New Report Sir.. - Copy

8/6/2019 New Report Sir.. - Copy

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RESERVE BANK OF INDIA

PATNA

PROJECT REPORT

CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA:

A BRIEF SKETCH

PREPARED BY-ABHISHEK KUMAR SINGH (YOUNG SCHOLAR)

RBI YOUNG SCHOLARSHIP SCHEME 2011


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PREFACE

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

economy. The banking system of India should not only be hassle free but it should beable to meet new challenges posed by the technology and any other external and

internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer

confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system

has reached even to the remote corners of the country. This is one of the main reasons

of India's growth process.

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

Dividends with the nationalization of 14 major private banks of India.

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

getting a draft or for withdrawing his own money. Today, he has a choice. Gone are

days when the most efficient bank transferred money from one branch to other in two

days. Now it is simple as instant messaging or dials a pizza. Money has become the

order of the day.

Banking in India originated in the last decades of the 18th century. The oldestbank in existence in India is the state bank of India, a government-owned bank that

traces its origins back to June 1806 and that is the largest commercial bank in the

country. Central banking is the responsibility of the Reserve bank of India, which in

1935 formally took over these responsibilities from the then Imperial Bank of India,

relegating it to commercial banking functions. After India's independence in 1947, the

Reserve Bank was nationalized and given broader powers. In 1969 the government

nationalized the 14 largest commercial banks; the government nationalized the six next

largest in 1980.


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ACKNOWLEDGEMENT

First of all I would like to thank to Reserve bank of India to allow me to be a part of

such a reputed institution, the Central Bank of India, who gave me the chance to workon the project titled CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA in Patna city. I

sincerely thank the Governor, Reserve Bank of India and Shri Mohit kumar Singh

Regional Director Patna office for facilitating and providing an opportunity to learn in

the form of a training programme. I further thank Shri S.Maurya,D.G.M for helping me

in the project along with RBI.

A special thanks to Mr. Kshitiz Raj singh Manager (D.A.D) for helping me to

understand all important vital aspect relating to banking system and providing data and

& structure.

As a part of DBS , I owe my thanks to all other persons working in DBS for

providing me information, support and understanding related to different aspects of

banking system.

Lastly and significantly I am grateful to Mr K.S.Gauri Assistant Manager of DAPM

for providing great support and also for making me feel comfortable with the homely

interaction with all the other staff and the entire staff of RBI.

I am also thankful to Mr Pravin kumar Manager, DAPM, (personnel) for providing me

support and solving my problem during my tenure in RBI Patna office. He stood

besides us whenever we needed him in the whole course. Without whos friendly and

loving attitude, the project would not have been such a joyful learning and a memorable

experience forever

ABHISHEK KUMAR SINGH


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C0NTENTS

Subject. Page no

1. Synopsis..... 5

2. Introduction of .. 6-8

y RBI

y DBS

3. Banking sectors in India . 9-11

y Public sector

y Private sector

y Co-operative, RRBs

4. Challenges.. 12-33

01. How to reduce NPA

02. Implementation of Basel II

03. Risk management

04. Corporate governance

05. Customer service

06. Latest Technology

07. Human Resource Management

08. Talent Management

09. Interest rate risk

10. Transparency and disclosure

11. Competition

12. Challenges in banking security

13. Know your customer guidelines (Anti money laundering)

14. Grow in size

5. Recommendations.. 34-35

6. Conclusion 36-37

7. Bibliography.. 38


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SYNOPSIS

The enhanced role of the banking sector in the Indian economy, the increasing levels

of deregulation along with the increasing levels of competition have facilitatedglobalisation of the India banking system and placed numerous demands on banks. The

last decade has witnessed major changes in the financial sector - new banks, new

financial institutions, new instruments, new windows, and new opportunities - and, along

with all this, new challenges.

Indian banks are facing innumerable challenges such as worrying level of NPAs,

deteriorating asset quality, increasing pressures on profitability, asset-liability

management, liquidity risk management, market risk management and ever tightening

prudential norms. Besides this, the disclosure requirements are also increasing.

However, it must be recognized that there is little to celebrate, as the banking

system in India has to remain on toes to face myriad changes and to deliver banking of

international standards and quality. The greatest challenge that the PSBs are today

facing is the Asset Management, both financial and human.

Global challenges in banking

A new broad challenges faced by the Indian banks in the following areas, viz.,enhancement of customer service; application of technology; implementation of

Basel II&III; improvement of risk management systems; implementation of new

accounting standards; enhancement of transparency & disclosures.

Over the last few years, the falling interest rates, gave banks very little

incentive to lend to projects, as the return did not compensate them for the risk

involved. This led to the banks getting into the retail segment big time. It also led to

a lot of banks playing it safe and putting in most of the deposits they collected into

government bonds. Now with the bond party over and the bond yields starting to goup, the banks will have to concentrate on their core function of lending.

Furthermore, the interference of the central government with the functioning of

PSBs should stop. A fresh autonomy package for public sector banks is in

offing. The package seeks to provide a high degree of freedom to PSBs on

operational matters. This seems to be the right way to go for PSBs.


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INTRODUCTIONOFRBI

(THE CENTRAL BANK OF INDIA)

The central bank of the country is the Reserve Bank of India (RBI). The Reserve

Bank of India was established on April 1, 1935 in accordance with the provisions of THE

RESERVE BANK OF INDIA ACT, 1934. Though originally privately owned, since

nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

The Central Office of the Reserve Bank has been in Mumbai since inception. The

Central Office is where the Governor sits and is where policies are formulated. Now it

has 22 regional offices, most of them in state capitals. The Act, 1934 (II of 1934)

provides the statutory basis of the functioning of the Bank. The Bank was constituted forthe need of following:

y To regulate the issue of banknotes

y To maintain reserves with a view to securing monetary stability and

y To operate the credit and currency system of the country to its advantage.

FUNCTIONSOF RBI

Monetary Authority:

y Formulates, implements and monitors the monetary policy.

y Objective: maintaining price stability and ensuring adequate flow of credit to

productive sectors.

Regulator and supervisor of the financial system:

y Prescribes broad parameters of banking operations within which the country's

banking and financial system functions.

y Objective: maintain public confidence in the system, protect depositors' interest

and provide cost-effective banking services to the public.

Manager of Foreign Exchange

y Manages the Foreign Exchange Management Act, 1999.

y Objective: to facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in India.


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Issuer of currency:

y Issues and exchanges or destroys currency and coins not fit for circulation.

y Objective: to give the public adequate quantity of supplies of currency notes and

coins and in good quality.

