f economic and soc ia l change .

Private secto r banking

“Pr iva te sec to r banks a re those which a re owned by

group o f shareho lders who e lec t the i r d i rec to rs fo r manag ing

the bank .” 1 7

The word ‘The’ and ‘L imi ted’ wi l l su f f ix the i r

names . They came in to ex i s tence to supp lement the

per fo rmance o f Pub l ic s ec to r banks and se rve the needs o f

the economy be t te r . S ince pub l ic sec to r banks a re

Government owned , they lacked in i t i a t ive to make p ro f i t s

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and improve the i r f inanc ia l hea l th . Na t iona l i sa t ion of

commerc ia l banks k i l l ed the compet i t ive env i ronment , which

i s essen t ia l fo r mak ing p ro f i t s .

Once aga in , compet i t ion was in jec ted in to the bank ing

bus iness wi th the recommendat ions o f the Naras imham

Commit tee I in 1991 , which advoca ted f ree en t ry o f p r iva te

banks . At p resen t , bo th p r iva te as wel l as pub l ic sec to r

banks have to opera te in an increas ing ly compet i t ive

env i ronment . The compet i t ion fo r pub l ic sec to r banks i s

coming f rom the p r iva te sec to r banks . Desp i te hav ing the

advan tage o f a subs tan t ia l p resence and pene t ra t ion in the

ru ra l a reas , the pub l ic sec to r b anks a re under t remendous

p ressure to main ta in the i r marg ins and to surv ive the

compet i t ion . The cus tomer -cen t r ic approach o f p r iva te

sec to r banks have th rown open many more cha l lenges fo r the

pub l ic sec to r banks , espec ia l ly in re ta in ing cus tomers and

expand ing cus tomer base . To re ta in the ex i s t ing cus tomers

and to a t t rac t new cus tomers , bo th the pub l ic and p r iva te

sec to r banks a re adop t ing var ious measures .

19

In to ta l i ty , the re a re 183 commerc ia l banks , as on 1s t

March 2007 . Of these , 179 banks a re schedu le d commerc ia l

banks and 4 banks a re non -schedu led commerc ia l banks . Out

o f the 179 schedu led commerc ia l banks 96 banks a re RRBs,

20 banks a re na t iona l i sed banks and the remain ing 8 banks

be long to the SBI g roup . In the p r iva te sec to r , ou t o f the 55

p r iva te banks , 2 8 banks are Ind ian banks and 2 7 banks a re

fo re ign banks .

Genes is o f Commercia l Banking in India

Banking in Ancient India

“Ind ia had rud imenta ry fo rms o f bank ing s ince the

Ved ic t imes .” 1 8

“Evidence regard ing the ex i s tence o f

money- lend ing opera t i ons in Ind ia i s found in l i t e ra tu re o f

Ved ic t imes , i . e . . . , 2000 to 1400 BC. The l i t e ra tu re o f the

Buddh is t pe r iod , example , the Ja takas and recen t

a rchaeo log ica l d iscover ies supp ly ev idence o f the ex i s tence

o f S res th i s o r bankers . F rom the laws of Manu , i t appears

tha t money - lending and a l l i ed p rob lems had assumed

Out of the 20 nationalised banks, the New Bank of India was merged with the Punjab National

Bank in the long-term interest of the depositors to reduce the number of nationalised banks to 19. At

present, IDBI Limited is considered as a nationalised bank.

20

cons iderab le impor tance in anc ien t Ind ia . Manu,

1 9 who had

approved money lend ing as a l awfu l occupa t ion had a l so

p rescr ibed e f fec t ive methods o f recover ing the dues . ” The

f ive means o f recovery i n Manu Smri t i a re exh ib i ted in the

fo l lowing d iagram 1 .3 :

21

“Banking was a s ide bus iness dur ing the Vedic per iod

bu t in the Ramayana and the Mahabhara ta e ras i t became a

fu l l t ime bus iness ac t iv i ty fo r the peop le .” 2 0

“The famous

Kau t i lya’s Ar thasas t ra , wh ich i s asc r ibed to be da t ing back

to the 4t h

cen tu ry B .C, con ta ins re fe rences to c red i to rs and

l end ing . For ins tance , i t says , ‘ i f any one became bankrup t ,

deb t owed to the S ta te ha d p r ior i ty over the c red i to rs ’ .

Thus , i t appears tha t l end ing ac t iv i t i es were no t en t i re ly

unknown in the med ieva l Ind ia and the concep t such as

p r io r i ty o f c la ims o f c red i to rs was es tab l i shed bus iness

prac t ices .” 2 1

“The seven teen th cen tu ry wi tnessed the es tab l i shment

o f agency houses by the Eng l ish t raders . These agency

houses , apar t f rom engag ing themse lves in t rade and

commerce , a l so ca r r ied on wi th the bank ing bus iness . The

Br i t i sh Agency Houses , which combined bank ing bus iness

wi th the t rad ing ac t iv i t i es , were the fo re runners o f the

modern jo in t s tock ba nks es tab l i shed in the coun t ry on the

European l ines . The f i r s t jo in t s tock bank es tab l i shed in the

coun t ry was the Bank o f Hindus tan in 1770 .” 2 2

“Af te r tha t ,

Bengal Bank was se t up in 1784 and a round 1786 , Genera l

22

Bank o f Ind ia was es tab l i shed , bu t these banks cou ld no t

prov ide the se rv ices due to the i r own c r i ses . ” 2 3

Banking before independence

“Modern Commerc ia l bank ing made i t s beg inn ing in

Ind ia wi th the se t t ing up o f the f i r s t P res idency Bank , the

Bank o f Benga l , in Ca lcu t ta in 1806 . Two o ther P res i dency

Banks were se t up in Bombay and Madras in 1840 and 1843

respec t ive ly . They were pr iva te shareho lders ’ banks , though

the Eas t Ind ia Company a lso con t r ibu ted to the share cap i ta l

o f each o f them. The bu lk o f the share cap i ta l had come

f rom pr iva te shar eho lders , mos t ly Europeans . They were

amalgamated in to the Imper ia l Bank o f Ind ia in 1921 , which

was na t iona l i sed in to the S ta te Bank o f Ind ia in 1955 .”2 4

“The year 1860 i s a l and mark in the h i s to ry o f pub l ic banks

in Ind ia , s ince in tha t year the p r inc ip le o f l imi ted l i ab i l i ty

was app l ied to Jo in t S tock banks .” 2 5

Since , 1860 t i l l the

end o f the 19t h

cen tu ry , a number o f Ind ian Jo in t Banks

came in to ex i s tence . For ins tance , the Al lahabad Bank was

s ta r ted a t Al lahabad in 1865 . In 1875 , the Al l iance Bank of

Simla was s ta r ted . “The f i r s t pu re ly Ind ian Jo in t s tock bank

23

was the Oudh Commerc ia l Bank which came in to ex i s tence

in 1889 . I t was fo l lowed by the Pun jab Nat iona l Bank in

1894 and the Peop le ’s Bank in 1901 . In 1895 , the famous

Punjab Nat iona l Bank came in to ex i s tence .” 2 6

“Insp i red by the Swadesh i Movement , severa l Ind ian

en t repreneurs ven tu red in to the modern bank ing bus iness .

