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BASEL ACCORDS WITH SPECIAL REFRENCE
TO BASEL III.
By
AASIM AHMED KHANDAY
REG. No: 125860701
Submitted to Mangalore University
I n partial fu lf ilment of the requirement of the
Master of Business Administration Degree course
Under the valuable guidance of
Coll ege Guide: Company Guide:
Prof. Amit Menzes Mr. Riyaz ul Rahman Wani
Faculty SIMS, Associate Executive, J&k
Bank.
Pandeshwar, Mangalore
Department of Business Management
Srinivas institute of management studies
Pandeshwar, Mangalore.
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DECLARATION
I Aasim Ahmed Khanday (Reg no.125860701) Second year MBA student of
Srinivas Institute of Management Studies, Mangalore hereby declare that this
project report entitled A study on impact of Basel Accords with special
reference to Basel-III is my original work and has been prepared by me under
the guidance of MR Amit Menzees, Faculty, Srinivas Institute of Management
studies in partial fulfilment of the requirement of the award of the degree of
Master of Business Administration of Mangalore University and has not beenpart of any other degree or diploma of any other University or institution.
Aasim Ahmed Khanday.
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ACKNOWLEDGEMENT
The success of the project depends on a contribution of many people, especially
those who take time to share their thoughtful criticism and suggestions to
improve the project work.
At the very beginning I would like to thank Almighty the guiding light of my
life for granting me the potency and courage to complete this project work
successfully.
My immense gratitude to our beloved Principal Dr. P.S.Aithaland to rest of the
faculty and staff during the project course.
I am very grateful to J&K bank for having given me an opportunity to undertake
the project and Mr. RIYAZ UL RAHMAN WANI, Associate Executive,
Integrated Risk Management Department, CHQs,for guiding and inspiring me
at every point of time.
My heartful thanks to my project guide Mr. AMIT MENZEES who gave
valuable Inputs right from the start and was constantly motivating and
appreciating my Performance.
Last but never the least, I express my deep gratitude to my adorable parents,
encouraging friends and all those unsung heroes who have been indirectly or
directly responsible for the successful completion of the dissertation report.
Aasim Ahmed Khanday
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Executive summary
With the financial crisis of 2008 in the hindsight, the Basel Committee on Banking
Supervision has put forward the guidelines which impose stringent capital and liquidity
requirements through Basel III. Basel III is focused on increase in capital, especially equitycapital to absorb the impact of market, credit and operational risk. As was evident from the
recent crisis, the social cost of the failure of a large bank was much larger than the loss to the
owner of capital.
Increase in the requirement of capital will affect the ROE of the banks, financial ratios would
be hurt and the public sector banks will not be able to expand their loan book due to
unavailability of capital. According to ICRA, increase in the core Tier1 capital from 6% to
8% will reduce the return on equity percentage points from 18% to 15%. Public sector banks
with core capital less than 7% will be severely impacted whereas the earnings of the private
sector banks will not be affected much as they are already well capitalized but would reduceleveraging. Cost of capital for the banks would increase with the increase in equity in the
capital structure as equity is an expensive form of capital. As capital costs increase credit will
become more expensive. Banks will impose tougher conditions for granting credit to small
and medium sized firms and for start-up businesses. Also with deposit rates rising lower than
expectations at 14% will put further pressure of credit costs. With the credit becoming
costlier the investment activity in the country will be severely impacted. This will also
increase the cost of other off-balance items like Letter of Credit. Thus, though BASEL III
will make banks more capable of handling a financial crisis, it will have a negative impact on
the GDP of the economies like India, which should be a matter of concern.
It is more relevant at an economy's macro level to address issues such as systemic risk,
market discipline, liquidity and transparency in the risk-management framework. It is
interesting to note that though risk capital may be the necessary safety cushion for banks,
capital alone may not be sufficient to protect them from any extreme unexpected loss events.
In reality, risk capital will remain only a number and may not be effective if banks do not
assess their risk periodically and take timely corrective action when the risk exceeds the
threshold limit. Thus, whether it is Basel II or Basel III, it is crucial that a bank does not
depend solely on "regulatory capital". What is needed is a dynamic risk mitigation strategy,
where all employees act as risk managers in their own area. A proper risk culture needs to be
developed across the organization and "risk" should be an input for future business decision-
making. Risk management should not merely be an activity to comply with regulatory
requirements.
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Table of contents
Chapter
No
Title Page No
Research methodology 01-02
1 Introduction-Banking 03-07
2 Industry and company profile 08-59
3 Risk overview and Basel
committee
60-93
4 Basel III 94-112
5 Impact of Basel III on India 113-133
6 Findings, Recommendationsand conclusion 134-145
Bibliography 146
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RESEARCH
METHODOLOGY
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RESEARCH METHODOLOGY:
IMPORTANCE OF THE PROJECT
The project helps in understanding the clear meaning of Risk Management. It helps to
understand how Basel committee came into existence. It has framed regulations for banks in
series called Basel Accords. The latest Accord is Basel III, which had amended Basel II, and
framed new capital regulations, so that banks can survive and face times of depression easily.
This project helps to understand regarding the impact of Basel III on banking and on the
economy as whole.
OBJECTIVES OF PROJECT
To Study the complete structure and history of Jammu and Kashmir Bank.
To understand the risk and different risk management approaches in bank.
To gain insights into the credit risk management.
To know/understand the need of Basel Accords.
To understand the Basel Accords and more particularly Basel-III in detail.
To understand the RBI guidelines regarding Basel-III.
To estimate the additional capital requirements of PSBs and Pvt. Sector.
To examine the impact of Latest Basel Accord on Indian banking.
Scope of the study:
The purpose of the study is to evaluate, analyze and examine the risk management. The Basel
Committee is raising the resilience of the banking sector by strengthening the regulatory
capital framework, building on the three pillars of the Basel II framework. The reforms raise
both the quality and quantity of the regulatory capital base and enhance the risk coverage of
the capital framework. They are underpinned by a leverage ratio that serves as a backstop to
the risk-based capital measures, is intended to constrain excess leverage in the banking
system and provide an extra layer of protection against model risk and measurement error.
Finally, the Committee is introducing a number of macroprudential elements into the capital
framework to help contain systemic risks arising from procyclicality and from the
interconnectedness of financial institutions. The study aims to find out the strategy used by
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the Basel committee to maintain the risk management procedure, so that banks are well
positioned and can face the tough times at very ease.
DATA COLLECTION METHOD: To fulfill the objectives of my study, I have taken both
into considerations viz. primary & secondary data.
Primary data:Primary data has been collected through personal interview by direct contact
method. The method which was adopted to collect the information is Personal Interview
method.
Personal interview and discussion was made with manager and other personnel in the
organization for this purpose.
Secondary data:
The data is collected from the Magazines, Annual reports, Internet, Text books.
The various sources that were used for the collection of secondary data are
Internal files & materials.
Websites
LIMITATIONS:
The time constraint was a limiting factor, as more in depth analysis could not be
carried.
Some of the information is confidential in nature that could not be divulged for the
study.
Because of secrecy, it becomes difficult to obtain actual facts and figures of advances
of branches,
.