Developmental role

y Performs a wide range of promotional functions to support national objectives.

Related Functions

y Banker to the Government: performs merchant banking function for the central

and the state governments; also acts as their banker.

y Banker to banks: maintains banking accounts of all scheduled banks.


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DEPARTMENT OF BANKING SUPERVISION

The Department of Banking Supervision has its Central Office in Mumbai and 16regional offices at various centers in the country. In December 1993 the Department of

Supervision was carved out of the DBOD with the objective of segregating the

supervisory role from the regulatory function of RBI.

The Department of Banking Supervision at present exercises the supervisory role

relating to commercial banks in the following forms: Preparing of independent inspection

programmes for different institutions. Inspection evaluates financial condition and

performance of the bank which includes judging asset quality, solvency and capital

adequacy earning performance and liquidity of the bank. Then seeing management and

operating condition and compliance of the bank which includes Regulatory complianceand Guidance compliance and finally doing summary assessment of the bank

.Undertaking scheduled and special on-site inspections, off-site surveillance, ensuring

follow-up and compliance. Determining the criteria for the appointment of statutory

auditors and special auditors and assessing audit performance and disclosure

standards.

Exercising supervisory intervention in the implementation of regulations which

includes-recommendation for removal of managerial and other persons, suspension of

business, amalgamation, merger/winding up, issuance of directives and imposition of

penalties. The Department of Banking Supervision follow CAMELS approach during its

inspection of commercial banks. It judges banks on the basis of the following six

parameters :

C- CREDIT ADEQUACY

A- ASSET OR CREDIT QUALITY

M- MANAGEMENT

E- EARNINGS

L-LIQUIDITY

S-SOLVENCY


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BANKING SECTOR IN INDIA

PUBLIC SECTOR BANKS (25)-The public sector is the one whose working is in

the hands of the government. The government holds a majority stake in public sector

industries. Their activities are mostly influenced by the government. It may be defined

as "an enterprise where there is no private ownership but its activities are not mainly

confined to the maximization of profits and private interests of the enterprise but it is

influenced by social. (Including SBI &its associate)

PRIVATE BANK (30)- A private bank is owned by either an individual or a general

partner(s) with limited partner(s). In any such case, the creditors can look to both the"entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-

partners' assets.

FOREIGN SECTOR BANK(40)- Foreign sector bank are those bank which have

their head office in other countries outside India and branch is working in India.

CO-OPERATIVE BANK(68)-The co-operative bank is very much useful for rural

people. The co-operative banking sector is divided into the following categories.

a. State co-operative bank

b. Central co-operative bank.

c. Primary Agriculture Credit Societies

RRBs(196)

A rural bank is a financial institution that helps rationalize the developing regions or

developing country to finance their needs specially the projects regarding agricultural

progress.


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HISTORYOFBANKING

Indian banking system, over the years has gone through various phases after

establishment of Reserve Bank of India in 1935 during the British rule, to function asCentral Bank of the country. Earlier to creation of RBI, the central bank functions were

being looked after by the Imperial Bank of India. With the 5-year plan having acquired

an important place after the independence, the Govt. felt that the private bank may not

extend the kind of cooperation in providing credit support, the economy may need. In

1954 the All India Rural Credit Survey Committee submitted its report recommending

creation of a strong, integrated, State-sponsored, State-partnered commercial banking

institution with an effective machinery of branches spread all over the country. The

recommendations of this committee led to establishment of first public sector Bank in

the name of State Bank of India on July 01, 1955 by acquiring the substantial part ofshare capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a

result of re-organisation of princely States, the associate bank came in to fold of public

sector banking.

In these five decades since independence, banking in India has evolved through

four distinct phases:

FOUNDATION PHASE:- can be considered to cover 1950s and 1960s till the

nationalisation of banks in 1969. The focus during this period was to lay the foundation

for a sound banking system in the country. As a result the phase witnessed the

development of necessary legislative framework for facilitating re-organisation andconsolidation of the banking system, for meeting the requirement of Indian economy. A

major development was transformation of Imperial Bank of India into State Bank of India

in 1955 and nationalisation of 14 major private banks during 1969.

EXPANSION PHASE:- had begun in mid-60s but gained momentum after

nationalisation of banks and continued till 1984. A determined effort was made to make

banking facilities available to the masses. Branch network of the banks was widened at

a very fast pace covering the rural and semi-urban population, which had no access to

banking hitherto. Most importantly, credit flows were guided towards the priority sectors.

However this weakened the lines of supervision and affected the quality of assets of

banks and pressurized their profitability and brought competitive efficiency of the

system.

CONSOLIDATION PHASE:- The phase started in 1985 when a series of policy

initiatives were taken by RBI which saw marked slowdown in the branch expansion.

Attention was paid to improving house-keeping, customer service, credit management,


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

structural constraints that obstructed the growth of money market.

REFORMS PHASE:-The macro-economic crisis faced by the country in 1991 paved

the way for extensive financial sector reforms which brought deregulation of interest

rates, more competition, technological changes, prudential guidelines on assetclassification and income recognition, capital adequacy, autonomy packages etc.


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Challenges Facing BankingIndustryInIndia

The banking industry in India has undergone a major transformation due to changes ineconomic conditions and continuous deregulation. These multiple changes happening

one after other has a ripple effect on a bank to graduate from completely regulated

seller market to completed deregulated customers market.

Figure: Challenges Facing BankingIndustryInIndia


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Deregulation: This continuous deregulation has made the Banking market extremely

competitive with greater autonomy, operational flexibility and decontrolled interest rate

and liberalized norms for foreign exchange. The deregulation of the industry coupled

with decontrol in interest rates has led to entry of a number of players in the banking

industry. At the same time reduced corporate credit off take (thanks to sluggish

economy) has resulted in large number of competitors batting for the same pie.

New rules: Changed environment has redefined new rules of the game. Banks are

transforming to universal banking, adding new channels with lucrative pricing and

freebees to offer. Natural fall out of this has led to a series of innovative product

offerings catering to various customer segments, specifically retail credit.

Efficiency: This in turn has made it necessary to look for efficiencies in the business.

Banks need to access low cost funds and simultaneously improve the efficiency. The

banks are facing pricing pressure, squeeze on spread and have to give thrust on retailassets.

Diffused Customer loyalty: This will definitely impact Customer preferences, as they

are bound to react to the value added offerings. Customers have become demanding

and the loyalties are diffused. There 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.

Misaligned mindset: These changes are creating challenges, as employees are madeto adapt to changing conditions. There is resistance to change from employees and the

Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control

orientation. Acceptance of technology is slowly creeping in but the utilization is not

maximized.