Dur ing the boom per iod o f 1906 -13 , thus , the re was a

mushroom growth o f banks . Many p rominen t banks a l so

came in to ex i s tence dur in g th i s per iod . These were the Bank

o f Ind ia [1906] , the Canara Bank [1906] , the Bank of Baroda

[1908] and the Cen t ra l Bank o f Ind ia [1911] .” 2 7

“The Ind ian

jo in t - s tock banks have had a h i s to ry o f checkered g rowth

f rom the i r incep t ion t i l l abou t the midd le o f the twen t ie th

cen tu ry . There were long per iods o f s low growth

in te r spersed wi th shor t per iods of rap id g rowth o f bank

fo rmat ion , fo l lowed by bank ing c r i s i s , wh ich saw the fa i lu re

o f banks in l a rge numbers . For example , dur ing the per iod

1913-36 , 480 banks fa i l ed and another 620 banks fa i l ed over

a shor te r per iod o f 1937 -48 . Thus , recur ren t bank fa i lu res

were the main fea tu re o f the g rowth o f bank ing in Ind ia over

th i s per iod . Th is was no t pecu l ia r to Ind ia as i t was a l so the

24

exper ience o f mos t o ther coun t r ies in the ea r ly s tage o f

bank ing deve lopment .” 2 8

“The progress o f bank ing dur ing

the Second Wor ld War and i t s immedia te a f te rmath was

aga in charac te r ized by over - rap id expans ion and la rge sca le

fa i lu re o f banks . When Ind ia became independen t in 1947 , i t

inher i t ed an ex t remely weak bank ing s t ruc tu re wi th 640

banks o f which on ly 96 were schedu led banks and the res t

were smal l non -schedu led banks .” 2 9

The fo l lowing tab le g ives an idea o f the g rowth o f

Ind ian jo in t s tock banks in Ind ia s ince 1920:

Growth o f Indian Jo int S tock Banks

Table 1 .1 .

Year No . o f banks Depos i t s

[ in crores o f Rupees]

1920 61 160

1930 89 150

1940 661 280

S o u r c e : S u n d h a r a m , K . P . M . , “ M o n e y , B a n k i n g , T r a d e a n d

F i n a n c e ” , p . 4 5 6 .

Banking a f ter independence

The deve lopment in the Bank ing sec to r a f te r

independence has been d i scussed in th ree phases :

25

[ i ] Post - independence Era [1947 -1969]

After independence , Ind ia fo l lowed a bank ing s t ruc tu re

in the l ines o f the Br i t i sh Banking sys tem. Accord ing to

Mrs . Ind i ra Gandh i , fo rmer Pr ime Min is te r o f Ind ia , “ the

bank ing sys tem was con t ro l led by a co te r ie o f indus t r ia l i s t s

and bus iness magna tes who had used pub l ic funds to bu i ld

up p r iva te indus t r ia l empi res .” 3 0

“The bank ing scene in

Ind ia p r io r to 1969 was charac te r ized by concen t ra t ion o f

bus iness in met ropo l i t an and u rban cen t res wi th the majo r

indus t r ies and wholesa le t rade c la iming a l a rge chunk of

bank c red i t and the con t ro l and management o f majo r banks

be ing he ld by lead ing bus iness tycoons in the coun t ry .

Loans were advance d no t on the bas i s o f the v iab i l i ty o f the

scheme bu t on the c red i t -wor th iness o f the bor rowers . The

per fo rmance o f a bank was judged by the amount o f p ro f i t i t

made and the d iv idend i t dec la red .” 3 1

“Between 1939 and 1945 , the to ta l vo lume o f depos i t s

of schedu led banks rose f rom Rs .260 c ro res to over Rs .1 ,020

c ro res . S ide by s ide wi th the expans ion o f bank depos i t s ,

the re has been a con t inued expans ion o f bank c red i t ,

26

re f lec t ing the rap id expans ion o f indus t r i a l and agr icu l tu ra l

ou tpu t .”3 2

“There was no u n i fo rm law govern ing the bank ing

sys tem as an ins t rument o f economic change s ta r ted when

the p lann ing e ra was ushered in the f i f t i es . Fo l lowing the

examples o f the na t iona l i sa t ion of many European Cen t ra l

Banks a f te r the Wor ld War I I , the Reserve Bank o f I nd ia

was na t iona l i sed with e f fec t f rom January 1 , 1949 .”3 3

“The

beg inn ing o f pos t - independence per iod saw the pass ing o f

Bank ing Regu la t ion Act in 1949 which gave wide powers to

RBI to regu la te the banks and con ta ined numerous

p rov is ions fo r improv ing the qua l i ty o f bank management .

“In i t s r epor t submi t ted in 1954 , the Al l Ind ia Rura l Cred i t

Survey Commit tee recommended the c rea t ion o f one s t rong ,

in teg ra ted , s ta te sponsored , s ta te par tnered commerc ia l

bank ing ins t i tu t ion wi th an e f fec t ive mach inery o f b r anches

sp read over the whole coun t ry . In pursuance o f i t s

recommendat ions , the Imper ia l Bank was na t ional i sed and

renamed as S ta te Bank o f Ind ia f rom Ju ly 1 , 1955 .

Nat iona l i sa t ion of the Imper ia l Bank o f Ind ia hera lded the

en t ry o f pub l ic sec to r in to comme rc ia l bank ing .” 3 4

Due to

27

the commit tee ’s recommendat ions , the commerc ia l bank ing

sys tem moved to the ru ra l a reas as wel l . “The fa i lu re o f the

Pala i Cen t ra l Bank L imi ted and the Laxmi Bank Limi ted in

1960 a t t rac ted the a t t en t ion o f the Government to the ne ed

fo r p reven t ing such a happen ing in fu tu re . To p ro tec t the

in te res t s o f smal l bank depos i to rs , the Depos i t Insurance

Corpora t ion was c rea ted on January 1 , 1962 . The Soc ia l

Con t ro l over the commerc ia l bank ing sys tem wi th e f fec t

f rom February 1 , 1969 wi th the main ob jec t ives o f ach iev ing

a wider d i sposa l o f bank c red i t , p reven t ing i t s misuse ,

d i rec t ing i t s f low to p r io r i ty a reas and making i t more

e f fec t ive ins t rument o f economic deve lopment cons t i tu tes

the mos t impor tan t l andmark in the bank ing h i s to ry in the

coun t ry .”3 5

“Commerc ia l banks have done wel l in the mobi l i sa t ion

o f sav ings . By sus ta ined pub l ic i ty , e f fo r t s to b ranch ou t to

un banked a reas and be t te r se rv ice to cus tomers , they have

con t r ibu ted g rea t ly to the deve lopment o f bank ing hab i t

among the p eople . S ince 1950 -51 , bank depos i t s have

increased near ly 500 per cen t o r f ive - fo ld .”3 6

28

The t rend o f increase o f depos i t s and c red i t o f

schedu led banks i s shown be low:

Table 1.2

Trend of deposits and credit

Year Bank Depos i t s

[Rs in crores]

Bank credi t

[Rs in crores]

1951-52 820 580

1955-56 1040 760

1960-61 1750 1320

1965-66 2950 2290

1967-68 3890 3100

S o u r c e : S u n d h a r a m , K . P . M . , “ M o n e y , B a n k i n g , T r a d e a n d

F i n a n c e ” , p . 4 6 0 .

[ i i ] Post -nat ional i sa t ion Era [1969 -1991]

“ Ju ly 19 , 1969 marks an impor tan t mi les tone in the

h i s to ry o f the Ind ian Bank ing because on tha t day by a

Pres iden t ia l Ord inance , the 14 majo r Ind ian commerc ia l

banks , each hav ing to ta l depos i t s o f no t l ess than Rs .50

c ro res a t the end o f June , 1969 was na t ional i sed . ” 3 7

[Appendix A]