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INTRODUCTION
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Chapter-I Banking
Introduction
A bank is a financial institution that provides banking and other financial services to their
Customers. A bank is generally understood as an institution which provides fundamental
Banking services such as accepting deposits and providing loans. There is also nonbanking
Institutions that provide certain banking services without meeting the legal Definition of a
bank. Banks are a subset of the financial services industry. A banking system also referred as
a system provided by the bank which offers cash Management services for customers,
reporting the transactions of their accounts and Portfolios, throughout the day. The banking
system in India should not only be hassle Free but it should be able to meet the new
challenges posed by the technology and any other external and internal factors. For the past
three decades, Indias banking system has several outstanding achievements to its credit. The
Banks are the main participants of the financial system in India. The Banking sector offers
several facilities and opportunities to their customers. All the banks safeguard the money and
valuables and provide loans, Credit, and payment services, such as checking accounts, money
orders, and cashiers Cheques. The banks also offer investment and insurance products. As a
variety of models For cooperation and integration among finance industries have emerged,
some of the Traditional distinctions between banks, insurance companies, and securities firms
have Diminished. In spite of these changes, banks continue to maintain and perform their
Primary roleaccepting deposits and lending funds from these deposits.
Banking is today an integral part of our everyday life: At home, at school, at office, at
business, on travel everywhere we counter some aspect of banking. The significance of
banking in our day to day life is being felt increasingly. What are the institutions, so
inevitable in the present day set up? How do they transact? How did the concept emerge?
These are some of the simple queries that do not surface in our minds but are lurking deep
down. Money plays a dominant role in todays life. Forms of money have evolved from coin
to paper currency notes to credit cards. Commercial transactions have increased in content
and quantity from simple banker to speculative international trading. Hence the need arose
for a third party who will assist smooth banding of transaction, mediate between the seller
and buyer, hold custody of money and goods, remit funds and also to collect proceeds. He
was the banker. As the number of such mediators grew there is need to control. Such
mediating agencies gave birth to the concept of banks and banking. With the exception
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of the extremely wealthy, very few people buy their homes in all-cash transactions. Most of
us need a credit in form of loans, to make such a large purchase. In fact, many people need
financial support from Bank to fulfill the financial requirement. The world as we know it
wouldn't run smoothly without credit and banks to issue it. In this article we'll, explore the
birth of this flourishing industry.
Need of the Banks
Before the establishment of banks, the financial activities were handled by money lenders and
individuals. At that time the interest rates were very high. Again there were no Security of
public savings and no uniformity regarding loans. So as to overcome such Problems the
organized banking sector was established, which was fully regulated by the Government. The
organized banking sector works within the financial system to provide Loans accept deposits
and provide other services to their customers. The following Functions of the bank explain
the need of the bank and its importance:
To provide the security to the savings of customers.
To control the supply of money and credit
To encourage public confidence in the working of the financial system, increase Savingsspeedily and efficiently.
To avoid focus of financial powers in the hands of a few individuals and Institutions.
To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of
customers.
Services provided by banking organizations
Bank essentially performs the following functions:-
Accepting Deposits or savings functions from customers or public by providing bank
account, current account, fixed deposit account, recurring accounts etc.
The payment transactions like lending money to the public. Bank provides an effective
credit delivery system for loan able transactions.
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Provide the facility of transferring of money from one place to another place. For
performing this operation, bank issues demand drafts, bankers cheques, and money orders
etc. for transferring the money. Bank also provides the facility of Telegraphic transfer or tele-
cash orders for quick transfer of money.
A bank performs a trustworthy business for various purposes.
A bank also provides the safe custody facility to the money and valu ables of the general
public. Bank offers various types of deposit schemes for security of money. For keeping
valuables bank provides locker facility. The lockers are small compartments with dual
locking system built into strong cupboards. These are stored in the banks strong room and
are fully secured.
Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the
government disbursements like pension payments and tax refunds also take place through
banks.
Users of Banking Services:
The emerging trends in the level of expectation affect the formulation of marketing mix.
Innovative efforts become essential the moment it finds a change in the level of expectations.There are two types of customers using the services of banks, such as general customers and
the industrial customers.
General Users:
Persons having an account in the bank and using the banking facilities at the terms and
conditions fixed by a bank are known as general users of the banking services. Generally,
they are the users having small sized and less frequent transactions or availing very limited
services of banks.
Industrial Users:
The industrialists, entrepreneurs having an account in the bank and using credit facilities and
other services for their numerous operations like establishments and expansion, mergers,
acquisitions etc. of their businesses are known as industrial users. Generally, they are found a
few but large sized customers.
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Economic functions of banks
Banks in any country are very important to the growth and prosperity of the
economy. So their role in the economy is very vital. The various important economic
functions of the banks are as under:
1. Credit Creation: The creation of credit or deposits is one of the most vital operations
of the commercial bank. Credit creation is the multiple expansions of banks demand
deposits. Banks advance a major portion of their deposits to the borrowers and keep
smaller parts of deposits to the customers on demand. Even then the customers of the
banks have full confidence that the depositors lying in the banks is quite safe and can
be withdrawn on demand. The banks utilize this trust of their clients and expand loans
by much more time than the amount of demand deposits possessed by them. This
tendency on the part of the commercial banks to expand their demand deposits as a
multiple of their excess cash reserve is called creation of credit.
2. Settlement of payments: Banks act as both collection and paying agents for
customers. It includesthe offsetting of payment flows between geographical areas
there by reducing the cost of settlement between them.
3. Credit intermediation:Banks borrow from one individual or institution and lend
back to other individuals and institutions there by act as credit Intermediary (middle
men).
4. Credit quality improvement: Banks lend money to commercial and personal
individuals and institutions. The improvement comes from diversification of thebank's assets and capital which provides a buffer to absorb losses without defaulting
on its obligations.
5. Promoting capital formation: A developing economy needs a high rate of capital
formation to accelerate the economic development, but the rate of capital formation
depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving
is very low. But banks encourage savings in the underdeveloped countries by
providing very attractive services. Banks also mobilize the idle capital of the country
and make it available for productive purposes.
6. Maturity transformationbanks borrow more on demand debt and short term debt,
but provide more long term loans. In other words, they borrow short and lend long.
With a stronger credit quality than most other borrowers, banks can do this by
aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions
(e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash,
investing in marketable securities that can be readily converted to cash if needed, and
raising replacement funding as needed from various sources (e.g. wholesale cash
markets and securities markets).
7. Facilitator of monetary policy: A well-developed banking system is on essential
pre-condition to the effective implementation of monetary policy. Under-developed
countries cannot afford to ignore this fact. Banks follow monetary policy of centralbank to bring out the necessary change in economy.
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8. Influence economic activity: Banks are in a position to influence economic activity
in a country by their influence on the rate interest; they do it by influencing the rate of
interest in the money market through its supply of funds.
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INDUSTRY PROFILE
AND COMPANY
PROFILE
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Chapter 2- industrial profile and company profile
Evolution of Banking System
The banking history is interesting and reflects evolution in trade and commerce. It also
throws light on living style, political and cultural aspects of civilized mankind. The strongest
faith of people has always been religion and God. The seat of religion and place of worship
were considered safe place for money and valuables. Ancient homes didn't have the benefit of
a steel safe, therefore, most wealthy people held accounts at their temples. Numerous people,
like priests or temple workers were both devout and honest, always occupied the temples,
adding a sense of security. There are records from Greece, Rome, Egypt and Ancient
Babylon that suggest temples loaned money out, in addition to keeping it safe. The fact that
most temples were also the financial centers of their cities and this is the major reason that
they were ransacked during wars. The practice of depositing personal valuables at these
places which were also functioning as the treasuries in ancient Babylon against a receipt was
perhaps the earliest form of Banking.