Competency Gap: Placing the right skill at the right place will determine success. The

competency gap needs to be addressed simultaneously otherwise there will be missed

opportunities. The focus of people will be on 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.


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Challenges ForPublic SectorBanks InIndia

01. How to reduce NPA

02. Implementation of Basel II

03. Risk management

04. Corporate governance

05. Customer service

06. Latest Technology

07. Human Resource Management

08. Talent Management

09. Financial Inclusion10. Transparency and disclosure11. Competition

12. Challenges in banking security

13. Know your customer guidelines(Anti money laundering)

14. Grow in size


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1.HOW TO REDUCE NPA

Non Performing Asset means an asset or account of borrower, which has been

classified by a bank or financial institution as sub-standard, doubtful or loss asset, in

accordance with the directions or guidelines relating to asset classification issued by

The Reserve Bank of India.

1.1Categories of NPAs

Sub-standard Assets - which has remained NPA for a period of 90 days to less

than or equal to 12 months.

Doubtful Assets - has remained in the sub-standard category for a period of 12

months up to 3 years depending upon availability of security.

Loss Assets - loss has been identified by the bank or internal or external auditors

or the RBI inspection but the amount has not been written off wholly.

The problem India Faces is not lack of strict prudential norms but

i. The legal impediments and time consuming nature of asset disposal proposal.

ii. Postponement of problem in order to show higher earnings.

iii. Manipulation of debtors using political influence.

(Amount in Rs crore)

Years

As on March 31 2011

Standard

Assets

Sub-standard

Assets

Doubtful

Assets

Amount %

share

Amount %

share

Amount %

share

(1) (2) (3) (4) (5) (6)Public SectorBanks

2005 770431 94.27 11084 1.35 30218 3.69

2006 1029493 96.14 11394 1.06 24804 2.32

2007 1335175 97.19 14147 1.03 19944 1.45

2008 1656585 97.66 16870 0.99 19167 1.13

2009 2059725 97.91 19521 0.93 20715 0.98

2010 2462030 97.73 27688 1.10 24685 0.98


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1.2 Several Reasons an Account Becoming NPA

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other debt

instrument from capital markets.

6. Business failures.

7. Diversion of funds for expansion \ modernization \setting up new projects \

heeling or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,

misappropriation etc.9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and

follow-ups, delay unsettlement of payments\ subsidiaries by government bodies

etc.

External factors:

1. Sluggish legal system long legal tangles Changes that had taken place in labour

laws, Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage,

industrial recession, excess capacity, natural calamities like floods, accidents.

5. Failures, nonpayment over dues in other countries, recession in other countries,

externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.

1.3 Suggestions

Through RBI has introduced number of measures to reduce the problem of

increasing NPAs of the banks such as CDR mechanism. One time settlement schemes,enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness

of these measures. What I would like to suggest for reducing the evolutions of the NPAs

of Public Sector Banks are as under.

(1) Each bank should have its own independent credit rating agency which should

evaluate the financial capacity of the borrower before than credit facility.


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(2) The credit rating agency should regularly evaluate the financial condition of the

clients.

(3) Special accounts should be made of the clients where monthly loan concentration

reports should be made.

(4) It is also wise for the banks to carryout special investigative audit of all financial and

business transactions and books of accounts of the borrower company when there is

possibility of the diversion of the funds and mismanagement.

(5) The banks before providing the credit facilities to the borrower company should

analyze the major heads of the income and expenditure based on the financial

performance of the comparable companies in the industry to identify significant

variances and seek explanation for the same from the company management. They

should also analyze the current financial position of the major assets and liabilities.

(6) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how theywould face the environmental threats and opportunities with the use of their strength

and weakness, and what will be their possible future growth in concerned to financial

and operational performance.

(7) Independent settlement procedure should be more strict and faster and the decision

made by the settlement committee should be binding both borrowers and lenders and

any one of them failing to follow the decision of the settlement committee should be

punished severely.

(8) There should be proper monitoring of the restructured accounts because

there is every possibility of the loans slipping into NPAs category again.

(9) Proper training is important to the staff of the banks at the appropriate level with

ongoing process. That how they should deal the problem of NPAs, and what continues

steps they should take to reduce the NPAs.

(10) Willful Default of Bank loans should be made a Criminal Offence.

(11) No loan is to be given to a Group whose one or the other undertaking has

become a Defaulter.


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2.0IMPLEMENTATION OF BASEL II

Implementation of Basel II is seen as one of the significant challenges for PublicSector Banks.

WHAT IS BASEL II?

Basel II is the second of the Basel Accords which are recommendations on banking

laws and regulations issued by the Basel Committee on Banking Supervision.

Ithas following 3 pillars --

The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major

components of risk that a bank faces: credit risk, operational risk and market risk. Other

risks are not considered fully quantifiable at this stage.

The Second Pillar- Supervisory Review Process

Supervisory review process has been introduced to ensure not only that bank have

adequate capital to support all the risks, but also to encourage them to develop and use

better risk management techniques in monitoring and managing their risks.

The third pillar

The third pillar greatly increases the disclosures that the bank must make. This is

designed to allow the market to have a better picture of the overall risk position of the

bank and to allow the counterparties of the bank to price and deal appropriately.


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Basel II aims to encourage the use of modern risk management techniques; and to

encourage banks to ensure that their risk management capabilities are commensurate

with the risks of their business. Previously, regulators' main focus was on credit risk and

market risk. Basel II takes a more sophisticated approach to credit risk, in that it allows

banks to make use of internal ratings based Approach - or "IRB Approach" as they have

become known - to calculate their capital requirement for credit risk. It also introduces,

in addition to the market risk capital charge, an explicit capital charge for operational

risk. Together, these three risks - credit, market, and operational risk - are the so-called

"Pillar 1" risks.

Banks' risk management functions need to look at a much wider range of risks than this

- interest rate risk in the banking book, foreign exchange risk, liquidity risk, business

cycle risk, reputation risk, strategic risk. The risk management role of helping identify,

evaluate, monitor, manage and control or mitigate these risks has become a crucial role

in modern-day banking. Indeed, it is probably not exaggerating the importance of this to

say that the quality of a bank's risk management has become one of the keydeterminants of a success of a bank it was decided that banks in India will initially adopt

the Standardised Approach (SA) for credit risk and the Basic Indicator Approach (BIA)

for operational risk. The prime considerations while deciding on the likely approach

included the cost of implementation and the cost of compliance.