29

M.Gopalakr i shnan , a p rofess iona l banker s ta te s tha t

“ the s t r ik ing fea tu re o f the pos t -na t iona l i sa t ion bank ing

scene i s the rap id i ty wi th which the b ranch ne twork has

mul t ip l ied i t se l f . The ra te o f b ranch expans ion has been

unpara l le led anywhere e l s e in the wor ld” 3 8

“The ch ie f

ob jec t ive o f bank na t iona l i sa t ion was to sp read bank ing

fac i l i t i e s and thereby to c rea te bank ing hab i t in

economica l ly backward a reas and open b ranches par t i cu la r ly

in ru ra l a reas wi th a v iew to p romot ing rap id deve lopment

o f the these a reas .” 3 9

“ In th i s pos t na t iona l i sa t ion per iod

the emphas i s was on the opening o f l a rge number o f

b ranches in ru ra l and semi -u rban a reas , backward reg ions

and s ta tes which were h i ther to under banked . Be tween 1969

and 1991 , the to ta l number o f b r anches increased near ly

e igh t fo ld f rom 8 ,262 to 50 ,220 . The bu lk o f th i s inc rease

was on accoun t o f ru ra l b ranches . The share o f ru ra l and

semi -u rban b ranches combined in the to ta l number o f

b ranches reached 76 percen t in 1991 whi le i t was on ly 26

per cen t in 1969 .” 4 0

“To he lp the commerc ia l banks march

towards v i l l ages , the Reserve bank fo rmula ted the Lead

Bank Scheme [LBS] which was in t roduced in December ,

30

1969 . The es tab l i shment o f Regiona l Rura l banks in the

coun t ry marks ano ther impor tan t l andmark i n the bank ing

h i s to ry o f the coun t ry . The main ob jec t ive o f es tab l i sh ing

the RRBs i s to p rov ide c red i t and o ther fac i l i t i e s , e spec ia l ly

to the smal l and marg ina l fa rmers , ag r icu l tu ra l l abourers ,

ar t i sans and smal l en t repreneurs in ru ra l a reas .”4 1

“Pol ic ies ,

a t tha t t ime , ensured c red i t f lows to ce r ta in impor tan t

sec to rs o f the economy. Impor tan t ly , the Government a l so

used the bank ing sec to r a s an ins t rument to f inance i t s own

def ic i t . Whi le th i s was fac i l i t a ted th rough h igh Cash

Reserve Rat io [CRR] and S ta tu to ry L iqu id i ty Ra t io [SLR] to

keep the bor rowing cos t o f the Government low, the in te res t

ra te on bank loan was f ixed a t lower than marke t ra tes .

Along wi th h igh CRR and SLR, the opera t iona l f reedom of

the banks was cur ta i l ed wi th h igh p r io r i ty lend ing n orms [as

h igh as 40 per cen t o f the to ta l l end ing] . Whi le some of

these measures were adopted to enhance soc ia l wel fa re , they

a f fec ted the e f f i c iency and p roduc t iv i ty o f the bank ing

sec to r adverse ly . Also , due to the expans ionary po l icy

pursued by the RBI , banks had to open a ce r ta in number o f

b ranches in the ru ra l a reas . Many o f these b ranches were

31

economica l ly no t v iab le due to which the number o f loss

mak ing b ranches increased which whi t t l ed away the

resources o f the bank ing indus t ry . Fur ther , due to

res t r i c t ions on the opera t ions o f p r iva te and fo re ign banks

the dominance o f the pub l ic sec to r banks p reva i led ,

resu l t ing in l ack o f compet i t ion .” 4 2

“Af te r the na t iona l i sa t ion o f 14 majo r banks on Ju ly

19 , 1969 and es tab l i shment o f RRBs, ano ther majo r

deve lopment in the sphere o f comme rc ia l bank ing was the

na t iona l i sa t ion on Apr i l 15 , 1980 o f s ix more banks in the

p r iva te sec to r hav ing to ta l depos i t s no t l ess than Rs .200

cro res in Ind ia as on March 14 , 1980 .” 4 3

[Appendix A] .

One more mi les tone in the deve lo pment o f the bank ing

sec to r i s the es tab l i shment o f the Nat iona l Bank fo r

Agr icu l tu re and Rura l Deve lopment [NABARD] on Ju ly 12 ,

1982 for p rov id ing c red i t fo r p romot ion o f ag r icu l tu re ,

smal l - sca le indus t r ies , co t tage and v i l l age indus t r ies ,

hand ic ra f t s and o ther ru ra l c ra f t s and o ther a l l i ed economic

ac t iv i t i e s in ru ra l a reas .

32

[ i i i ] Post - l ibera l i sa t ion Era [ from 1991 onwards]

“The per iod o f re fo rms in Ind ian bank ing commenced

in the second ha l f o f 1991 . The Government o f Ind ia

appo in ted Naras imham Commit t ee , which sugges ted su i tab le

measures . The recommendat ions made by th i s h igh - leve l

commit tee on the f inanc ia l sec to r re fo rms p rov ided the b lue

p r in t fo r bank ing re fo rms in Ind ia . The re forms sugges ted by

the Naras imham Commit tee t r i ed to enhance the e f f ic i ency

and v iab i l i ty o f the banking sys tem.” 4 4

“Accord ing to

Dr.C.Rangara jan , fo rmer Governor , Reserve Bank o f Ind ia ,

the cen t ra l ob jec t ive o f re fo rm in the f inanc ia l sec to r has

been to improve the e f f ic iency , compet i t iveness and

p roduc t iv i ty o f the sys te m.” 4 5

The main reason fo r the

appo in tment o f the Naras imham Commit tee by the

Government was the unsa t i s fac to ry per fo rmance o f the

banks . The f inanc ia l p ic tu re o f the banks was very g loomy

in 1991 . “The opera t iona l e f f ic iency o f bank ing sys tem had

been unsa t i s fac to ry charac te r i sed by low pro f i t ab i l i ty , h igh

and g rowing non per fo rming asse t s and re la t ive ly low

cap i ta l . In 1992 -93 , the ne t p ro f i t s o f pub l ic sec to r banks

were [ - ] 1 .00 per cen t o f work ing funds . Severa l banks were

33

in fac t no t in a pos i t ion to m ake adequa te p rov is ion fo r

doub t fu l deb ts . The pa id -up cap i ta l and rese rves to depos i t s

o f pub l ic sec to r banks was a round 2 .85 per cen t in 1990 -91 ,

which was much lower than the in te rna t iona l s tandards . The

ba lance shee t per fo rmance o f bank ing sec to r was t hus a

mixed one which was la rge in asse t base , s t rong in widen ing

the c red i t coverage , bu t weak as fa r as v iab i l i ty and

sus ta inab i l i ty was concerned .” 4 6

“Deregu la t ion , en t ry of

pr iva te banks , eas ing o f S ta tu to ry L iqu id i ty Ra t io [SLR] and

Cash Reserve Rat i o [CRR], p rov id ing more f reedom to banks

fo r f ix ing in te res t ra tes on advances /depos i t s , r ec ru i tmen t

po l ic ies , b ranch ne twork , e tc . were in i t i a ted on the

recommendat ions o f the Commit tee . Fur ther , p ruden t ia l

norms fo r c lass i f i ca t ion o f NPAs were in t roduced wi th

adop t ion o f p rov is ion ing as per the g lobal s tandards . New

and exc i t ing bank ing p roduc ts l ike F lex i depos i t s , r e t a i l

loans and fo rex bank ing were in t roduced . Use o f in te rne t

based bank ing , phone bank ing , ATMs and o ther

t echno log ica l too l s improved ef f ic iency , economy and

e f fec t iveness in the i r work ing . 4 7 “

A s t rong and e f f ic ien t

f inanc ia l sys tem i s c r i t i ca l to the a t t a inment o f the

34

ob jec t ives o f c rea t ing a marke t -d r iven , p roduct ive and

compet i t ive economy. F inanc ia l s t ab i l i ty requ i res

appropr ia te ac t io n bo th a t the macro and micro leve l s in

t e rms o f ins t i tu t ions , marke t s and in f ras t ruc tu re . A major

e lement o f f inanc ia l sec to r re fo rms in Ind ia has been a se t

o f p ruden t ia l measures a imed a t impar t ing s t rength to the

bank ing sys tem as wel l as ensur ing sa fe ty and soundness

th rough g rea te r t ransparency , accoun tab i l i ty and pub l ic

cred ib i l i ty .” 4 8 “

These re fo rms a re expec ted to have an

impac t on the opera t ions o f banks . Wi th reduced s ta tu to ry

requ i rements , banks wi l l have more funds a t the i r d i sposa l

fo r commerc ia l l end ing . And in te res t ra t e l ibe ra l i sa t ion i s

expec ted to b r ing f lex ib i l i ty and compet i t ion in to the

bank ing sys tem. Compet i t ion i s a l so in fused by open ing up

the banking sec tor fo r the p r iva te and fo re ign banks . Along

wi th these f l ex ib i l i t i e s , ce r ta in regu la to ry re fo rms we re a l so

