94 Chapter III Profile of Indian Banking Industry: SBI and ICICI Banks This chapter presents the history of Indian Banking Industry. It also presents the general banking scenario, structure of banks. It also discusses the history of SBI and ICICI and how these banks try to motivate and satisfy their employees. The different motivational practices adopted by the banks are presented and the first objective of the study is ascertained. 3.1 Introduction In any economy banking sector plays a vital role for overall development of agriculture, small business and different industries. In the pre-nationalisation period bank had been managed by few people who were serving their vested interest for their personal gains. 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. For the past three decades India’s 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. The bank also offers investment and insurance products. As a variety of models for cooperation and integration among financial industries have emerged, some of the traditional distinctions between banks, insurance companies, and security firms have diminished. 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 for 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.
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94
Chapter III
Profile of Indian Banking Industry: SBI and ICICI Banks
This chapter presents the history of Indian Banking Industry. It also presents the general
banking scenario, structure of banks. It also discusses the history of SBI and ICICI and
how these banks try to motivate and satisfy their employees. The different motivational
practices adopted by the banks are presented and the first objective of the study is
ascertained.
3.1 Introduction
In any economy banking sector plays a vital role for overall development of agriculture,
small business and different industries. In the pre-nationalisation period bank had been
managed by few people who were serving their vested interest for their personal gains.
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. For the past three decades India’s
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. The bank
also offers investment and insurance products. As a variety of models for cooperation and
integration among financial industries have emerged, some of the traditional distinctions
between banks, insurance companies, and security firms have diminished. 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
for 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.
95
3.2. Historical Background
Banking is an ancient business in India with some of oldest references in the writings of
Manu. Bankers played an important role during the Mogul period. During the early part
of the East India Company era, agency houses were involved in banking. Modern
banking (i.e. in the form of joint-stock companies) may be said to have had its beginnings
in India as far back as in 1786, with the establishment of the General Bank of India.
Bank of Hindustan was set up in 1870; it was the earliest Indian Bank. Later, three
presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of
Bombay and Bank of Madras were set up, which laid foundation for modern banking in
India. In 1921, all presidency banks were amalgamated to form the Imperial Bank of
India. Imperial bank carried out limited number of central banking functions prior to
establishment of RBI. It engaged in all types of commercial banking business except
dealing in foreign exchange.
Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was
constituted as an apex body without major government ownership. Banking Regulations
Act was passed in 1949. This regulation brought RBI under government control. Under
the act, RBI got wide ranging powers for supervision & control of banks. The Act also
vested licensing powers & the authority to conduct inspections in RBI. In 1955, RBI
acquired control of the Imperial Bank of India, which was renamed as State Bank of
India. In 1959, SBI took over control of eight private banks floated in the erstwhile
princely states, making them as its 100% subsidiaries.
It was 1960, when RBI was empowered to force compulsory merger of weak banks with
the strong ones. It significantly reduced the total number of banks from 566 in 1951 to 85
in 1969. In July 1969, government nationalised 14 banks having deposits of Rs. 50 crores
& above. In 1980, government acquired 6 more banks with deposits of more than Rs.200
crores. Nationalisation of banks was to make them play the role of catalytic agents for
economic growth. The Narasimha Committee report suggested wide ranging reforms for
the banking sector in 1992 to introduce internationally accepted banking practices. The
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amendment of Banking Regulation Act in 1993 saw the entry of new private sector
banks.
Banking industry is the back bone for growth of any economy. The journey of Indian
Banking Industry has faced many waves of economic crisis, such as the economic crisis
of US in 2008-09 and now the European crisis. The general scenario of the world
economy is very critical. It is the banking rules and regulation framework of India which
has prevented it from the world economic crisis. In order to understand the challenges
and opportunities of Indian Banking Industry, it is important to understand the general
scenario and structure of Indian Banking Industry.
3.3. General Banking Scenario in India
The general banking scenario in India has become very dynamic now-a-days. Before pre-
liberalization era, the picture of Indian Banking was completely different as 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 Reserve Bank of India was nationalized on January 1, 1949 under the terms of the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948. In 1949, the Banking
Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "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.
By the 1960s, the Indian banking industry had become an important tool to facilitate the
speed of development of the Indian economy. The Government of India issued an
ordinance and nationalised the 14 largest commercial banks with effect from the midnight
of July 19, 1969. A second dose of nationalization of 6 more commercial banks followed
in 1980. The stated reason for the nationalization was to give the government more
control of credit delivery. With the second dose of nationalization, the Government of
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India controlled around 91% of the banking business of India. Later on, in the year 1993,
the government merged New Bank of India with Punjab National Bank. It was the only
merger between nationalized banks and resulted in the reduction of the number of
nationalised banks from 20 to 19. After this, until the 1990s, the nationalized banks grew
at a pace of around 4%, closer to the average growth rate of the Indian economy.