Gradually as the personal possession got evaluated in term of money, in form of coins made
of precious metal like gold and silver, these were being deposited in the temple treasuries. As
these coins were commonly accepted form of wealth, lending activity to those who neededit and were prepared to borrow at an interest began. The person who conducted this
lending activity was known as the Bankerbecause of the bench he usually set. It is also
observed that the term bankrupt got evolved then as the irate depositors broke the bench and
table of the insolvent banker. With the expansion of trade the concept of banking gained
greater ground. The handling of banking transcended from individual to groups to
companies. Issuing currency was one of the major functions of the banks. The earliest from
of money coins, were a certificate of value stamped on a metal, usually gold, silver, and
bronze or any other metal, by an authority, usually the king. With the increasing belief and
faith in such authority of their valuation and the necessities of wider trade a substitute to
metal was found in paper. The vagaries of monarchical rule led to the issues of currency
being vested with the banks since they enjoyed faith, controlled credit and trading. All forms
of money were a unit of value and promised to pay the bearer of specified value. Due to
failure on account of unwise loans, to rule and organize, a stable banking system arose. The
words earliest bank currency notes were issued in Sweden by stock holms Banco in July
1661.
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History of Indian Banking System
In ancient India there is evidence of loans from the vedic period (beginning 1750BC). Later
during the mayura dynasty (321 to 185BC,), an instrument called adesha was in use, which
was an order on a banker desiring him to pay the money of the note to a third person, whichcorresponds to the definition of a bill of exchange as we understand it today. During the
Buddhist period, there was considerable use of these instruments.
In fact, the history of Indian banking can be easily understood under three main phases which
are as:
1. Colonial / Pre-independence period
2. Nationalization Period
3. Liberalization period
1. Colonial /Pre-independence period
During the period of British rule merchants established the union bank of Calcutta in 1829,
first as a private joint stock association, then partnership. Its proprietors were the owners of
the earlier commercial bank and the Calcutta bank, who by mutual consent created union
bank to replace these two banks. In 1840 it established an agency at Singapore, and closed the
one at Mirzapore that it had opened in the previous year. Also in 1840 the bank revealed that
it had been the subject of a fraud by the banks accountant. Union bank was incorporated in
1845 but failed in 1848, having been insolvent for some time and having used money fromdepositors to pay its dividends.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest joint stock
bank in India; it was not the first though. That honor belongs to the bank of Upper India,
which was established in 1863, and which survived until 1913, when it failed, with some of
its assets and liabilities being transferred to the Alliance Bank of Simla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. the comptoir
dEscompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French possession, followed HSBC establisheditself in Bengal in 1869. Calcutta was the most active trading port, mainly due to the trade of
British Empire, and so became a banking centre.
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. A number of banks established then have
survived to the present such as Bank of Baroda, Corporation Bank, Bank of India, Canara
Bank and Central Bank of India.
During the First World War through the end of the second world war and two years thereafteruntil the independence of India were challenging for Indian banking. The years of the First
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World War were turbulent, and it took its toll with banks simply collapsing despite the Indian
economy gaining indirect boost due to war-related economic activities. At least 94 banks in
India failed between 1913 and 1918.
Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. Indias independence marked the end of regime of
the laissez-faire for the Indian banking. The Government of India initiated measures to play
an active role in the economic life of the nation, and the industrial policy resolution adopted
by the government in 1948 envisaged a mixed economy. This resulted into greater
involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
The Reserve Bank of India, Indias central banking authority, was established in April
1935, but was nationalized on January 1949 under the terms of the Reserve Bank of
India Act, 1948.
In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India to regulate, control, and inspect the banks in India
The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors.
2. Nationalization Period
By the 1960s, the Indian banking industry has become an important tool to facilitate the
Development of the Indian economy. At the same time, it has emerged as a large Employer,
and a debate has ensured about the possibility to nationalise the banking Industry. Indira
Gandhi, the-then Prime Minister of India expressed the intention of the Government of India
(GOI) in the annual conference of the All India Congress Meeting In a paper entitled " Stray
thoughts on Bank Nationalisation" . The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised
the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash
Narayan, a national leader of India, described the step as a " Masterstroke of poli tical
sagacity" Within two weeks of the issue of the Ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August, 1969. A second step of nationalisation of 6 more commercial banks
followed in 1980. The stated reason for the nationalisation was to give the government more
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control of credit Delivery. With the second step of nationalisation, the GOI controlled around
91% of the Banking business in India. Later on, in the year 1993, the government merged
New Bank of India with Punjab National Bank. It was the only merger between nationalised
banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After
this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the
Average growth rate of the Indian economy. With the nationalization there were a lot of positive
changes in Indian banking system. These are discussed as under:
a) The ownership of the govt. gave a new confidence to the savers and being backed by a
sovereign the normal suspicions associated with the capabilities of the bankers in the private
sector were gone.
b) Banking ceased to be selective. The entry barriers that existed for customers to bank,
social economic and political were lowered. This resulted in a massive quantitative expansion
of the bank customer base as well as in the nature of services provided.
c) The expansion of banks also expanded the economy.
d) A large employment base was created.
e) The quality of credit assets fell because of liberal credit extension policy.
f) The credit facilities extended to the priority sector at concessional rates.
3. Liberalization Period
By the beginning of 1990, the social banking goals set for the banking industry made most of
the public sector resulted in the presumption that there was no need to look at thefundamental financial strength of this bank. Consequently they remained undercapitalized.
The banking industry is of extreme importance, as the health of the financial sector in
particular and the economy was a whole would be reflected by its performance. The need for
restructuring the banking industry was felt greater with the initiation of the real sector reform
process in 1991.The reforms have enhanced the opportunities and challenges for the real
sector making them operate in a borderless global market place. However, to harness the
benefits of globalization, there should be an efficient financial sector to support the structural
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reforms taking place in the real economy. Hence, along with the reforms of the real sector,
the banking sector reformation was also addressed
The root cause of banking reforms was:
Regulated interest rate structure.
Lack of focus on profitability.
Lack of transparency in the banks balance sheet.
Lack of competition.
Excessive regulation on organization structure and managerial
resource.
Excessive support from government
In the early 1990s, the then Narsimha Rao government embarked on a policy of
Liberalisation, licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of Commerce,
Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move Along with the
rapid growth in the economy of India revolutionized the banking sector in India which has
seen rapid growth with strong contribution from all the three sectors of Banks, namely,
government banks, private banks and foreign banks. The next stage for The Indian banking
has been setup with the proposed relaxation in the norms for Foreign Direct Investment,
where all Foreign Investors in banks may be given voting rights which could exceed the
present cap of 10%, at present it has gone up to 49% with some Restrictions. The new policy
shook the banking sector in India completely. Bankers, till this time, were used to the 4-6-4
method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in
a modern outlook and tech-savvy methods of working for the Traditional banks. All this led
to the retail boom in India. People not just demanded more from their banks but also received
more. Currently (2007), banking in India is generally fairly mature in terms of supply,
product range and reach-even though reach in rural India Still remains a challenge for the
private sector and foreign banks. In terms of quality of Assets and capital adequacy, Indian
banks are considered to have clean, strong and transparent balance sheets as compared to
other banks in comparable economies in its Region. The Reserve Bank of India is an
autonomous body, with minimal pressure from the government. The stated policy of the Bankon the Indian Rupee is to manage Volatility but without any fixed exchange rate-and this has
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To help sectors of the economy that they have special credit needs for eg. Housing, small
business and agricultural loans etc.