in t roduced , which were mean t to make s t rong enough the

banks to face f luc tua t ions in the economy. Overa l l , these

re fo rms a re a imed a t improv ing the per fo rmance o f banks .”4 9

“The f i r s t phase o f banking sec to r re fo rms s ta r t ed in

November , 1991 and the second phase began in Apr i l 1998

35

on the bas i s o f the Naras imham Commit tee ’ s

recommendat ions . “ In the f i r s t phase o f bank ing re fo rms ,

the focus was on a r res t ing qua l i ty de te r io ra t ion o f

per fo rmance o f banks judged by parameter s o f as se t qua l i ty ,

p ro f i t ab i l i ty and ne t wor th . The task in the second phase o f

re fo rms was to draw up s t ra tegy fo r enhanc ing the ab i l i ty o f

bank ing sys tem to mee t cha l lenges o f in te rna t iona l

compet i t ion and adopt i t s func t ion ing to chang ing

env i ronment .”5 0

Deve lopment o f Commercia l banks a f ter nat iona l i sa t ion

Nat iona l i sa t ion , which was adop ted as a soc ia l con t ro l

measure by the Government o f Ind ia had a t remendous

impac t on the g rowth o f the commerc ia l banks . There was

s ign i f ican t g rowth in the number o f banks and b ranches ,

espec ia l ly in rura l and semi -u rban a reas , which were

h i ther to unexp lo red so fa r by the bank ing sec to r . There was

subs tan t ia l g rowth in depos i t s and advances by bank

b ranches .

36

Expans ion o f commercia l banks

There has been a vo luminous g rowth in the number o f

commerc ia l banks in Ind ia s ince the na t iona l i sa t ion o f

commerc ia l banks in 1969 . The number o f schedu led

commerc ia l banks has increased 2 .45 t imes in 2007 when

compared to 1969 when the banks were na t iona l i sed which

can be c lea r ly unders to od wi th the he lp o f the t ab le 1 .3 .

37

Table 1 .3

Progress o f Commercia l banks in India [1969 -2007]

No. o f

Commerc ia l

Banks

June

1969

March

1999

March

2000

March

2001

March

2002

March

2003

March

2004

March

2005

March

2006

March

2007

Scheduled

banks 73 302 297 296 294 289 286 284 218 179

Non-

scheduled

banks

16 1 5 4 5 5 4 4 4

89 303 297 301 298 294 291 288 222 183

Source : www.rb i .o rg . in .

Th is has been represen ted in the char t No . 1 .4 :

38

Branch expans ion

“The per iod fo l lowing the na t iona l i sa t ion o f majo r

commerc ia l banks wi tnessed an unprecedented g rowth in the

b ranch ne twork o f banks . Th is phenomenal increase has

b rough t abou t a wider spa t ia l and func t iona l sp read of

bank ing fac i l i t i e s in the count ry . I t i s no t mere ly the

increase in the number o f bank ing of f ices , bu t the i r

d i s t r ibu t ion over the re l a t ive ly backward and h i ther to un

banked areas tha t i s s ign i f ican t . ” 5 1

The g rowth o f b ranches o f Commerc ia l banks i s

dep ic ted in th e be low ment ioned tab le No .1 .4 as fo l lows:

39

Table 1 .4

Growth o f branches in Commercia l banks in India [1969-

2007]

Year Rural Semi -urban Urban Metro Tota l

No . Percent No. Percent No. Percent No. Percent No. Percent

1969 1832 22 .4 3322 40 .1 1447 17 .5 1661 20 8262 100

1991 35042 58 .3 11323 18 .8 8081 13 .4 5667 9 .4 60113 100

2002 32423 49 14688 22 10540 16 8625 13 66276 100

2003 32315 49 14786 22 10665 16 8644 13 66410 100

2004 32080 47 .9 15018 22 .4 10990 16 .4 8882 13 .2 66970 100

2005 30755 44 .9 15174 22 .1 11678 17 10942 16 68549 100

2006 30776 44 .3 15370 22 .1 12008 17 .3 11263 16 .2 69417 100

2007 30633 42 .7 16310 22 .7 12925 18 11913 16 .6 71781 100

S o u r c e : O v e r v i e w o f B a n k i n g D e v e l o p m e n t 1 9 4 7 - 2 0 0 7 ,

S h r i . D . T . P a i , p p . 1 2 4 - 1 2 5 .

Th is has been represen ted in char t No .1 .5 :

40

There has been a man i fo ld increase in the number o f

b ranches a f te r na t iona l i sa t ion . As a resu l t , the number of

b ranches has increased f rom 8262 in 1969 to 71781 in June

2007 .

Depos i t mobi l i sa t ion and Credi t deployment

Mobi l i s ing the sav ings o f the pub l ic i s one o f the

p r ime func t ions o f commerc ia l banks . Nat iona l i sa t ion has

resu l ted in pub l ic conf idence and as a r e su l t the depos i t s

have increased spec tacu la r ly f rom Rs .5173 c ro res in 1969 to

Rs .26 ,08 ,309 c rores in March 2007 record ing an 504 fo ld

increase in depos i t s s ince na t iona l i sa t ion .

The very purpose o f mobi l i s ing depos i t s i s to dep loy

the amount in a p ro f i t ab le way . The advances made by

commerc ia l banks have subs tan t ia l ly increased f rom Rs .3729

c ro res in 1969 to R s .19 ,28 ,913 c ro res .

The tab le 1 .5 dep ic t s the da ta regard ing the depos i t s

and advances o f commerc ia l banks in Ind ia be tween 1969

and 2007 .

41

Table 1 .5

Depos i t s and advances o f commercia l banks in India

[1969-2007]

[Rupees in Crores]

Year

Depos i t s

Advances

Credi t

depos i t

ra t io %

1969 5173 3729 72 .1

1991 200036 132510 66 .2

2002 1100454 637943 57 .9

2003 1304347 741770 56 .9

2004 1533052 856685 55 .9

2005 1708610 1092008 63 .9

2006 2109049 1507077 71 .5

2007 2608309 1928913 74

S o u r c e : O v e r v i e w o f B a n k i n g D e v e l o p m e n t , S h r i . D . T . P a i ,

p . 1 2 3 .

Thi s t ab l e ha s been r ep r e se n t ed i n cha r t No . 1 .6 :

42

The Cred i t depos i t r a t io [CDR] i s one o f the measur ing

rods o f the f inanc ia l per fo rmance o f commerc ia l banks .

“Cred i t depos i t r a t io i s the p ropor t ion o f loan -asse t s c rea ted

by banks f rom the depos i t s rece ived . The h igher the ra t io ,

the h igher the loan -asse t s c rea ted f rom depos i t s . The c red i t

depos i t r a t io revea l s the ef f ic iency wi th which the

commerc ia l and f inanc ia l in te rmedia r ies a re t app ing sav ings

f rom the ava i lab le source s and channel i s ing them in to

var ious p roduc t ive ac t iv i t i es o f the economy . ” 5 2

The CDR

was 72 .1 per cen t in 1969 i . e . a t the t ime o f na t iona l i sa t ion .

In 1991 , i t r educed to 66 .2 per cen t . I t fu r ther reduced to 57

per cen t a f te r which i t g radua l ly increas ed to 74 per cen t in

2007 .

The Cred i t depos i t r a t io has been worked ou t by us ing

the fo l lowing fo rmula :

Credi t depos i t ra t io = Tota l loans and advances X 100

Tota l depos i t s

The commerc ia l banks have been fac ing innumerab le

changes and cha l lenges af te r the in t roduc t ion o f f inanc ia l

re fo rms in 1991 . The coex is tence o f publ ic sec to r , p r iva te

43

sec to r and fo re ign banks has genera ted compet i t ion in

bank ing sec to r l ead ing to a s ign i f ican t improvement in

e f f i c iency and cus tomer se rv ice and the mant ra o f t oday i s

the Surviva l o f the f i t t es t .