The minimum requirements to be met by banks relate to (a) internal rating system

design, (b) risk rating system operations, (c) corporate governance and oversight, (d)

use of internal ratings, (e) risk quantification, (f) validation of internal estimates, (g)

requirements for recognition of leasing, (h) calculation of capital charges for equity

exposures and (i) disclosure requirements. The earliest dates of making application bybanks and likely approval by the regulator for implementing the standardized approach

for operational risk are April 1, 2010 and September 30, 2010 respectively. The earliest

dates of making application by banks and likely approval by the regulator for

implementing advanced measurement approach for operational risk are April 1, 2012

and March 31, 2014 respectively.

3.0Risk management

Risk management is relatively new and emerging practice as far as Indian banks

are concerned and has been proved that its a mirror of efficient corporate governance

of a financial institution. Globalisation and significant competition between foreign and

domestic banks, survival and optimizing returns are very crucial for banks and financial

institutions. In a volatile and dynamic market place for achieving sustainable business

growth and shareholders value, it is essential to develop a link between risks and


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rewards of all products and services of the bank. Hence, the banks should have efficient

risk management framework to mitigate all internal and external risks.

The Risk Has IncreasedSubstantially Due To Various Factors As Below

Globalization: Despite opposition to it, globalization has come to stay. Trade

barriers have reduced considerably. Capital movement has also been liberalized

to a large extent.

Deregulation: Interest rates have been deregulated. Exchange rate of rupee is

market determined though RBI often intervenes to keep its value low.

Competition: Competition has multiplied. The new generation private sectorbanks are giving a stiff competition to public sector banks. Moreover, the process

of disintermediation has also affected the public sector banks adversely.

Technology: Rapid growth of technology has many benefits. Unfortunately, public

sector banks are yet to leverage their recently acquired strength in this area. In

the meanwhile, risk relating to technology has increased substantially.

Manpower: Public sector banks are handicapped by age profile and low technical

skills of their employees.

There are three main categories of Risks

Credit Risks: The Risk that the borrower will not able to repay the debt (loan) under the

terms of the original agreement . Credit risk includes new dimensions with cross-

border transactions. Sometimes, transfer risk will arise when currency of obligation

becomes unavailable to borrowers.

It is most critical risk in public sector banks.

It required most subjective judgment.

It must be managed carefully.


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The Base Rate System-

With effect from 1st July 2010, Base rate shall include all those elements of thelending rates that are common across all categories of borrowers. Banks may

choose any benchmark to arrive at the base rate for a specific tenor that may bedisclosed transparently. Banks will determine their actual lending rates on loans

with reference to the base rate and by including such other customer specific

charges as considered appropriate. With the introduction of the base rate system, all categories of loans will be

priced only with reference to the base rate with a few exceptions. The base rate

can also serve as the reference benchmark rate for floating rate loan products,

apart from other external market benchmark rates. The floating interest rate

based on external benchmarks should, however, be equal to or above the base

rate at the time of sanction or renewal.

Since the base rate will be the minimum rate for all loans, the current stipulation

of BPLR as the ceiling rate for loans up to Rs.200,000 is withdrawn. It is

expected that this will increase the credit flow to small borrowers at reasonable

rates and direct bank finance will provide effective competition to other forms of

high cost credit.

In wholesale fund- based banking systems, the London Interbank Offered Rate

(LIBOR) is widely used as a benchmark which is essentially an interbank deposit

rate.

4.0 Corporate governance

For strengthening financial sector and to maintain financial stability, various

measures were taken by the Reserve Bank of India. First, the Board for Financial

Supervision stressed the importance of good corporate governance in financial

institutions. In the year 2005-2006, Reserve Banks Board for Financial Supervision

suggested to the Government to extend the fit and proper status guidelines prescribed

for private sector banks to the public sector banks, with a view to attaining higher

standards of corporate governance.

I would like to quote an Economist and Noble laureate Milton Friedman. According to

him Corporate Governance is to conduct the business in accordance with owner or

shareholders desires, which generally will be to make as much money as possible,

while conforming to the basic rules of the society embodied in law and local

customs


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The Reserve Banks policy objective is to ensure high-quality corporate governance

in banks. It has issued guidelines stipulating fit and proper criteria for directors of

banks. In terms of the guidelines, a majority of the directors of banks are required to

have special knowledge or practical experience in various relevant areas. The Reserve

Bank also has powers to appoint additional directors on the board of a banking

company.

Currently in India, about four-fifths of the banking business is under the control of

public sector banks (PSBs), comprising the SBI and its subsidiaries and the nationalised

banks. Corporate governance in PSBs is complicated by the fact that effective

management of these banks vests with the government and the top managements and

the boards of banks operate merely as functionaries. The ground reality is such that the

Government performs simultaneously multiple functions vis--vis the PSBs, such as the

owner, manager, quasi-regulator, and sometimes even as the super-regulator. Unless

the issues connected with these multiple, and sometimes conflicting, functions areresolved and the boards of banks are given the desired level of autonomy it would be

difficult to improve the quality of corporate governance in PSBs. It is desirable that all

the banks are brought under a single Act so that the corporate governance regimes do

not have to be different just because the entities are covered under multiple Acts of the

Parliament or that their ownership is in the private or public sector.

The underlying theme is accountability at all levels including the Boards From the

perspective of banking industry, corporate governance also includes in its ambit the

manner in which their boards of directors govern the business and affairs of individual

institutions and their functional relationship with senior management. This is determinedby how banks:

y set corporate objectives (including generating economic returns to owners);

y run the day-to-day operations of the business and;

y consider the interests of recognized stakeholders i.e., employees, customers,

suppliers, supervisors, governments and the community and

y align corporate activities and behaviours with the expectation that banks will

operate in a safe and sound manner, and in compliance with applicable laws

and regulations; and ofcourse protect the interests of depositors, which is

supreme.

For ensuring good corporate governance, the importance of overseeing the various

aspects of the corporate functioning needs to be properly understood, appreciated and

implemented. There are four important aspects of oversight that should be included in

the organizational structure of any bank in order to ensure the appropriate checks and

balances:


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(1) oversight by the board of directors or supervisory board;

(2) oversight by individuals not involved in the day-to-day running of the various

business areas;

(3) direct line supervision of different business areas; and

(4) independent risk management and audit functions.

The supervisory experience of Regulators in general, in banks consider the following as

critical elements in the governance process:

Establishing strategic objectives and a set of corporate values that are

communicated throughout the banking organization.

Setting and enforcing clear lines of responsibility and accountability throughout the

organization.