Classification of Banking Industry in India
Indian banking industry has been divided into two parts, organized and unorganized sectors.
The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative
Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The unorganized sector,
which is not homogeneous, is largely made up of money lenders and indigenous bankers. An
outline of the Indian Banking structure may be presented as follows:-
Reserve bank of India
At the apex level of Indian banking industry, there is Reserve Bank of India (RBI) as central
Bank. Reserve bank of India is a central bank and was established in April 1, 1935 in
accordance with the provisions of reserve bank of India act 1934. The central office of RBI is
located at Mumbai since inception. Though originally the reserve bank of India was privately
owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was
inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid
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up. RBI is governed by a central board (headed by a governor) appointed by the central
government of India. RBI has 22 regional offices across India. The reserve bank of India was
nationalized in the year 1949. The general superintendence and direction of the bank is
entrusted to central board of directors of 20 members, the Governor and four deputy
Governors, one Governmental official from the ministry of Finance, ten nominated directors
by the government to give representation to important elements in the economic life of the
country, and the four nominated director by the Central Government to represent the four
local boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Board
consists of five members each central government appointed for a term of four years to
represent territorial and economic interests and the interests of cooperative and indigenous
banks. The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the
statutory basis of the functioning of the bank. The bank was constituted for the need of
following:
- To regulate the issues of banknotes.
- To maintain reserves with a view to securing monetary stability
- To operate the credit and currency system of the country to its advantage.
Functions of RBI as a central bank of India are explained briefly as follows:
Bank of I ssue: The RBI formulates, implements, and monitors the monitory policy. Its main
objective is maintaining price stability and ensuring adequate flow of credit to productive
sector.
Regulator-Supervisor of the financial system: RBI prescribes broad parameters of banking
operations within which the countrys banking and financial system functions. Their main
objective is to maintain public confidence in the system, protect depositors interest and
provide cost effective banking services to the public.
Manager of exchange control : The manager of exchange control department manages the
foreign exchange, according to the foreign exchange management act, 1999. The managers
main objective is to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India.
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helped a great deal in improving the standard of banking in India to develop on sound lines
and to improve the methods of their operation.
Promotional Functions: With economic growth assuming a new urgency since
independence, the range of the Reserve Banks functions has steadily widened. The bank now
performs a variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve bank was asked to
promote banking habit, extend banking facilities to rural and semi-urban areas, and establish
and promote new specialized financing agencies.
Indian Scheduled Commercial Banks
The commercial banking structure in India consists of scheduled commercial banks, andunscheduled banks.
Scheduled Banks: Scheduled Banks in India constitute those banks which have been
included in the second schedule of RBI act 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section 42(6a) of the Act. Scheduled
banks in India means the State Bank of India constituted under the State Bank of India Act,
1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (subsidiary banks)
Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking
companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other
bank being a bank included in the Second Schedule to the Reserve bank of India Act, 1934 (2
of 1934), but does not include a co-operative bank. For the purpose of assessment of
performance of banks, the Reserve Bank of India categories those banks as public sector
banks, old private sector banks, new private sector banks and foreign banks, i.e. private
sector, public sector, and foreign banks come under the umbrella of scheduled commercial
banks.
Commercial Banks: Commercial banks may be defined as, any banking organization that
deals with the deposits and loans of business organizations. Commercial banks issue bank
checks and drafts, as well as accept money on term deposits. Commercial banks also act as
moneylenders, by way of installment loans and overdrafts.
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Commercial banks also allow for a variety of deposit accounts, such as checking, savings,
and time deposit. These institutions are run to make a profit and owned by a group of
individuals.
Public Sector Banks: These are banks where majority stake is held by the Government of
India.
Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.
Private Sector Banks: These are banks majority of share capital of the bank is held by
private individuals. These banks are registered as companies with limited liability.Examples
of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.
Foreign Banks: These banks are registered and have their headquarters in a foreign country
but operate their branches in our country. Examples of foreign banks in India are: HSBC,
Citibank, Standard Chartered Bank, etc.
Cooperative Banks: A co-operative bank is a financial entity which belongs to its members,
who are at the same time the owners and the customers of their bank. Co-operative banks are
often created by persons belonging to the same local or professional community or sharing a
common interest. Co-operative banks generally provide their members with a wide range of
banking and financial services (loans, deposits, banking accounts, etc).
Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs) on
October 2, 1975. The banks provide credit to the weaker sections of the rural areas,
particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs.
Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank,
State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of
India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs.
5 Crores. There are several concessions enjoyed by the RRBs by Reserve Bank of India such
as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower
statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks,
managerial and staff assistance from the sponsoring bank and reimbursement of the expenses
on staff training. The RRBs are under the control of NABARD. NABARD has the
responsibility of laying down the policies for the RRBs, to oversee their operations, provide
refinance facilities, to monitor their performance and to attend their problems.
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Unscheduled Banks
Unscheduled commercial banks are those banks which are not included in Second
schedule of the RBI Act of 1934.
Banking structure in I ndia
At the end of September 2013, The Branch and ATM wise position of different categories of
banks in India is tabulated as under:
S.No Name Branches ATMs
Rural Semi-
urban
Urban Metro
Politian
total ON
Site
OFF
Site
Total
1. Scheduled
commercial banks
23776 22468 17878 17118 81240 47545 48141 95686
2 Public sector banks 22188 17773 14248 13257 67466 34012 24181 58193
3 Nationalized banks 15606 12154 10744 10132 48636 18227 12773 31050
4 State bank group 6582 5619 3504 3125 18830 15735 11408 27143
5 Private sector 1581 4687 3569 3615 13452 13249 22830 36079
6 Old private sector 881 2025 1395 1085 5386 3342 2429 5771
7 Foreign sector 07 08 61 246 322 284 1130 1414
Source: (Reserve Bank of India)
BANKING IN INDIA
Indian banking is the lifeline of the nation and its people. Banking has helped in developing
the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon.
The sector has translated the hopes and aspirations of millions of people into reality. But to
do so, it has had to control miles and miles of difficult terrain, suffer the indignities of foreign
rule and the pangs of partition. Today, Indian banks can confidently compete with modern
banks of the world. Before the 20th century, usury, or lending money at a high rate of
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interest, was widely prevalent in rural India. Entry of Joint stock banks and development of
Cooperative movement have taken over a good deal of business from the hands of the Indian
money lender, who although still exist, have lost his menacing teeth. In the Indian Banking
System, Cooperative banks exist side by side with commercial banks and play a
supplementary role in providing need-based finance, especially for agricultural and
agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc.
along with some small industries and self-employment driven activities. Generally, co-
operative banks are governed by the respective co-operative acts of state governments. But,
since banks began to be regulated by the RBI after 1st March 1966, these banks are also
regulated by the RBI after amendment to the Banking Regulation Act 1949. The Reserve
Bank is responsible for licensing of banks and branches, and it also regulates credit limits to
state co-operative banks on behalf of primary co-operative banks for financing SSI units.