S ta tement o f the Prob lem

Cred i t i s a very scarce resource par t i cu la r ly in a

coun t ry l ike Ind ia . Th is i s very much t rue in case o f p r io r i ty

sec to r loans where the Government p lays a very impor tan t

ro le in p rov is ion o f c red i t to the economica l ly weaker

sec t ions o f the soc ie ty , which have a l l a long been neg lec ted

by the secur i ty o r ien ted bank ing sys tem. “ In a p ruden t ia l

economy, bo th lend ing and recovery a re l ike b rea th ing ou t

and b rea th ing in . The one i s no t poss ib le wi th ou t the

o ther .”5 3

In o ther words , wi thou t recovery the banking cyc le

i s no t comple te . Recovery o f p r io r i ty sec to r loans i s the

pers i s ten t p rob lem faced by the commerc ia l bankers . Whi le

inadequate and improper a l loca t ion o f c red i t endangers the

bas ic soc io -economic ph i losophy o f the coun t ry , mount ing

overdues o f c red i t endangers the very founda t ion on which

the bank ing sys tem res t s . The p rob lem of overdues i s

44

phenomenal in respec t o f p r io r i ty sec to rs . Th is has no t on ly

cu r ta i l ed the recyc l ing of funds , bu t a l so imposed on the

banks’ , s t a tu to ry p rov is ion ing agains t sub - s tandard ,

doub t fu l and bad deb ts . The t imely recovery o f funds len t , i s

a mus t fo r con t inuous recyc l ing o f funds . P i l ing o f overdues

resu l t s in poor recyc l ing o f funds , which in tu rn dep ic t s

poor recovery management by the com merc ia l banks . N on-

repayment o f loans by bor rowers , on the one hand , l ead to

b lock ing up o f funds in the hands o f few, and u l t imate ly the

benef i t s o f c red i t canno t be passed on to a l a rge sec t ion o f

peop le who a re in d i re ne ed o f c red i t . Mount ing o f overdues ,

on the o ther hand , weakens the co rpora te s t reng th o f the

commerc ia l banks . Therefo re , a jud ic ious dep loyment o f

c red i t and t imely repayment o f c red i t a re very impor tan t fo r

hea l thy and e f fec t ive func t ion ing o f any bank in g sys tem.

The p resen t s tudy becomes essen t ia l now to f ind ou t the

measures adop ted by the commerc ia l b anks fo r recover ing

the p r io r i ty sec to r loans .

45

Scope o f the s tudy

The s tudy i s conf ined to T i ruch i rappa l l i d i s t r i c t . Areas

ou ts ide T i ruch i rappa l l i d i s t r i c t a re no t covered in th i s s tudy .

For compara t ive ana lys i s , on ly the pub l ic sec to r and p r iva te

sec to r have been taken in to cons idera t ion . The coopera t ive

banks , Reg iona l Rura l Banks , fo re ign banks and Loca l Area

Banks a re beyond the purv iew of the s tud y . The researcher

has conf ined her s tudy on ly to recovery o f p r io r i ty sec to r

loans . The o ther loans d i sbursed by commerc ia l banks a re

no t covered in the s tudy . Even though , there a re 22 banks in

the pub l ic sec to r and 13 banks in the p r iva te sec to r , on ly 4

banks f rom the pub l ic sec to r and 4 banks f rom the p r iva te

sec to r have been chosen fo r the s tudy . Only 200 bor rowers

have been chosen fo r the s tudy .

Objec t ives o f the s tudy

The p r imary ob jec t ive o f the s tudy i s to eva lua te the

recovery per fo rmance o f comm erc ia l banks regard ing

p r io r i ty sec to r loans in Ti ruch i rappa l l i d i s t r i c t and to make

a compar i son o f the recovery per fo rmance o f pub l ic sec to r

banks wi th tha t o f the p r iva te sec to r banks .

46

The fo l lowing a re the ob jec t ives o f the s tudy :

1 . To s tudy abou t t he incep t ion and deve lopm ent o f

commerc ia l banks in Ind ia .

2 . To c rea te a genera l awareness abou t the p r io r i ty sec to r

loans p rov ided by commerc ia l banks and the measures

adop ted by the bankers in recover ing the loans .

3 . To make a compara t ive s tudy abou t t he p r io r i ty sec to r

loans demanded by pub l ic and pr iva te sec to r commerc ia l

banks and to f ind ou t the ex ten t to which such loans have

been recovered in T i ruch i rappa l l i Dis t r i c t .

4 . To make a compar i son o f the repayment per fo rmance o f

bor rowers o f pub l ic a nd p r iva te sec to r banks in

T i ruch i rappa l l i d i s t r i c t .

5 . To f ind ou t the reasons fo r poor recovery o f p r io r i ty

sec to r loans by the commerc ia l bankers and non-payment o f

p r io r i ty sec to r loans by bor rowers wi th in the s t ipu la ted

t ime .

6 . To g ive sugges t ions to the bankers for improving the

recovery per fo rmance .

47

H ypo t hese s

Hypo theses f ramed for dec id ing the repayment

per fo rmance o f bor rowers

Sl. No. Variable Hypothesis

[i] Sex There is no significant relationship

between sex and repayment performance

[ii] Education Education does not have any influence

on the repayment performance

[iii] Family size Family size does not determine the

repayment performance of the borrower

[iv] Marital status

There is no significant relationship

between marital status and repayment

performance

[v]

Number of earning

members in the

family

Repayment performance of the borrower

does not depend on the number of

earning members in the family

[vi] Age Age of the borrower does not have any

influence on repayment performance

[vii] Family structure

There is no significant relationship

between family structure and repayment

performance

[viii] Monthly income of

the family

Repayment performance does not

depend on the monthly income of the

family

[ix] Status of

employment

Status of employment does not

determine the repayment performance

of the borrower

[x] Adequacy of loan

Adequacy of loan does not determine

the repayment performance of the

borrower

48

Concep tua l Def in i t ions

Clar i ty o f var ious concep ts used in a s tudy i s very

much requ i red fo r a mean ingfu l sc ien t i f i c s tudy . I t

f ac i l i t a te s the researcher to have a be t te r unders tand ing and

percep t ion o f the p rob lems under inves t iga t ion , as impor tan t

concep ts used in the s tudy a re made c lea r and any chance

fo r misunders tand ing i s avo ided . Such concep tua l i sa t ion no t

on ly he lps the researcher in the research work bu t a l so

p rov ides be t te r unders tand ing to anybody who goes th rough

the thes i s .

1 . Demand : Demand re fe rs to the aggrega te o f p r inc ipa l and

in te res t due dur ing the f inanc ia l year unde r cons idera t ion . I t

inc ludes overdues o f p rev ious years bu t exc ludes demand fo r

loans wr i t t en o f f o r reschedu led .

2 . “Recovery : The amount tha t has a l ready been rea l i sed i s

ca l led recovery . Recovery a lways re fe rs to a par t i cu la r

per iod and no t a t a par t i cu la r po in t o f t ime . I t i s genera l ly

re la ted to the demand fo r recovery dur ing the re fe rence

per iod . Thus , a cen t percen t recovery means tha t the to ta l

amount due up to the re fe rence per iod on ly has been

49

recovered . I t does no t mean tha t the en t i re loan has b een

recovered , fo r there may be ins ta l men ts o f loan tha t a re s t i l l

to fa l l due .” 5 4

3 . Recovery ra te : Recovery ra te i s def ined as tha t par t o f

to ta l demand [ i . e . overdue demand p lus cu r ren t demand]

co l lec ted by the bank f rom borrowers . I t exc ludes any

repayment made by Government ins t i tu t ions on beha l f o f

bor rowers .

4 . Del inquency : De l inquency re fe rs to shor t - run de lays in

repayment .

5 . Defaul t : Defau l t re fe rs to non - repayment o f p r inc ipa l and

in te res t tha t becomes due and payab le . I t occurs when there

i s any v io la t ion in the loan con t rac t .