Table 3.1. Banks Nationalized
S.No 1969 1980
1. Allahabad Bank Andhra Bank
2. Bank of Baroda Corporation Bank
New Bank
3. Bank of India Punjab & Sind Bank
4. Bank of Maharashtra Vijaya Bank
5. Canara Bank Oriental Bank of Commerce
6. Central Bank of India UTI Bank
7. Syndicate Bank
8. UCO Bank
9. United Bank of India
10. Union Bank
11. Punjab National Bank
12. Indian Overseas Bank
13. Indian Bank
14. Dena Bank
Source: Survey
In the early 1990s, the then Narasimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. The next stage for the Indian
banking has been set up 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 74% 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.
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The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People not just demanded more
from their banks but also received more.
3.4. Structure of Indian Banking Industry
Banking Industry in India functions under the sunshade of Reserve Bank of India - the
regulatory, central bank. Banking Industry mainly consists of:
• Commercial Banks
• Co-operative Banks
The commercial banking structure in India consists of: Scheduled Commercial Banks
Unscheduled Bank. Scheduled commercial Banks constitute those banks which have
been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.
RBI in turn includes only those banks in this schedule which satisfy the criteria laid down
vide section 42 (60) of the Act. Some co-operative banks are scheduled commercial
banks although not all co-operative banks are. Being a part of the second schedule
confers some benefits to the bank in terms of access to accommodation by RBI during the
times of liquidity constraints. At the same time, however, this status also subjects the
bank certain conditions and obligation towards the reserve regulations of RBI.
For the purpose of assessment of performance of banks, the Reserve Bank of India
categorise them as public sector banks, old private sector banks, new private sector banks
and foreign banks.
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Table 3.2.
Profile of Scheduled Commercial Banks in India
Number Number
Total Total Net
Total
advances Deposits NPA
Category Number of
of banks of Offices
(crore) (crore) Ratio Employees
SBI &
6 18,772 994154 1245862 1.49 2,82,453
Associate
Nationalized
20 45,640 2311478 3127122 .92 4,75,082
Banks(IDBI)
Private Banks
21 11,968 797534 1002759 .56 2,18,679
Foreign Banks 33 316 195539 240689 .67 27,968
total 80 76,696 4298704 5616432 .97 10,04,182
Source- Profile of Banks 2010-2011,
RBI
As per the above table the profile of Scheduled Commercial Banks is depicted as on 2010
-2011. The total number of employees of SBI and Associates is 2,82,453 and that of
Private Banks is 2,18,679. The number of offices of SBI is 18,772 and that of Private
Banks is 11,968. This shows a steady increase in private sector banking at par with public
sector banking.
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Table 3.3.
Ten Largest Banks in India
Name of Bank Credit Market NIMs Tier I Return on Gross Portfolio Share (2010- Capital Net Worth NPA % as in March (%) 11) % as in (2010-11) as in
2011 March March
(Rs. billion) 2011 2011
State Bank of India 7,567 18% 2.9% 7.8% 13% 3.3%
Punjab National 2,421 6% 3.5% 8.4% 24% 1.8%
Bank
Bank of Baroda 2,287 5% 2.8% 10.0% 24% 1.4%
ICICI Bank 2,164 5% 2.3% 13.2% 10% 4.5%
Bank of India 2,131 5% 2.5% 8.3% 17% 2.2%
Canara Bank 2,125 5% 2.6% 10.9% 26% 1.5%
HDFC Bank 1,600 4% 4.2% 12.2% 17% 1.1%
IDBI Bank 1,571 4% 1.8% 8.1% 16% 1.8%
Axis Bank 1,424 3% 3.1% 9.4% 19% 1.1%
Central Bank of
India 1,297 3% 2.7% 6.4% 18% 2.2%
Total banking 42,874 100% 2.9% 9.7% 17% 2.3%
NIM: Net Interest Margin
Source: Annual Reports, Results of banks, ICRA Research 2011
As per the above table the top 10 largest banks, State Bank of India occupies the first
place and ICICI bank occupies fourth place. It may be considered as though it is in the
fourth position in top ten banks, ICICI occupies first place among private sector banks.
3.5. Industry scenario of Indian Banking Industry
The growth in the Indian Banking Industry has been more qualitative than quantitative
and it is expected to remain the same in the coming years. Based on the projections made
in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan,
the report forecasts that the pace of expansion in the balance-sheets of banks is likely to
decelerate. The total assets of all scheduled commercial banks by end-March 2010 are
estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of GDP at current
market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at
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an annual composite rate of 13.4 per cent during the rest of the decade as against the
growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that
there will be large additions to the capital base and reserves on the liability side. The
Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, nonscheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and private sector
banks (the old/ new domestic and foreign). These banks have over 67,000 branches
spread across the country.