During the last 30 years since nationalization tremendous changes have taken place in the
financial markets as well as in the banking industry due to financial sector reforms. The
banks have shed their traditional functions and have been innovating, improving and coming
out with new types of services to cater emerging needs of their customers. Banks have been
given greater freedom to frame their own policies. Rapid advancement of technology has
contributed to significant reduction in transaction costs, facilitated greater diversification of
portfolio and improvements in credit delivery of banks. Prudential norms, in line with
international standards, have been put in place for promoting and enhancing the efficiency of
banks. The process of institution building has been strengthened with several measures in the
areas of debt recovery, asset reconstruction and securitization, consolidation, convergence,
mass banking etc. Despite this commendable progress, serious problem have emerged
reflecting in a decline in productivity and efficiency, and erosion of the profitability of the
banking sector. There has been deterioration in the quality of loan portfolio which, in turn,
has come in the way of banks income generation and enhancement of their capital funds.
Inadequacy of capital has been accompanied by inadequacy of loan loss provisions resulting
into the adverse impact on the depositors and investors confidence. The Government,
therefore, set up Narsimhan Committee to look into the problems and recommend measures
to improve the health of the financial system. The acceptance of the Narsimhan Committee
recommendations by the Government has resulted in transformation of hitherto highly
regimented and over bureaucratized banking system into market driven and extremely
competitive one. The massive and speedy expansion and diversification of banking has not
been without its strains. The banking industry is entering a new phase in which it will be
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facing increasing competition from non-banks not only in the domestic market but in the
international markets also. The operational structure of banking in India is expected to
undergo a profound change during the next decade. With the emergence of new private
banks, the private bank sector has become enriched and diversified with focus spread to the
wholesale as well as retail banking. The existing banks have wide branch network and
geographic spread, whereas the new private banks have the clout of massive capital, lean
personnel component, the expertise in developing sophisticated financial products and use of
state-of-the-art technology. Gradual deregulation that is being ushered in while stimulating
the competition would also facilitate forging mutually beneficial relationships, which would
ultimately enhance the quality and content of banking. In the final phase, the banking system
in India will give a good account of itself only with the combined efforts of cooperative
banks, regional rural banks and development banking institutions which are expected to
provide an adequate number of effective retail outlets to meet the emerging socio-economic
challenges during the next two decades. The electronic age has also affected the banking
system, leading to very fast electronic fund transfer. However, the development of electronic
banking has also led to new areas of risk such as data security and integrity requiring new
techniques of risk management. Cooperative (mutual) banks are an important part of many
financial systems. In a number of countries, they are among the largest financial institutions
when considered as a group. Moreover, the share of cooperative banks has been increasing in
recent years; in the sample of banks in advanced economies and emerging markets analyzed
in this paper, the market share of cooperative banks in terms of total banking sector assets
increased from about 9 percent in mid-1990s to about 14 percent in 2004.
Bank Marketing In the Indian Perspective:
The formulation of business policies is substantially influenced by the emerging trends in the
national and international scenario. The GDP, per capita income, expectation, the rate of
literacy, the geographic and demographic considerations, the rural or urban orientation, the
margins in economic systems, and the spread of technologies are some of the key factors
governing the development plan of an organization, especially banking organization. In ours
developing economy, the formulation of a sound marketing mix is found a difficult task. The
nationalization of the Reserve Bank of India (RBI) is a landmark in the development of
Indian Banking system that have paved numerous paths for qualitative-cum quantities
improvements in true sense. Subsequently, the RBI and the policy makers of the public sectorcommercial banks think in favour of conceptualizing modern marketing which would bring a
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radical change in the process of quality up gradation and village to village commercial
viability.
Bank Marketing Mix and Strategies:
The first task before the public sector commercial Banks is to formulate that Bank marketing
mix which suits the national socio-economic requirements. Some have 4 P's and some have 7
P's of marketing mix. The common four Ps of Marketing mix are as follows:-
Product:
To be more specific the peripheral services need frequent innovations, since this would be
helpful in excelling competition. The product portfolio designing is found significant to
maintain the commercial viability of the public sector banks. The banks professionals need to
assign due weightage to their physical properties. They are supposed to look smart active and
attractive.
Price:
Price is a critical and important factor of bank marketing mix due numerous players in the
industry . Most consumers will only be prepared to invest their money in search of
extraordinary or higher returns. They are ready to pay additional value if there is a perception
of extra product value. This value may be improved performance, function, services,
reliability, and promptness for problem solving and of course, higher rate of return
Promotion:
Bank Marketing is actually is the marketing of reliability and faith of the people. It is the
responsibility of the banking industry to take people in favour through Word of mouth
publicity, reliability showing through long years of establishment and other services.
Place:
The choice of where and when to make a product available will have significant impact on
the customers. Customers often need to avail banking services fast for this they require the
bank branches near to their official area or the place of easy access.
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Current Scenario and Future Landscape of Indian Banking
The industry is currently in a transition phase. On the one hand, the PSBs, which are the
mainstay of the Indian Banking system, are in the process of shedding their flab in terms of
excessive manpower, excessive non Performing Assets (NPAS) and excessive governmental
equity, while on the other hand the private sector banks are consolidating themselves through
mergers and acquisitions. PSBs, which currently account for more than 78 percent of total
banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000),
falling revenues from traditional sources, lack of modern technology and a massive
workforce while the new private sector banks are forging ahead and rewriting the traditional
banking business model by way of their sheer innovation and service. The PSBs are of course
currently working out challenging strategies even as 20 percent of their massive employee
strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS)
schemes. The private players however cannot match the PSbs great reach, great size and
access to low cost deposits. Therefore one of the means for them to combat the PSBs has
been through the merger and acquisition (M& A) route. Over the last two years, the industry
has witnessed several such instances. For instance, Hdfc Banks merger with Times Bank
Icici Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura, Centurion
Bank, Induslnd Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTIbank- Global Trust Bank merger however opened a Pandoras box and brought about the
realization that all was not well in the functioning of many of the private sector banks.
Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other
services and integrated them into the mainstream banking arena, while the PSBs are still
grappling with disgruntled employees in the aftermath of successful VRS schemes. Also,
following Indias commitment to the WTO agreement in respect of the services sector,
foreign banks, including both new and the existing ones, have been permitted to open up to
12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches.
Talks of government diluting their equity from 51 percent to 33 percent in November 2000
have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules
being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M&
A route to acquire willing Indian partners. Meanwhile the economic and corporate sector
slowdown has led to an increasing number of banks focusing on the retail segment. Many ofthem are also entering the new vistas of Insurance. Banks with their phenomenal reach and a
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regular interface with the retail investor are the best placed to enter into the insurance sector.
Banks in India have been allowed to provide fee-based insurance services without risk
participation invest in an insurance company for providing infrastructure and services support
and set up of a separate joint venture insurance company with risk participation.
Liberalization and de-regulation process started in 1991-92 has made a sea change in the
banking system. From a totally regulated environment, we have gradually moved into a
market driven competitive system. Our move towards global benchmarks has been, by and
large, calibrated and regulator driven. The pace of changes gained momentum in the last few
years. Globalization would gain greater speed in the coming years particularly on account of
expected opening up of financial services under WTO. Four trends change the banking
industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2)
Globalization of operations, 3) Development of new technology and 4)Universalisation of
banking. With technology acting as a catalyst, we expect to see great changes in the banking
scene in the coming years. The Committee has attempted to visualize the financial world 5-10
years from now. The picture that emerged is somewhat as discussed below. It entails
emergence of an integrated and diversified financial system. The move towards universal
banking has already begun. This will gather further momentum bringing non-bankingfinancial institutions also, into an integrated financial system.