Ensuring that board members are qualified for their positions, have a clear

understanding of their role in corporate governance and are not subject to undue

influence from management or outside concerns. Ensuring that there is appropriate oversight by senior management

Effectively utilizing the work conducted by internal and external auditors, in

recognition of the important control functions they provide

Ensuring that compensation approaches are consistent with the banks ethical

values, objectives, strategy and control environment.

Conducting corporate governance in a transparent manner

Ensuring an environment supportive of sound corporate governance

5.0 Customerservice

Banking being service industry, customer service is backbone. Customer service in

Public Sector Banks is very complex issue because customers of Public sector banks

come from all walks of life.

1. From poorest to richest.

2. Youngest to oldest.

3. Illiterate to highly educated.

4. Sweeper to Chief Executive.

5. Individuals to Corporate.

6. People from all regions, religion, caste, age, service, profession etc.

7. People from different backgrounds, culture, temperament and ego levels.


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.Mahatma Gandhis perception of a customer was as follows:

He is not dependent on us. We are dependent on him. He is not an interruption on our

work. He is the purpose of it. He is not an outsider on our premises. He is part of it. We

are not doing him a favor by serving him. He is doing us a favor by giving us an

opportunity to do so.

As far as the customer I concerned, he is the pivot of all activities in the era of

consumerism. Customer is god in the UK and USA. Customer is the king in Japan. But,

the customer is the Boss in India and the Boss is always right.

The Public Sector Banks may need to include customer oriented approach or

customer focus in their five areas of businesses such as cash accessibility, asset

security, money transfer, deferred payment and financial advices.

There are four strategies available to customer relations' managers:

To win back or save customers.

To attract new and potential customers.

To create loyalty among existing customers and.

To up sell or offer cross services.

In order to develop close relationship with the customers the Public SectorBanks have

to focus on the technology oriented innovations that offer convenience to the customers.

Today customers are offered ATM services, access to internet banking and phonebanking facilities and credit cards. These have elevated banking beyond the barriers of

time and space.

So providing better services than Private Sector Banks to customer is a challenge

for Public Sector Banks. Because a satisfied customer brings in more customers and

he is the best advertisement for the bank.

6.0 Latesttechnology

An online banking facility enables you to handle your finances efficiently.

Online banking uses modern computer technologies to offer the users

convenient banking facilities. If you have access to such a facility, there is absolutely no

need for you to personally visit your banks branch for any sort of transaction. You can


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simply login with the internet-banking password that your banker has given you, and

carry all the necessary work online. It also eliminates the necessity of doing any paper-

based work and saves considerable time for the users.

Private sector and foreign banks were using technology and computerized system

since its beginning while PSBs were not. So they found difficulty in managing all these

things. Many of Indian PSBs ignored technological change and had lost market share to

foreign banks and new private banks. Technology helps in having a huge branch

network easily and also it reduces the operational cost this may b clarified by an

example as:-

Operational cost per transaction of an account via different type is-

y Via computers on counter- 40 Rs

y Via ATM -16-17 Rs

y Via online -46 Paise

So it is cleared that manually/direct transaction cost comes very high and

electronically and online it is very low. So thats why public sector banks should improvetheir working system and should make it totally online but challenge is before PSBs.

The users can do variety of work using your online banking pin code. The bankers

benefit equally from the online banking facilities. Besides offering their users the

convenience of banking, the online banking system means significant cost savings for

the bankers themselves. With such an automatic system in place, the bankers need not

to hire employees specialized in handling paper work and teller interactions. This

reduces the bankers operating costs considerably, translating into significant cost

savings over the long-term.

6.1 VARIOUS ADVANTAGES OF BANKING ONLINE:

The biggest advantage of online banking is its convenience. Unlike a banks

branches, online banking facilities are open 24/7. This offers you banking from the

comfort of your home with just a click. You can access such a facility from anywhere in

the world. This could be great advantage if you need to address urgent monetary

concerns while away from home. Transactions online are fast and mostly quicker than ATM transactions. Moreover, online banking systems have sophisticated tools that

provide effective management of the users assets.

Initially the online banking security system was quiet simple, a id and a password

and you are done. It was quiet risky then anyone who gets access to these two can

empty your account. Many people at that time will do setting with the courier people and


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got access to this details. But now even the card and the id password as sent thru

separate courier. So its now more secure.

Most banks now hassms verification, you are sent a code that you need to add

when you are adding a new account for transfer, its simple and logical. Thou sometimes

the sms takes too much time to be received. Stanchart is fast the minute you press add

the sms is in your inbox, may be because of lesser traffic. Icici has also an extra

transactionpassword plus you need to have a debit card and have to use the grid at the

back of card to validate it. This three way verification is quiet robust and thus you dont

getphis ing emails these days. Becausephis e rs know that having an id andpas s word

is notenough.

INTERNET BANKING

The Internet banking portal of the bank enables its retail banking customers to

operate their accounts from anywhere anytime, removing the restrictions imposed bygeography and time. It's a platform that enables the customers to carry out their

banking activities from their desktop, aided by the power and convenience of the

Internet.

Using Internet banking services, customer can do the following normal banking

transactions

online:

Funds transfer between own accounts.

Third party transfers to accounts maintained at any branch of SBI

Group Transfers to accounts in State Bank Group Inter Bank Transfers to accounts with other Banks

Online standing instructions for periodical transfer for the above

Credit PPF accounts across branches

Request for Issue of Demand Draft

Request for opening of new accounts

Request for closure of Loan Accounts

Request for Issue of Cheque Book

TECHNOLOGICAL LEAP

The banks realised that if they have to survive, they will have to adopt

moderntechnology. State Bank of India was amongst the first to focus on technology

and a team is constantly at work to innovate in an attempt to lower costs. So, the bank

has now introduced two-faced ATMs, which will increase efficiency.


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Technology will not just help them reach out to young customers better but also

help them cut costs and improve efficiency. Heres how the economics work. While a

transaction at a branch costs around Rs 50, one at an ATM works out to Rs 18, a senior

State Bank of India executive said. Transactions through the Internet are even cheaper

at around Rs 10 each.

As a result, banks like State Bank of India want 50 per cent of the transactions from

non-branch channels such as ATMs, net banking and mobile phones.

These are some initiatives all bank wants to take in future though few banks have madeprogress in this regard:

y Set up a data warehouse and a data mart soon. IDRBT may be involved as aconsultant. It may need to set up a NAS and SAN to consolidate its storage.

y Disaster Recovery site may be built at a secured location to create a replica of itsdata center. A call center will be set up as a CRM initiative, which usesinformation from the data warehouse with the help of the Base24 switch.