The Public Sector Banks (PSBs), which are the base of the Banking sector in India
account for more than 78 per cent of the total banking industry assets. Unfortunately they
are burdened with excessive Non Performing assets (NPAs), massive manpower and lack
of modern technology. On the other hand the Private Sector Banks are making
tremendous progress. They are leaders in Internet banking, mobile banking, phone
banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the
Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI
Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan
Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO
Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO
Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in
the Indian Banking Industry.
Banking Industry in India is going through a transitional phase. The first phase of
financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in
a shift from Class banking to Mass banking. This in turn resulted in a significant growth
in the geographical coverage of banks. Every bank had to earmark a minimum percentage
of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector
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also grew during the 1970s in protected environs and the banking sector was a critical
source. The next wave of reforms saw the nationalization of 6 more commercial banks in
1980. Since then the number of scheduled commercial banks increased four-fold and the
number of bank branches increased eight-fold. After the second phase of financial sector
reforms and liberalization of the sector in the early nineties, the Public Sector Banks
(PSB) s found it extremely difficult to compete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance after the
guidelines permitting them were issued in January 1993. Eight new private sector banks
are presently in operation. These banks due to their late start have access to state-of-the-
art technology, which in turn helps them to save on manpower costs and provide better
services.
During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same
period. The share of foreign banks (numbering 42), regional rural banks and other
scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent
respectively in deposits and 8.41percent, 3.14 percent and 12.85 percent respectively in
credit during the year 2000.
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Fig 3.1.
Commercial Banking Structure in India
Reserve Bank of India
Bank Financial Institution
All India
State Level
Other
Scheduled
Co-operative
Commercial
credit
Financial
Institution
Institution
banks
institutions
Institution
Public Sector
Private
Foreign
Regional
Urban
banks Sector banks banks
Rural Banks
Cooperative
Source: SBI Manual
Rural
Cooperative Credit
Institutions
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3.6. Current Scenario
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 PSB‟s 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, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the
lookout. The UTI bank- Global Trust Bank merger however opened a Pandora’s 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
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schemes. Also, following India’s commitment to the W To 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. A talk of government diluting their equity from 51 percent to
33 percent in November 2000 has also opened up a new opportunity for the takeover of
even the PSBs. The FDI rules being more rationalized in the financial year 2002 may also
pave the way for foreign banks taking the mergers and acquisitions 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 of them are also
entering the new vistas of Insurance. Banks with their phenomenal reach and a 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.
Fig 3.2. Bankex – 10 Year Performance
Source:MoneyWorks4me.com
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According to an IBA-FICCI-BCG report titled ‘Being five star in productivity – road
map for excellence in Indian banking’, India’s gross domestic product (GDP) growth will
make the Indian banking industry the third largest in the world by 2025. According to the
report, the domestic banking industry is set for an exponential growth in coming years
with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the
current asset size of USD 1,350 billion (2010)”. The historical performance of the Banks
is depicted below.
Table 3.4 Historical Performance of Banks
The above table shows the 5 years historical performance of different types of players in
the banking industry, public sector bank has grown its deposits, advances and business
per employee by the highest rate – 21.7%, 23% and 21.1% respectively. As far as net
interest income is concerned, private banks are ahead in the race by reporting 24.2%
growth, followed by pubic banks (21.4%) and then by foreign banks (14.8%). Though the
growth in the business per employee and profit per employee has been the highest for
public sector banks, in absolute terms, foreign banks have the highest business per
employee as well as profit per employee.
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Fig 3.3. Historical Performance of Banks
In the last 5 years, foreign and private sector banks have earned significantly higher
return on total assets as compared to their pubic peers. The above fig depicts the trend,
foreign banks show an overall decreasing trend, private banks an increasing trend and
Public banks have been more or less stagnant. The net NPA of public sector bank was
also significantly higher than that of private and foreign banks at the end of Financial
Year 2011, which indicates the asset quality of public banks is comparatively poor. The
Capital Adequacy ratio was also very high for private and foreign bank as compared to
public banks. It can be concluded that the current position of ROA, Net NPA and CAR of
different kinds of players in the industry indicates that going ahead; public banks will
have to face relatively more problems as compared to private and foreign banks.
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Table 3.5 Five Year Performance of Banking Industry
The table above indicates that overall the top private banks have grown faster than that of
public banks. Axis Bank, one of the new private sector banks, has shown the highest
growth in all parameters i.e. net interest income, deposits, advances, total assets and book
value. Among public sector banks, Bank of Baroda has been the outperformer in the last
five years.
Kotak Mahindra Bank has reported the highest 5-year average net interest margin and
currently, it also has the highest CAR whereas HDFC Bank has the highest CASA, the
lowest net NPA to net advances ratio and the highest five-year-average ROA. On the
other hand, India’s largest bank, SBI reported the lowest five-year-average ROA.
Currently, it has the highest net NPA to net advances ratio and the lowest CAR. Looking
at all of the above, it is expected that Private Banks are better placed to garner growth in