The traditional banking functions would give way to a system geared to meet all the financial
needs of the customer. We could see emergence of highly varied financial products, which
are tailored to meet specific needs of the customers in the retail as well as corporate
segments. The advent of new technologies could see the emergence of new financial players
doing financial intermediation. For example, we could see utility service providers offering
say, bill payment services or supermarkets or retailers doing basic lending operations. The
conventional definition of banking might undergo changes.
The competitive environment in the banking sector is likely to result in individual players
working out differentiated strategies based on their strengths and market niches. For example,
some players might emerge as specialists in mortgage products, credit cards etc. whereas
some could choose to concentrate on particular segments of business system, while
outsourcing all other functions. Some other banks may concentrate on SME segments or high
net worth individuals by providing specially tailored services beyond traditional banking
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offerings to satisfy the needs of customers they understand better than a more generalist
competitor.
International trade is an area where Indias presence is expected to show appreciable increase.
Presently, Indian share in the global trade is just about 0.8%. The long term projection for
growth in international trade is placed at an average of 6% per annum. With the growth in IT
sector and other IT Enabled Services, there is tremendous potential for business
opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian
exports can be expected to grow at a sustainable rate of 15% per annum in the period ending
with 2010. This again will offer enormous scope to Banks in India to increase their Forex
business and international presence. Globalization would provide opportunities for Indian
corporate entities to expand their business in other countries.
Banks in India wanting to increase their international presence could naturally be expected to
follow these corporate and other trade flows in and out of India.
Retail lending will receive greater focus. Banks would compete with one another to provide
full range of financial services to this segment. Banks would use multiple delivery channels
to suit the requirements and tastes of customers. While some customers might value
relationship banking (conventional branch banking), others might prefer convenience banking(e-banking).
One of the concerns is quality of bank lending. Most significant challenge before banks is the
maintenance of rigorous credit standards, especially in an environment of increased
competition for new and existing clients. Experience has shown us that the worst loans are
often made in the best of times. Compensation through trading gains is not going to support
the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring,
controlling and monitoring as also revamp operating procedures. Credit evaluation may have
to shift from cash flow based analysis to borrower account behaviour, so that the State of
readiness of Indian banks for Basel II regime improves. Corporate lending is already
undergoing changes. The emphasis in future would be towards more of fee based services
rather than lending operations. Banks will compete with each other to provide value added
services to their customers.
Structure and ownership pattern would undergo changes. There would be greater presence of
international players in the Indian financial system. Similarly, some of the Indian banks
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would become global players. Government is taking steps to reduce its holdings in Public
sector banks to 33%. However the indications are that their PSB character may still be
retained.
Mergers and acquisitions would gather momentum as managements will strive to meet the
expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks.
As Banks seek niche areas, we could see emergence of some national banks of global scale
and a number of regional players.
Corporate governance in banks and financial institutions would assume greater importance in
the coming years and this will be reflected in the composition of the Boards of Banks.
Concept of social lending would undergo a change. Rather than being seen as directedlending such lending would be business driven. With SME sector expected to play a greater
role in the economy, Banks will give greater overall focus in this area. Changes could be
expected in the delivery channels used for lending to small borrowers and agriculturalists and
unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as
means to reduce transaction costs.
Technology as an enabler is separately discussed in the report. It would not be out of place,
however, to state that most of the changes in the Landscape of financial sector discussed
above would be technology driven. In the ultimate analysis, successful institutions will be
those which continue to leverage the advancements in technology in reengineering processes
and delivery modes and offering state-of-the-art products and services providing complete
financial solutions for different types of customers.
Human Resources Development would be another key factor defining the characteristics of a
successful banking institution. Employing and retaining skilled workers and specialists, re-
training the existing workforce and promoting a culture of continuous learning would be a
challenge for the banking institutions.
Challenges to Indian Banking:
The banking industry in India is undergoing a major change due to the advancement in Indian
economy and continuous deregulation. These multiple changes happening in series has a
ripple effect on banking industry which is trying to be organized completely, regulated sellers
of market to completed deregulated customers market.
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1. Deregulation:
This continuous deregulation has given rise to extreme competition with greater autonomy,
operational flexibility, and decontrolled interest rate and liberalized norms and policies for
foreign exchange in banking market. The deregulation of the industry coupled with decontrol
in the interest rates has led to entry of a number of players in the banking industry. Thereby
reduced corporate credit off which has resulted in large number of competitors battling for
the same pie.
2. Modified new rules:
As a result, the market place has been redefined with new rules of the game. Banks are
transforming to universal banking, adding new channels with lucrative pricing and freebeesto offer. New channels squeezed spreads, demanding customers better service, marketing
skills heightened competition, defined new rules of the game pressure on efficiency. Need for
new orientation diffused customer loyalty. Bank has led to a series of innovative product
Offerings catering to various customer segments, specifically retail credit.
3. Efficiency:
Excellent efficiencies are required at banker's end to establish a balance between thecommercial and social considerations Bank need to access low cost funds and simultaneously
improve the efficiency and efficacy. Owing to cutthroat competition in the industry, banks
are facing pricing pressure; have to give thrust on retail assets.
4. Diffused customer loyalty:
Attractive offers by MNC and other nationalized banks, customers have become more
demanding and the loyalties are diffused. Value added offerings bound customers to change
their preferences and perspective. These are multiple choices; the wallet share is reduced per
bank with demand on flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized service and hassle free, flawless service delivery.
5. Misaligned mindset:
These changes are creating challenges, as employees are made to adapt to changing
conditions. The employees are resisting changing and the seller market mindset is yet to be
changed. These problems coupled with fear of uncertainty and control orientation. Moreover
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banking industry is accepting the latest technology but utilization is far below from
satisfactory level.
6. Competency gap:
The competency gap needs to be addressed simultaneously otherwise there will be missed
opportunities. Placing the right skill at the right place will determine success. The focus of
people will be doing work but not providing solutions, on escalating problems rather than
solving them and on disposing customers instead of using the opportunity to cross sell.
Strategic options to cope withthe challenges:
Dominant players in the industry have embarked on a series of strategic and tactical
initiatives to sustain leadership. The major initiatives incorporate:
a) Focus on ensuring reliable service delivery through Investing on and implementing right
technology.
b) Leveraging the branch networks and sales structure to mobilize low cost current and
savings deposits.
c) Making aggressive forays in the retail advances segments of home and personal loans.
d) Implementing initiatives involving people, process and technology to reduce the fixed
costs and the cost per transaction.
e) Focusing on fee based income to compensate foe squeezed spread.
f) Innovating products to capture customer 'mind share' to begin with and later the wallet
share.
g) Improving the asset quality as Basel II norms.
Swot analysis of Indian banking industry
The bank marketing is than an approach to market the services profitability. It is a device to
maintain commercial viability. The changing perception of bank marketing has made it a
social process. The significant properties of the holistic concept of management and
marketing has made bank marketing a device to establish a balance between the commercial
and social considerations, often considered to the be opposite of each other. A collaborationof two words banks and marketing thus focuses our attention on the following:
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* Bank marketing is a managerial approach to survive in highly competitive market as well as
reliable service delivery to target customers.
* It is a social process to sub serve social interests.
* It is a fair way of making profits
* It is an art to make possible performance-orientation.