Satellite Banking

As you might be aware, having regard to much greater reliability of a satellite-basedcommunication link for interconnecting the branches of the banks,particularly in the hillyareas and difficult terrain where terrestrial communication link is difficult to provide, theReserve Bank had constituted a Technical Group to examine the proposal for providingsatellite connectivity to the bank branches in such areas. The objective is to enablegreater penetration of the electronic payment products in the hinterland areas also, byfacilitating the integration of the rural and remote branches with the core bankingsolution platform of the banks and help them providing efficient banking services to theircustomers.

7.0 Human Resource ManagementManpower Planning which is also called as Human Resource Planning consists

of putting right number of people, right kind of people at the right place, right time,doing the right things for which they are suited for the achievement of goals of theorganization. Human Resource Planning has got an important place in the arena ofindustrialization. Human Resource Planning has to be a systems approach and iscarried out in a set procedure.

The procedure is as follows:

1. Analysing the current manpower inventory2. Making future manpower forecasts3. Developing employment programmes4. Design training programmes


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Importance of ManpowerPlanning

1. Key to managerial functions- The four managerial functions, i.e., planning,organizing, directing and controlling are based upon the manpower. Human

resources help in the implementation of all these managerial activities. Therefore,staffing becomes a key to all managerial functions.2. Efficient utilization- Efficient management of personnels becomes an important

function in the industrialization world of today. Seting of large scale enterprisesrequire management of large scale manpower. It can be effectively done throughstaffing function.

3. Motivation- Staffing function not only includes putting right men on right job, butit also comprises of motivational programmes, i.e., incentive plans to be framedfor further participation and employment of employees in a concern. Therefore,all types of incentive plans becomes an integral part of staffing function.

4. Betterhumanrelations- A concern can stabilize itself if human relations

develop and are strong. Human relations become strong trough effective control,clear communication, effective supervision and leadership in a concern. Staffingfunction also looks after training and development of the work force which leadsto co-operation and better human relations.

5. Higherproductivity- Productivity level increases when resources are utilized inbest possible manner. higher productivity is a result of minimum wastage of time,money, efforts and energies.This is possible through the staffing and it's relatedactivities ( Performance appraisal, training and development, remuneration)

Need of ManpowerPlanningManpower Planning is a two-phased process because manpower planning not only

analyses the current human resources but also makes manpower forecasts and therebydraw employment programmes. Manpower Planning is advantageous to firm infollowing manner:

1. Shortages and surpluses can be identified so that quick action can be takenwherever required.

2. All the recruitment and selection programmes are based on manpower planning.3. It also helps to reduce the labour cost as excess staff can be identified and

thereby overstaffing can be avoided.4. It also helps to identify the available talents in a concern and accordingly training

programmes can be chalked out to develop those talents.5. It helps in growth and diversification of business. Through manpower planning,

human resources can be readily available and they can be utilized in bestmanner.

SWOT ANALYSIS OF PUBLIC SECTOR BANKS (IN HR CONTEXT)

Strengths


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High skilled personnel in middle and low levels in the banks. Aggression towards the development of the existing standards Strong regulatory impact by central bank to all banks for implementation Presence of intellectual capital to face the change in implementation with good

quality.

Weaknesses Poor technology infrastructure Presence of more number of smaller banks that would likely to be impacted

adversely. Poor compensation system Poor talent management.

Opportunities

Availability of fresh talent to strengthen thebank operations. Increasing risk manage expertise.

Need significant connection among business, credit & risk management andinformation technologyThreats Inability to meet additional capital requirements. Huge investment in technologies. Entrance of foreign banks to capture talent HR. Increasing the cost of human capital

8.0 Talent Management

Such personnel need to be identified, nurtured and motivated through a

systematic organizational plan to enable them to accept challenging roles early in

the career. Suitable changes in the promotion policies should take care of

aspirations of such extra ordinary and talented manpower.

Banks will also have to pay increasing attention to education and training

including sponsorship of identified persons to MBA programmes, Phd

programmes and other long duration programmes in technology and financial

management to develop a wider managerial pool of competent people who can

be developed fast to play the role of modern banker in ever difficult and turbulenttimes.

Banks will have to introduce innovative mechanism and process to respond to

the aspirations of such talented people by providing them sabbatical leave for

professional growth by sponsorship in seminars and conferences, both nationally

and internationally, to present papers and encouraging them to join professional


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organisations to develop appropriate competencies and network with fellow

professionals.

There is also need to develop organisation-wide awareness about banks key-

business problems including stagnant business units, strain on profitability, cost

of operations, unexplored business opportunities, manpower costs, NPAS etc.

The preconditions for an effective talent management is clarity of where the

organisation is, i.e., the starting point and where it wishes to reach in a given time

horizon, i.e., the destination

Otherinitiatives that can be included are

1. Deputation of Officers for Training in India and Abroad

2. Developments in the Short-term Secondment Scheme

3. International Seminar

4. Deputation of Class III and IV Staff to External Institutions in India5. 360-Degree Appraisal for Officers in all grades in the Bank.

6. Human Resources Audit.

7. Knowledge Sharing Series

8. Visits/Attachments/Industrial relations

9. Grants to various Institutions

10. Complaints Redressal Mechanism

11. Financial Education and Literacy

9.0 Financial Inclusion

Financial inclusion is the delivery of financial services at affordable costs to

sections of disadvantaged and low income segments of society. Unrestrained access to

public goods and services is the sine qua non of an open and efficient society. It is

argued that as banking services are in the nature of public good, it is essential that

availability of banking and payment services to the entire population without

discrimination is the prime objective of public policy. The term "financial inclusion" has

gained importance since the early 2000s, and is a result of findings about financialexclusion and its direct correlation to poverty. Financial inclusion is now a common

objective for many central banks among the developing nations.

The Reserve Bank of India has set up a commission (Khan Commission) in 2004

to look into financial inclusion and the recommendations of the commission were

incorporated into the mid-term review of the policy (200506). In the report RBI


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exhorted the banks with a view of achieving greater financial inclusion to make available

a basic "no-frills" banking account. In India, Financial Inclusion first featured in 2005,

when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C

Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village

in India where all households were provided banking facilities. In addition to this KYC

(Know your Customer) norms were relaxed for people intending to open accounts with

annual deposits of less than Rs. 50,000. General Credit Cards (GCC) were issued to

the poor and the disadvantaged with a view to help them access easy credit. In January

2006, the Reserve Bank permitted commercial banks to make use of the services of

non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil

society organizations as intermediaries for providing financial and banking services.