6 . Non-defaul ters : Non-defau l te r s a re those bor rowers who

repay the i r loan amount a long wi th s t ipu la ted ra te o f

in te res t on o r befo re the due da te .

7 . Defaul ters : Those bor rowers who do no t repay the loan

amount a long w i th in te res t on the due da te a re iden t i f i ed as

defau l te r s .

50

8 . Wi l fu l defaul ters : Wi l fu l defau l te r s a re those who do no t

repay the loan amount due toge ther wi th in te res t in sp i te o f

the fac t tha t they have su rp lus income over expend i ture ,

which i s adequa te fo r loan se rv ice .

9 . Non-wi l fu l defaul ters : Bor rowers who a re wi l l ing to

repay the loan amount wi th in te res t in sp i te o f the fac t tha t

the i r incrementa l income i s inadequa te for loan se rv ice a re

non-wi l fu l defau l te r s .

10 . “Outs tand ings : The pr inc ipa l p l us in teres t tha t remains

to be recovered i s ca l led ou ts tand ings . The ou ts tand ings

a lways re fe r to a par t i cu la r da te , say as on 31s t

December or

as on 30t h

June .” 5 5

11 . “Overdues: The amount tha t i s payab le on a par t i cu la r

da te bu t no t recovered by tha t d a te i s ca l l ed overdue .” 5 6

12 . “Cred i t Depos i t ra t io : Cred i t depos i t r a t io i s the

p ropor t ion o f loan -asse t s c rea ted by banks f rom the depos i t s

rece ived . The h igher the ra t io , the h igher the loan -asse t s

c rea ted f rom depos i t s . The c red i t depos i t r a t io revea l s the

e f f i c iency wi th which the commerc ia l and f inancia l

in te rmedia r ies a re t app ing sav ings f rom the ava i lab le

51

sources and channe l i s ing them in to var ious produc t ive

ac t iv i t i e s o f the economy.” 5 7

13 . [ i ] Rura l branch: Rura l b ranch i s a b ranch , whic h i s

loca ted in an a rea wi th a popu la t ion less than 10000 [as per

1991 census] .

[ i i ] Semi urban branch: Semi u rban branch i s a b ranch ,

which i s loca ted in an a rea wi th a popu la t ion on 10000 to 1

l akh .

[ i i i ] Urban branch: Urban b ranch i s a b ranch , w hich i s

loca ted in an a rea wi th a popu la t ion o f 1 l akh to 10 lakhs .

[ i v ] Metropo l i tan branch: Metropo l i t an b ranch i s a

b ranch , which i s loca ted in an a rea wi th a popu la t ion o f 10

lakhs and more .

14 .ANBC or cred i t equ iva lent o f Off -Balance Sheet

Exposures: Th is deno tes the ou ts tand ing as on March 31 o f

the p rev ious year . For the purpose o f p r io r i ty sec to r l end ing ,

Adjus ted NBC (ANBC) deno tes NBC p lus inves tmen ts made

by banks in non -SLR bonds he ld in HTM category

52

Design of the s tudy

Befo re admin is te r i ng the in te rv iew schedule to the 200

responden ts , a p i lo t s tudy was conduc ted by the researcher .

The in te rv iew schedu le was p rov ided to 30 bor rowers and

the ques t ions , which were no t p roper ly unders tood by them,

were modi f ied . Af te r mak ing necessary change s in the

in te rv iew schedu le , i t was g iven to 200 bor rowers fo r

s tudy ing the i r repayment behav iour . Out o f the 200

bor rowers , 145 responden ts bor rowed f rom the pub l ic sec to r

banks and 55 responden ts bor rowed f rom the p r iva te sec to r

banks .

Methodology

Data Base

The p resen t s tudy i s an empi r ica l one based on su rvey

method . Data were co l lec ted f rom both p r imary and

secondary sources .

[ i ] Pr imary Data

Pr imary da ta were co l lec ted f rom the o f f ic ia l s and

bor rowers o f the sample un i t s o f the pub l ic and the p r iva te

sec to r banks wi th the he lp o f in te rv iew schedu les . The

53

researcher has used in te rv iew schedu le fo r co l lec t ing da ta

f rom the bor rowers as the sample responden ts cons t i tu ted

bo th educa ted and less educa ted . In the in te rv iew schedu le ,

d icho tomous ques t ions [yes o r no ] and mul t ip le -cho ice

ques t ions were g iven . The responses to these ques t ions were

co l lec ted . Data was co l lec ted f rom the borrowers to s tudy

abou t the repayment per fo rmance o f the bor rowers dur ing

November 2009 .

[ i i ] Secondary Data

The secondary da ta were co l lec ted f rom the fo l lowing

sources :

[a ] Annua l repor t s o f the Sample banks ,

[b ] Ind ian Bank Assoc ia t ion’s Bul le t ins ,

[ c ] Reserve Bank o f Ind ia [RBI] pub l ica t ions v iz . ,

[1 ] RBI Bul le t ins

[2 ] Banking S ta t i s t i cs

[3 ] Repor t on Trend and progress o f B ank ing in Ind ia

[4 ] S ta t i s t i ca l t ab les re la t ing to banks in Ind ia ,

[d ] S ta te Bank o f Ind ia Month ly Rev iew ,

54

[e ] House magaz ines o f the sample banks ,

[ f ] P rev ious s tud ies ,

[g ] Journa l s on Bank ing s tud ies and

[h ] Annua l Cred i t P lan o f the Ind ian Overse as Bank , the

l ead bank o f the d i s t r i c t and

[ i ] S ta t i s t i ca l Handbook o f Tami l Nadu .

The researcher took lo t o f pa ins in co l lec t ing the

secondary da ta f rom the bankers because they were re luc tan t

to revea l the i r s ta tus regard ing the recovery o f loans . The

bankers were hes i tan t to p rov ide the de ta i l s because i t may

g ive an adverse p ic tu re abou t the i r e f f i c iency in recovery

management . In sp i te o f a l l these d i f f i cu l t i es , the r esearcher

was ab le to ob ta in the de ta i l s o f loans ou ts tand ing , loans

recovered and ov erdues fo r T i ruch i rappal l i d i s t r i c t fo r the

s tudy per iod 2002 -07 . The s tudy has been conf ined to 2002-

07 because da ta regard ing recovery i s no t ava i lab le a f te r

tha t per iod due to waiver o f ag r icu l tu ra l loans .

55

Construc t ion o f too l s

The in te rv iew schedu le was used fo r co l lec t ing da ta

f rom the bor rowers . Th is i s because the responden ts

cons t i tu ted bo th l i t e ra te and i l l i t e ra te bor rowers . For

cons t ruc t ing the in te rv iew schedu le fo r borrowers , p rev ious

s tud ies were re fe r red . Apar t f rom the prev ious s tud ies ,

bankers were a l so consu l ted . Wi th the he lp o f the

in fo rmat ion ga thered , the in te rv iew schedu le was p repared .

Af te r p repar ing the in te rv iew schedu le , i t was p re - tes ted

wi th 30 bor rowers [15 f rom the pub l ic sec to r banks and 15

f rom the p r iva te sec to r banks] an d the ques t ions , which were

no t p roper ly unders tood by them, were modi f ied . Af ter

mak ing necessary changes in the in te rv iew schedu le , i t was

g iven to 200 bor rowers fo r s tudy ing the i r repayment

behav iour .

Sampl ing Des ign

The publ ic and the p r iva te sec to r bank b ranches in

T i ruch i rappa l l i d i s t r i c t cons t i tu te the un iverse o f th i s

research work . The l i s t o f these banks was ob ta ined f rom the

reg iona l o f f ice o f Ind ian Overseas Bank .