* It is a professionally tested skill to excel competition.
STRENGTH
emerging economies banks over the last few years.
the sector. These changes include strengthening prudential norms, Enhancing the payments
system and integrating regulations between commercial and co-operative banks.
banking system has reached even to the remote corners of the country.
uality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in Comparable economies
in its region.
Foreign banks will have the opportunity to own up to 74 per cent of Indian private Sector
banks and 20 per cent of government owned banks.
WEAKNESS
marketing, service operations, risk management and the overall organisational performance
ethic & strengthen human capital.
The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.
al weaknesses such as a fragmented industry structure, restrictions on Capitalavailability and deployment, lack of institutional support infrastructure, Restrictive labour
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laws, weak corporate governance and ineffective regulations Beyond Scheduled Commercial
Banks (SCBs)
: The government has refused to dilute its Stake in
PSU banks below 51% thus choking the headroom available to these banks for raining equity
capital.
OPPORTUNITY
The market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on the retail
side, and in fee-based income and investment banking on the wholesale banking side. These
require new skills in sales & marketing, Credit and operations.
Given the demographic shifts resulting from changes in age profile and household Income,
consumers will increasingly demand enhanced institutional capabilities and service levels
from banks.
New private banks could reach the next level of their growth in the Indian Banking sector
by continuing to innovate and develop differentiated business Models to profitably serve
segments like the rural/low income and affluent/HNI Segments; actively adopting
acquisitions as a means to grow and reaching the Next level of performance in their service
platforms. Attracting, developing and retaining more leadership capacity
Foreign banks committed to making a play in India will need to adopt alternative
Approaches to win the race for the customer and build a value-creating Customer franchise
in advance of regulations potentially opening up post 2009. At the same time, they should
stay in the game for potential acquisition opportunities as and when they appear in the near
term, maintaining a fundamentally long-term value-creation mindset.
With the growth in the Indian economy expected to be strong for quite some time-
especially in its services sector-the demand for banking services, especially retail banking,
mortgages and investment services are expected to be strong.
rnment to amend the
Banking Regulation Act to permit banks to trade in commodities and Commodity derivatives.
: In an attempt to relieve banks of their capital crunch, the RBI has allowed
them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If
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the new instruments find takers, it would help PSU banks, left with little headroom for raising
equity.
THREATS
stability of the system.
private players.
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COMPANY PROFILE
BACKGROUND OF THE COMPANY
Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and commenced
its business from 4th July, 1939 in Kashmir (India). The Bank was first in the country as a
State owned bank. According to the extended Central laws of the state, Jammu & Kashmir
Bank was defined as a govt. Company as per the provision of Indian companies act 1956. In
the year 1971, the Bank received the status of scheduled bank. It was declared as "A" Class
Bank by RBI in 1976. Today the bank has more than 750 branches across the country and has
recently become a billion Dollar Company.
PROFILE
1. Incorporated in 1938 as a limited company.
2. Governed by the Companies Act and Banking Regulation Act of India.
3. Regulated by the Reserve Bank of India and SEBI.
4. Listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)
5. 53 per cent owned by the Government of J&K.
6. Rated "P1+" by Standard and Poor- CRISIL connoting highest degree of safety.
7. Four decades of uninterrupted profitability and dividends.
Unique Characteristics: One of a kind
1. Private sector Bank despite government holding 53 per cent of equity.
2. Sole banker and lender of last resort to the Government of J&K.
3. Plan and non -plan funds, taxes and non-tax revenues routed through the bank.
4. Salaries of Government officials disbursed by the Bank.
5. Only private sector bank designated as agent of RBI for banking.
6. Carries out banking business of the Central Government.
7. Collects taxes pertaining to Central Board of Direct Taxes in J&K.
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Brand Identity
The new identity for J&K Bank is a visual representation of the Banks philosophy and
business strategy. The three colored squares represent the regions of Jammu, Kashmir and
Ladakh. The counter-form created by the interaction of the squares is a falcon with
outstretched wingsa symbol of power and empowerment.
The synergy between the three regions propels the bank towards new horizons. Green
signifies growth and renewal, blue conveys stability and unity, and red represents energy and
power. All these attributes are integrated and assimilated in the white counter-form
NATURE OF THE BUSINESS
Banks safeguard money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashiers checks and offer
investment and insurance products, which they were once prohibited from selling.
There are several types of banks, which differ in the number of services they provide
and the clientele they serve.
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Commercial banks, which dominate this industry, offer a full range of services for
individuals, businesses, and governments. These banks come in a wide range of sizes,
from large global banks to regional and community banks.
Global banks are involved in international lending and foreign currency trading, in
addition to the more typical banking services.
Regional banks have numerous branches and automated teller machine (ATM)
locations throughout a multi-state area that provide banking services to individuals.
Banks have become more oriented toward marketing and sales.
Community banks are based locally and offer more personal attention, which many
individuals and small businesses prefer.
Savings banks and savings and loan associations, sometimes called thrift institutions,
are the second largest group of depository institutions.
Federal Reserve banks are Government agencies that perform many financial services
for the Government. Their chief responsibilities are to regulate the banking industry
and to help implement Nations monetary policy.
Interest on loans is the principal source of revenue for most banks, making their
various lending departments critical to their success. The money to lend comes
primarily from deposits in checking and savings accounts, certificates of deposit,
money market accounts
Technology is having a major impact on the banking industry. Electronic banking by
phone or computer allows customers to pay bills and transfer money from one
account to another. Through these channels, bank customers can also access
information such as account balances and statement history.
Use of check imaging, which allows banks to store photographed checks on the
computer, is one such example that has been implemented by some banks.
Many banks now offer their customers financial planning and asset management
services, as well as brokerage and insurance services, often through a subsidiary or
third party. Others are beginning to provide investment banking services that help
companies and governments raise money through the issuance of stocks and bonds
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VISION AND MISSION
Vision
To catalyze economic transformation and capitalize on growth.
Banks vision is to engender and catalyze economic transformation of Jammu and
Kashmir and capitalize from the growth induced financial prosperity thus engineered. The
bank aspires to make Jammu and Kashmir the most prosperous state in the country, by
helping create a new financial architecture for the J&K economy, at the center of which
will be the J&K Bank.
The Bank's vision is to be financially sound, profitable, growth and technology oriented,
committed to building and maximizing sustainable value for all its stakeholders. The
Bank is committed to achieve healthy growth in profitability and simultaneously to
remain consistent with the Bank's risk appetite and at the same time ensuring the highest
levels of ethical standards, professional integrity and regulatory compliance.
Mission
Our mission is two-fold: To provide the people of J&K international quality financial
service and solutions and to be a super-specialist bank in the rest of the country. The two
together will make us the most profitable bank in the country.
Quality Policy:
The bank begun its much-delayed expansion plan in 2011-12, improved its earnings and kept
the asset quality stable in the first half of this financial year. Recently, it sold a part of its
stake in MetLife for a profit of Rs 140-150 crore. This has made the banks share attractive to
investors, market analysts said.