These intermediaries could be used as business facilitators (BF) or business

correspondents (BC) by commercial banks. The bank asked the commercial banks in

different regions to start a 100% financial inclusion campaign on a pilot basis. As a

result of the campaign states or U.T.s like Puducherry, Himachal Pradesh and Keralahave announced 100% financial inclusion in all their districts while it is quite low at 33

percent for Bihar. Reserve Bank of Indias vision for 2020 is to open nearly 600 million

new customers' accounts and service them through a variety of channels by leveraging

on IT. However, illiteracy and the low income savings and lack of bank branches in rural

areas continue to be a road block to financial inclusion in many states. Apart from this

there are certain in Current model which is followed. There is inadequate legal and

financial structure.

Financially Excluded People The financially excluded sections largely comprise :

y Marginal farmers

y Landless labourers

y Oral lessees

y Self employed and unorganised sector enterprises

y Urban slum dwellers

y Migrants

y Ethnic minorities and socially excluded groups

y Senior citizens

y Women

y The North East, Eastern and Central regions contain most of the financially

excluded population.

Factors affecting access to financial services

y Legal identity : Lack of legal identity like voter id , driving license , birth

certificates ,employment identity card etc


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y Limited literacy : Particularly financial literacy and lack of basic education

prevent people to have access from financial services .

y Level ofincome : Level of income decides to have financial access . Low

income people generally have the attitude of thinking that banks are only for rich.

y 'Terms and conditions : While getting loans or at the time of opening accounts

banks places many conditions , so the uneducated and poor people find it very

difficult to access financial services .

y Complicated procedures : Due to lack of financial literacy and basic education ,

it is very difficult for those people who lack both to read terms and conditions and

account filling forms .

y Psychological and cultural barriers : Many people voluntarily excluded

themselves due to psychological barriers and they think that they are excluded

from accessing financial services .

y Place of living : As the name suggests that commercial banks operate only in

commercially profitable areas and they set up branches and main offices only inthat areas .People who lived in under developed areas find it very difficult to go to

areas in which banks are generally reside .

y Lack of awareness : Finally , people who lack basic education do not know the

importance of the financial products like Insurance , Finance , Bank Accounts ,

cheque facility ,etc.

Benefits OfInclusive Financial Growth

y Growth with equity : In the path of super power we the Indians will need to

achieve the growth of our country with equality . It is provided by inclusive

finance.

y Getrid of poverty : To remove poverty from the Indian context all everybody will

be given access to formal financial services . Because if they borrow loans for

business or education or any other purpose they get the loan will pave way for

their development .

y Financial Transactions Made Easy : Inclusive finance will provide banking

related financial transactions in an easy and speedy way .

y Safe savings along with financial services : People will have safe savingsalong with other allied services like insurance cover , entrepreneurial loans ,

payment and settlement facility etc,

y Inflating National Income : Boosting up business opportunities will definitely

increase GDP and which will be reflected in our national income growth .

y Becoming Global Player: Financial access will attract global market players to

our country that will result in increasing employment and business opportunities.


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Expectations of poorpeople from financial system Taking into account their

y Seasonal Inflow Of Income from agricultural operations,

y Migration from one place to another,

y Seasonal And Irregular Work Availability And Income; the existing financial

system needs to be designed to suit their requirements.y Security and safety of deposits

y Low transaction cost

y Convenient operating time

y Minimum paper work

y Frequent deposits

y Quick and easy access

y Product suitable to income and consumption

10.0 Transparency and disclosure

In pursuance of the Financial Sector Reforms introduced since 1991 and in order to

bring about meaningful disclosure of the true financial position of banks to enable the

users of financial statements to study and have a meaningful comparison of their

positions, a series of measures were initiated.

Transparency and disclosure norms are assuming greater importance in the

emerging environment. Banks are now required to be more responsive and

accountable to the investors.

Banks move to disclose in their balance sheets information on maturity profiles of

assets and liabilities, lending to sensitive sectors, movements in NPAs, besides

providing information on capital, provisions, shareholdings of the government, value

of investment in India and abroad, and other operating and profitability indicators.

The disclosure requirements broadly covered the following aspects:

y Capital adequacy

y Asset quality

y Maturity distribution of select items of assets and liabilities

y Profitability

y Country risk exposure


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y Risk exposures in derivatives

y Segment reporting

y Related Party disclosures

Transparency and disclosure standards are also recognised as important constituents

of a sound corporate governance mechanism.

Banks are required to formulate a formal disclosure policy approved by the Board of

directors that addresses the banks approach for determining what disclosures it will

make and the internal controls over the disclosure process.

Disclosure and transparency are not a panacea, but they can reduce the costs of

banking problems. Financial markets are quick to react to problems in institutions with

large exposures to troubled sectors. This provides an incentive to limit exposure in any

one area, and to quickly reduce exposure as problems emerge. Disclosure of problems

can force banking consolidation, transfer of problem assets, and closure of insolventinstitutions -- necessary conditions for quick recovery of a troubled banking sector. The

lessons from the United States and Japan indicate that other Asian economies may be

better off following the U.S. rather than the Japanese model. While the resolution of

banking problems in the United States was controversial and unpopular, it resulted in a

rapid resolution. In contrast, Japanese banks, by failing to disclose problems and not

being transparent, have delayed their recovery and exacerbated their difficulties.

It is a huge challenge for Public Sector Banks to implement a process for

assessing the appropriateness of their disclosures, including validation andfrequency.

11.0 Competition

Beginning from 1992, Indian banks were gradually exposed to the rigours of

domestic and international competition. Newly opened banks from the private sector

and entry and expansion of several foreign banks resulted in greater competition in both

deposit and credit markets. Consequent to these developments, there has been aconsistent decline in the share of public sector banks in total assets of commercial

banks. From the position of net loss in the mid-1990s, in recent years the share of

public sector banks in the profit of the commercial banking system has become broadly

commensurate with their share in assets, indicating a broad convergence of profitability

across various bank groups. This suggests that, with operational flexibility, public sector


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banks are competing relatively effectively with private sector and foreign banks. Public

sector bank managements are now probably more attuned to the market consequences

of their activities.

12.0 Challenges in banking security

Banks are the cornerstone of Indian economy and are continuously increasing its reach

and striving to excel in their services through extensive use of Information technology.

Technology, with its innovative solutions and tools, creates immense possibilities for

banking industry to grow and bring the customers under the fold of technology driventransformation. However, the technology transformation, characterized by wide spread

use of the Internet, with the new impetus for mobile, for financial transactions and

gradual evolution of underlying and backend infrastructure, becomes a reason for

concern also. It exposes a banking organization to a newer set of security threats; some

of them are heavily concentrated towards the industry, aiming for financial gain. The

security threats are becoming more organized and sophisticated in their intent, tactics

and style of execution, posing serious threats to the banking industry.