56

[ i ] Se lec t ion o f Area

T i ruch i rappa l l i Dis t r i c t has been chosen fo r the s tudy

because i t i s the four th la rges t c i ty o f the Ind ian S ta te o f

Tami l Nadu [a f te r Chenna i , Co imbato re and Madura i ] . Mul t i

va r ious c rops l ike paddy , sugarcane , g roundnu t , sunf lower ,

e tc a re g rown in the d i s t r i c t and agr icu l tu re i s the main

occupa t ion fo r mos t o f the peop le in the d i s t r i c t . Apar t f rom

agr icu l tu re , the re a re severa l med ium and la rge indus t r ia l

un i t s l ike BHEL, Dalmia Cements , Ko thar i Sugars , EID

Par ry Sugars , Ord inance fac to ry and a ra i lway workshop .

The d i s t r i c t i s no ted fo r syn the t ic gem cu t t ing indus t r ies and

ready-made garments . I t i s a l so famous fo r a r t i f i c i a l

d iamonds , c igar s , hand loom, c lo th , g lass bangles and

wooden and c lay toys . The popu la t ion as per 2001 census i s

24 ,18 ,366 which cons t i tu tes 12 ,08 ,535 males and 12 ,09 ,832

females . There i s humpty number o f educa t iona l ins t i tu t ions

ca te r ing to the var ied in te res t s o f s tudy communi ty .

There fo re , the re i s enough po ten t ia l fo r bo th th e banks and

the cus tomers u t i l i s ing the se rv ices to deve lop mutua l ly in

the d i s t r i c t . Bes ides , the researcher re s ides in th i s a rea . The

57

researcher has adopted convenience sampl ing fo r se lec t ing

the a rea .

[ i i ] Se lec t ion o f Banks

In T i ruch i rappa l l i Dis t r i c t , the re a re 35 banks wi th 191

b ranches [as on 31s t

March 2005] [Vide Append ix A] . As the

number o f b ranches in t he d i s t r i c t i s l a rge in number , the

researcher has adopted the purpos ive sampl ing techn ique to

se lec t the banks and the bank b ranches .

Out o f the 35 banks , 4 publ ic sec to r banks hav ing more

than 10 b ranches and 4 p r iva te sec to r banks hav ing more

than 6 branches were chosen fo r the s tudy . The four pub l ic

sec to r banks chosen were S ta te Bank o f Ind ia , Canara Bank ,

Ind ian Bank and Ind ian Overseas Bank . The four p r iva te

sec to r banks chosen were ICICI Bank Ltd . , Karur Vysya

Bank L td . , Lakshmi Vi las Bank Ltd . and Sou th Ind ian Bank

L td .

[ i i i ] Se lec t ion o f Branches

In aggrega te , the re a re 93 b ranches in the four pub l ic

sec to r banks chosen fo r the s tudy ou t o f which 9 b ranches

cons t i tu t ing 10 per cen t o f the un iverse has been chosen for

58

the s tudy . L ike wise , the re a re 36 b ranches in the four

p r iva te sec to r banks chos en fo r the s tudy ou t o f which 4

b ranches cons t i tu t ing 10 per cen t o f the un iverse has been

chosen . To ta l ly 13 b ranches cover ing 9 b ranches f rom pub l ic

sec to r and 4 b ranches f rom pr iva te sec to r have been s e lec ted

fo r the s tudy . The b ranches and the bor rowers se lec ted fo r

the s tudy f rom the pub l ic sec to r banks were as fo l lows:

Publ ic Sector Banks

S l .

No .

Name of the

Bank

Tota l

No .

o f

branches

Sample

s i ze o f

branches

Sample

borrowers

1 S ta te Bank o f

Ind ia 22 2 29

2 Canara Bank 14 1 29

3 Ind ian Bank 26 2 33

4 Ind ian

Overseas Bank 31 4 54

Tota l 93 9 145

S o u r c e : A n n u a l C r e d i t P l a n , I n d i a n O v e r s e a s B a n k , L e a d B a n k o f

T i r u c h i r a p p a l l i d i s t r i c t

Like wise , the b ranches and the bor rowers chosen f rom

the p r iva te sec to r banks were as fo l lows:

59

Private Sector Banks

S l .

No .

Name of the

Bank

Tota l

No .

o f

branches

Sample

s i ze o f

branches

Sample

borrowers

1 ICICI Bank

L td 9 1 16

2 Karur Vysya

Bank L td 10 1 10

3 Lakshmi Vi las

Bank L td 10 1 18

4 Sou th Ind ian

Bank L td 7 1 11

Tota l 36 4 55

S o u r c e : A n n u a l C r e d i t P l a n , I n d i a n O v e r s e a s B a n k , L e a d B a n k o f

Tiruchirappalli district

[ i v ] Se lec t ion o f borrowers

Tota l ly , 200 bor rowers were chosen fo r the s tudy .

These bor rowers were in te rv iewed wi th the he lp o f an

in te rv iew schedu le . The researcher has adop ted the non -

probab i l i ty sampl ing method in se lec t ing the bor rowers .

Th is i s because the bankers have to main ta in secrecy in

main ta in ing the bor rowal accoun ts o f the i r cus tomers .

Accord ing to Sec t ion 13 o f t he Bank ing Companies

[Acqu is i t ion and Transfer o f under tak ings] Act , 1970 , the

commerc ia l banks shou ld no t revea l any mat te r concern ing

60

the i r cus tomers . In th i s s i tua t ion , i t was no t poss ib le fo r the

researcher to ge t the l i s t o f cus tomers and the i r de ta i l s

d i rec t ly f rom the banks . Among the non -probab i l i ty

sampl ing methods , t he researcher has adop ted judgment

sampl ing fo r se lec t ing the bor rowers . She had to go d i rec t ly

to the banks in o rder to co l lec t the da ta re la t ing to the

repayment per formance o f the b or rowers . The researcher

in te rv iewed those bor rowers who were wi l l ing to prov ide the

requ i red in fo rmat ion . Co l lec t ing in fo rmat ion f rom the

defau l te r s was indeed a fo rmidab le t ask for the researcher .

Among the 200 bor rowers , the re were p rompt repayers and

defau l te r s . Depend ing upon the reasons g iven by the

bor rowers fo r non -payment o f the i r dues , the bor rowers were

c lass i f i ed in to wi l fu l and non -wi l fu l defau l te r s . Non -wi l fu l

defau l t a r i ses due to na tu ra l ca lami t ies , lo s s in bus iness o r

indus t ry , misunders tan d ing among the members in a se l f -

he lp g roup , fami ly p rob lems and loss o f job . Wi l fu l defau l t

ar i ses due to misa l loca t ion o f funds bor rowed , bor rowers ’

expec ta t ion o f waiver o f loan by the Government and no t

wi l l ing to repay fo r no reason .

61

Per iod of S tudy

The s tudy covers a per iod o f f ive years f rom 2002-03

to 2006-07 .

Fie ld work

The researcher herse l f conduc ted the f ie ld su rvey ,

which was requ i red for the s tudy . Af te r ge t t ing p r ior

permiss ion f rom the branch managers , the researcher

co l lec ted the da ta f rom the 200 bor rowers . I t took near ly

one month fo r the researcher to co l lec t the requ i red

in fo rmat ion f rom the bor rowers .

Process ing o f da ta

Af te r co l lec t ing the requ i red in fo rmat ion f rom the

bor rowers th rough the in te rv iew schedu le , the comple ted

schedu les were ed i ted proper ly to make them ready fo r

fu r ther p rocess ing . For the purpose o f cod i f ica t ion o f the

da ta co l lec ted , the mas te r t ab le was p repared by the

researcher in o rder to sum up the da ta found in the in te rv iew

schedu le . Wi th the he lp o f the ma s te r t ab le , the da ta was

c lass i f i ed as per the requ i rement o f the researcher . ‘Count

and ta l ly method’ was adop ted to de te rmine the f requenc ies

62

of each c lass i f i ca t ion tab le . Al l ca lcu la t ions were done

us ing ca lcu la to r .