At the current market price, J&K Bank is trading reasonably at 1.15x FY14 ABV. We
believe they deserve to get a better multiple, on the back of consistent performance on asset
quality as well as strong return ratios (RoA/RoE) over the last couple of years. Its superior
provision coverage ratio is icing on the cake and stands as one of the best in the industry
(greater than 93 per cent, including technical write-offs), providing cushion to its future
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Other Finances:-
Consumer Loan
Consumption Loan
Personal Loan to Pensioners
Mortgage loan for Trade and Service Sector
Loans against Mortgage of Immovable Property
Fair Price Shop Scheme
Travel and Tourist taxi operators
Specialized Finance:-
Help Tourism (For Kashmir valley only)
All purpose Agri term Loan
Fruit Advances Scheme (Apple)
Zaffron Finance
Roshni Financing Scheme
Craft Development Finance
Dastkar Finance
Giri Finance Scheme
Khatamband Craftsmen Finance
Commercial Premises Finance
Laptop/PC Finance
Saving and Deposits
CurrentAccounts
Gift ChequeSchemes
Value AddedServices
Term &Deposits
Saving BankDeposits
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Saving Bank Deposits:-
Saving Bank Deposit Scheme
SB Ujala- No Frills Account
Term Bank Deposits:-
Millennium Deposits Scheme
Flexi Deposits Scheme
Fixed Deposits Scheme
Child Care Scheme
Cash Certificates
Super Earner Deposits Scheme
Recurring Deposits Scheme
Recurring Plus Account
Smart Saver Scheme
Depositors Pension Scheme
Value Added Schemes:-
Tax Saver Term Deposit Scheme
Mehendi Deposit Certificate
Current Accounts:-
Platinum Account
Gold Account
Premium Plus Account
Premium Account
Basic Account
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Other Business of J&K Bank
AREA OF OPERATION
The Bank has its main market of operation in the state of Jammu and Kashmir. The
branch network of the bank is so dense that it has its branch every two kilometres.
The bank has also registered its presence in the main cities of India.
The bank is extensively supportive of small scale businesses and tourism in the state.
The bank constituted the J&K Bank Rural Self Employment Training Institutes
(JKBRSETI) Society, registered with Registrar of Society, Directorate of Industries
and Commerce (Kashmir), Srinagar for setting up JKBRSETIs in all the 12 lead
districts of the bank.
Non Life InsuranceMUTUAL FUNDLife Insurance
Bajaj Allianz
General Insurance
Co. Ltd
MetLife India
Insurance
CARDS
Empowerment
Credit Card
Merchant
Acquiring (Point of
Sale Equipment)
Global Access
Card
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The bank constituted a trust under the title Jammu and Kashmir Bank Social
Conscience Trust to prevent heritage and to take eco-preservation initiative.
The Bank operates a Regional Rural bank under the name J&K Grameen Bank.
The Bank is also active in the field of corporate social responsibility like providing
financial assistance for medical aid, supporting sports and educational institution.
OWNERSHIP PATTERN
SHARE HOLDING PATTERN AS ON 31.03.2013
SR.NO. PARTICULARS NO OF SHARES TOTAL %
PHYSICAL ELECTRONIC SHARESTO
CAPITAL
1 GOVERNMENT OF J&K 0 25775266 25775266 53.17
2 INDIAN MUTUAL FUNDS 0 2120006 2120006 4.37
3 INSURANCE COMPANIES 0 215608 215608 0.44
4 BANKS 0 2100 2100 0.00
5 NON RESIDENT INDIANS 1600 269352 270952 0.56
6FOREIGN INST.
INVESTORS0 10963479 10963479 22.62
7 BODIES CORPORATES 24094 3365353 3389447 6.99
8 RESIDENT INDIVIDUALS 2032949 3696908 5729857 11.82
9 CLEARING MEMBERS 0 11087 11087 0.02
TOTAL 2058643 46419159 48477802 100.00
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INFRASTRUCTURE FACILITIES
Head Office
J&K bank has its headquarter in Srinagar. Due to extreme cold during the winters it
becomes necessary to provide heating facilities.
The four storied building has several facilities for its employees and other customers.
The building houses the office of chairman and other important personnels of the
bank.
There is a cafeteria in the premises which serves the employees with quality food.
The Basement consists of parking facility.
There is a small park in the premises for employees.
The bank currently has 11 zonal office
1. Kashmir central.
2. Kashmir south .
3. Kashmir north
4. Ladakh
5. Jammu central.
6. Jammu west
7. Jammu north
8. Upper north Mohali
9. North Delhi
10.Mumbai
11.South Bangalore.
Besides J&K bank has RCCs in Kashmir(Srinagar),Jammu, Delhi and Mumbai
Branches
The bank has more than 750 branches all over the country, and 726 ATMs across the
country as on October 1, 2013.
The branches are fully computerized with latest technology.
All the CBS branches of the bank have been enabled for RTGS and NEFT facility.
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2.9 ACHIEVEMENTS AND AWARDS
J&K Banks Annual Report 2008-09 has won three awards at the prestigious LACP
2009 Vision Awards the worlds largest award programme for Annual Reports,
organized by California-based League of American Communications Professionals
(LACP), USA.
The LACP is a forum within the public relations industry that facilitates discussion of
best-in-class practices in public relations and recognizes exemplary communication
capabilities at a global level. The awards received include Rank 73 on the top
hundred list of annual reports from around the world, Platinum Award in the
Commercial Banks Up to $10billon annual revenue from the Asia Pacific Region
and Silver Award for Most Creative Report across all sectors from the Asia Pacific
Region.
J&K bank received the BANKING TECHNOLOGY 2009 Award presented by IBA
& TFCI on 28thJan 2010.
The Bank was awarded ASIAN BANKING AWARD 2005 for its development
project financing programme in recognition of contributing significantly to the
development of tourism industry of the J&K state. The Bank has won the ASIAN
BANKING AWARD for the second consecutive year. The J&K Bank has bagged the prestigious Financial Express Best Banks Award in the
Old Private Sector Banks category for scaling up its business and strengthening the
balance for the year ending March 2011.
The Bank has been awarded as the best Bank in the prestigious Dun & Bradstreet
(D&B) Polaris Software Banking Awards 2011. The award was conferred in the
category for Rural Reach- Private Sector.
J&k bank was conferred with the prestigious HR Leadership Award at IPE HRM
Congress Awards organized under the aegis Asia Pacific HRM Congress (APHC)
2012-13
J&K bank emerged as the Best Bank in the Old Private Sector Bank category at
the CNBC. TV18 Indias Best Bank and Financial Institution Awards 2012-13.
The Sunday Standard FINWIZ Best Bankers Award 2012-13
J&K Banks sustained focus on all the areas of banking during the past two years
enabled it to win four national awards at The Sunday Standard FINWIZ Best
Bankers Award.
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Conferred Best Banker in Financial Inclusion and Customer Friendliness
award
Runner-up for the Best Banker in priority Sector Growth and Agricultural
Credit
J&k Banks Chairman & CEO Mushtaq Ahmad were rated as the top ranked
CEO for being accomplished in all aspects of banking.
WORK FLOW MODEL
APPLICATION FROM THE CUSTOMER
DETAILED ANALYSIS OF THE APPLICATION AND DOCUMENTS
STUDY OF RESULTS BY THE CONCERNED DEPARTMENTS
APPROVAL / REJECTION FROM THE CONCERNED MANAGER
FINAL SANCTION/ISSUE OF PRODUCTS AND SERVICES
RECOMMENDATIONS BY THE DEPARTMENTS
MONITORING AND FOLLOW-UP
CONTROL
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FUTURE GROWTH AND PROSPECTUS
Over the last several years RBI has undertaken wide-ranging financial sector reforms
to improve financial