Sta t i s t i ca l too l s used

Da ta co l lec t ed th rough p r imary and secondary sources

were c la ss i f i ed and g rouped wi th the he lp o f f requency

t ab les . The s ta t i s t i ca l too l s , v iz . pe rcen tages , F r iedman’s

t e s t and ch i - square t es t were used wherever necessary to

es tab l i sh the fac t s and re la t ionsh ip be twee n var iab les and to

d raw infe rences . Many o f the ca lcu la t ions were made

manua l ly wi th the he lp of hand ca lcu la to rs . Tab les , char t s ,

d iag rams and g raphs were a l so presen ted to v i sua l i se the

observa t ions and in fe rences . For t es t ing the ac tua l

hypo theses re la t ed to th i s s tudy , the re levan t s ta t i s t i ca l

hypo theses were f ramed and tes ted us ing ch i - square

d i s t r ibu t ion . The s ta t i s t i ca l nu l l hypo thes is , a l so known as

hypo thes i s o f no d i f fe rence was assumed in th i s s tudy . In

mos t o f the cases , f ive per cen t t ab le va lu es were compared

wi th the ca lcu la ted va lues o f t es t s t a t i s t i c s . Th is was done

because the in fe rences d rawn shou ld g ive 95 per cen t

accuracy .

63

Limi ta t ions o f the S tudy

The researcher took every poss ib le e f fo r t to avo id the

shor tcomings and e r ro rs in the co l lec t ion of the da ta . Grea t

ca re was exerc i sed by the resea rcher whi le b r ing ing ou t the

f ind ings and a r r iv ing a t the conc lus ions o f the s tudy . In

sp i te o f a l l e f fo r t s t aken by the researcher , the p resen t s tudy

has a few l imi ta t ions wor th men t ion ing as i t de a l s wi th the

eva lua t ion o f recovery per fo rmance o f commerc ia l banks .

[ i ] The s tudy i s conf ined to on ly the commerc ia l banks , i . e . ,

the pub l ic and the p r iva te sec to r banks . As such , the

Coopera t ive banks , Reg iona l Rura l Banks , Loca l Area Banks

and fo re ign banks a re beyond the purv iew of the s tudy .

[ i i ] The s tudy re la tes to Recovery per fo rmance o f

commerc ia l banks regard ing p r ior i ty sec to r loans on ly in

T i ruch i rappa l l i Dis t r i c t .

[ i i i ] The s tudy o f recovery per fo rmance o f commerc ia l

banks have been based on the secondary da ta p rov ided by

the banks th rough the Annua l repor t s o f the respec t ive banks

and the Annua l Act ion P lan p rov ided by the l ead bank o f the

d i s t r i c t , n amely , the Ind ian Overseas Bank . The f inanc ia l

64

pos i t ion as exh ib i ted by the annual repor t s i s t rue on ly fo r

the l as t day o f the accoun t ing year and i t may no t be

app l icab le fo r the remain ing par t o f the year .

[ iv ] For wan t o f t ime and resources , the researcher has

chosen on ly 200 responden ts us ing judgment sampl ing . The

researcher faced g rea t d i f f i cu l ty in co l lec t ing da ta f rom the

bor rowers because she had to admin is te r the in te rv iew

schedu le no t on ly to p rompt repayers bu t a l so to defau l te r s .

She was ab le to co l lec t the da ta on ly wi th the he lp o f the

respec t ive bankers .

[v ] The co l lec ted da ta m ay re f lec t the a t t i tude o f the

responden ts based on the i r exper iences whi le ge t t ing the

necessary loans f rom the commerc ia l banks .

[v ] The op in ions o f the responden ts were co l lec ted dur ing

November 2009 and hence there may be cogn i t ive changes in

the i r a t t i tude as wel l as the i r op in ions due to some ex te rna l

cues .

[v i ] In the ana lys i s o f recovery per fo rmance o f commerc ia l

banks , the to ta l number o f commerc ia l banks in bo th the

pub l ic sec to r and p r iva te sec to r vary be tween years and even

65

in the same year , they vary be tween sec tors . Th is i s due to

non-ava i lab i l i ty o f the comple te da ta about the banks in the

Dis t r i c t Cred i t P lan prepared by the l ead bank o f the

d i s t r i c t , namely , Ind ian Overseas Bank . Wi th th i s d rawback ,

the resea rcher has made the ana lys i s .

Chapter scheme

1 . Chapte r I dea l s wi th the In t roduc t ion , evo lu t ion o f

commerc ia l banking , scope , ob jec t ives , hypo theses ,

concep tua l def in i t ions , methodo logy , l imi ta t ions , and

the chap te r i s a t ion scheme o f the s tudy .

2 . Chapte r I I g ives de ta i l s abou t the research s tud ies

p rev ious ly conduc ted in recovery per fo rmance .

3 . Chapte r I I I g ives a v iv id p ic tu re abou t the p r io r i ty

sec to r loans and the recovery measures adop ted by

bankers .

4 . Chapte r IV p rov ides de ta i l s regard ing the p ro f i l e o f

the s tudy a rea i . e . , T i ruch i rappa l l i d i s t r i c t .

5 . Chapte r V makes an ana lys i s abou t the l end ing and

recovery o f p r io r i ty sec to r loans in T i ruch i rappal l i

d i s t r i c t and makes a compar i son abou t the recovery

per fo rmance o f pub l ic sec to r wi th p r iva te sec to r banks

in T i ruch i rappa l l i d i s t r i c t .

6 . Chapte r VI makes an ana ly t ica l s tudy abou t the

repayment per fo rmance o f bor rowers in

66

Tiruch i rappa l l i d i s t r i c t and makes a compara t ive s tudy

abou t the repayment per fo rmance o f bor rowers o f

pub l ic sec to r banks wi th tha t o f the p r iva te sec to r

banks .

7 . Chapte r VI I g ives the summary o f f ind ings and

sugges t ions fo r improv ing the recovery per fo rmance

o f commerc ia l banks and g ives a conc lus ion .

CHART NO. 1.5

GROWTH OF BRANCHES OF COMMERCIAL BANKS IN

INDIA [1969-2007]

0

5000

10000

15000

20000

25000

30000

35000

40000

1969 1991 2002 2003 2004 2005 2006 2007

YEAR

NU

MB

ER

OF

BR

AN

CH

ES Rural

Semi-urban

Urban

Metropolitan

CHART 1.4

0

50

100

150

200

250

300

350

Nu

mb

er o

f b

an

ks

1969 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year

PROGRESS OF COMMERCIAL BANKS IN INDIA

[1969-2007]

Scheduled banks Non-scheduled banks

DIAGRAM 1.2

CHART SHOWING THE STRUCTURE OF

COMMERCIAL BANKS IN INDIA

STRUCTURE OF COMMERCIAL BANKS IN INDIA

[183]

PUBLIC SECTOR BANKS

[28]

PRIVATE SECTOR BANKS

[55]

STATE BANK OF INDIA

GROUP [8]

NATIONALISED BANKS

[20]

REGIONAL RURAL BANKS

[96]

INDIAN BANKS

[28]

FOREIGN BANKS

[27]

OLD PRIVATE SECTOR BANKS

[19]

NEW PRIVATE SECTOR BANKS

[9]

SCHEDULED BANKS

[179]

NON-SCHEDULED BANKS

[4]

DIAGRAM NO. 1.3

MANU’S RECOVERY MEASURES

DHARMENA-through moral pursuance

Manu’s recovery measures

VYARALARENA-through legal process

BALENA-using force

CHHALENA-through deceit and

ACHARITHENA-through torture.

DIAGRAM NO. 1.1

PRIORITY SECTORS

AGRICULTURE

PRIORITY SECTORS

SMALL SCALE INDUSTRIES

ROAD AND WATER TRANSPORT

OPERATORS

PROFESSIONAL AND SELF

EMPLOYED PEOPLE

EDUCATION

HOUSING

EXPORTS

CONSUMPTION

MICRO CREDIT

SOFT WARE INDUSTRY

FOOD AND AGRO PROCESSING

SECTOR

CHART NO.1.6

0

500000

1000000

1500000

2000000

2500000

3000000

AM

OU

NT

1969 1991 2002 2003 2004 2005 2006 2007YEAR

DEPOSITS AND ADVANCES OF COMMERCIAL

BANKS IN INDIA [1969-2007]

DEPOSITS ADVANCES