Managing security in banking industry is a complex challenge requiring in-depth

analysis of how security impacts the banking operations, identification of security threat

vector pertaining to banking industry and the evolution of it, review of the security

initiatives undertaken by the industry and evaluation of different approaches, trends and

technologies that have been emerging to address the specific challenges. Banking as a

business involves the management of risks. While much has been said about the

financial risks, the risks arising out of the large scale implementation of technology is of

recent origin, with banks having taken to large scale use of technology for their normal

day-to-day business. Security in banks has thus assumed significant proportions,

comprising both physical aspects in addition to those relating to Information, Information

Systems and Information Technology, all of which have an impact on the reputationalrisk of a financial organisation.

The largest set of functions in the banking sector which has benefited from the

advances in IT relate to payment systems since quick, safe and efficient transfer of

funds across the length and breadth of the country is the requirement of the day.

Security in Payment Systems cannot be addressed in isolation. It requires the


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integration of work processes, communication linkages and integrated delivery systems

and should focus on stability, efficiency and risk control. Yet another prime aspect of

concern in a good security policy is the role that the human beings have in a secure

computerised environment.

It would be advisable to build security features at the application level in respect of

banking oriented products, because of the critical nature of financial data transfer. The

financial messages should have the under noted features:

The receipt of the message at the intended destination

The content of the message should be the same as the transmitted one

The Sender of information should be able to verify its receipt by the recipient

The Recipient of the message could verify that the sender is indeed the person

Information in transit should not be observed, altered or extracted

Any attempt to tamper with the data in transit will need to be revealedNon-repudiation

These features boil down essentially to authentication (to verify the identity of

the sender of the message to the intended recipient to prevent spoofing or

impersonation), authorisation (to control the access to specific resources for

unauthorised persons), confidentiality (to maintain the secrecy of the content of

transmission between the authorised parties), integrity (to ensure that no

changes/errors are introduced in the messages during transmission) and

nonrepudiation (to ensure that an entity cannot later deny the origin and receipt and

contents of the communication

13.0 KNOW YOUR CUSTOMER GUIDELINES(ANTI MONEY

LAUNDERING)

Know your customer (KYC) is the due diligence and bank regulation that financial

institutions and other regulated companies must perform to identify their clients and

ascertain relevant information pertinent to doing financial business with them. Know

your customer policies are becoming increasingly important globally to prevent identity

theft fraud, money laundering and terrorist financing.


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One aspect of KYC checking is to verify that the customer is not on any list of

known fraudsters, terrorists or money launderers, such as the Office of Foreign Assets

Controls Specially Designated Nationals list. As well as sanctions lists, there are lists of

third party vendors that track links between persons regarded as high-risk owing to

negative reports in the media about them or in public records.

Banks doing KYC monitoring for anti-money laundering (AML) and checks relating

to combating the financing of terrorism (CFT) increasingly use specialized transaction

monitoring software, particularly names analysis software and trend monitoring

software.

The RBI had come up with more specific guidelines regarding KYC. These were divided

into four parts:

y CustomerAcceptance Policy:All banks shall develop criteria for accepting any

person as their customer to restrict any anonymous accounts and ensuredocumentation mentioned in KYC.

y Customer Identification Procedures: Customer to be identified not only while

opening the account, but also at the time when the bank has a doubt about his

transactions.

y Monitoring of Transactions: KYC can be effective by regular monitoring of

transactions. Identifying an abnormal or unusual transaction and keeping a watch

on higher risk group of the account is essential in monitoring transactions.

y Risk management: This is about managing internal work to reduce the risk of

any unwanted activity. Managing responsibilities, duties and various audits plus

regular employee training for KYC procedures.

Otheraspects of KYC

To prevent the possible misuse of banking activities for anti-national or illegal

activities, the RBI has given various directives to banks:

Strengthening the banks' 'Internal Control System' by allocating duties and

responsibilities clearly, and periodically monitoring them.

Before giving any finance at branch level, making sure that the person has no

links with notified terrorist entities and reporting any such 'suspect;' accounts to

the government.

Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC

guidelines are being properly adhered to or not by banks.


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Most important, banks must keep an eye out for all banking transactions and

identify suspicious ones. Such transactions will be immediately reported to the

bank's head office and authorities and norms shall also be laid down for freezing

of such accounts.

14.0 Grow in size Public Sector Banks should now go global in search of new markets, customers

and profits.

Some of the Public Sector Banks have their presence in overseas to a limited

extent.

The State Bank of India, the largest bank in India, ranks only 57 th amongst the

top global banks.It is 10th largest in size , SBIs assets base of $352 billion and

$285 deposits.

Therefore, our banks are not equipped enough to compete in the international

arena.

Realising the need to grow in size, the Indian banking system today is moving

from a regime of large number of small banks to small number of large banks.

Mergers and acquisitions in the banking sector are the order of the day.

This trend may lead logically to promote the concept of financial super market

chain, making available all types of credit and non-fund facilities under one roof

which is challenge for public sectors bank and demand of time.


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Recommendations

FOR NPA

y This would require managerial efficiency on the part of PSBs to not only reduce the

average level of net NPA but also to prevent the recurrence of this problem by

ensuring addition of fresh NPA to bare minimum.

y Banks should have framework for acceptable compromise proposals and

supportive recovery policy directed towards out-of-court settlements. Appointmentof recovery agents, utilizing services of private security agencies of ascertaining

means of NPA borrowers etc. are the other areas, which require fresh review.

y Quality asset building will also require up-to-date market information on various

industries, a deeper and penetrating insight about the financial transactions of large

borrowal groups, economic trends in a globalised environment and industry


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knowledge about new areas for financing like software, infrastructure, service

sector and other IT based industries etc.

FOR CORPORATE GOVERNANCE

y It is desirable that all the banks are brought under a single Act so that the

corporate governance regimes do not have to be different just because the

entities are covered under multiple Acts of the Parliament .

y Although the Reserve Bank maintains a tight vigil and inspects these entities

thoroughly at regular time intervals, the quality of corporate level governance

mechanism does not appear to be satisfactory.

y Oversight by the board of directors or supervisory board; Oversight by individuals

not involved in the day-to-day running of the various business areas; Direct line

supervision of different business areas; and Independent risk management,

compliance and audit functions. Banks need to develop mechanisms, which can

help them ensure percolation of their strategic objectives and corporate valuesthroughout the organisation.

FOR MAN POWER PLANNING

y would need to hire people in large numbers over next few years to maintain

growth and stay competitive.

y The entire HR framework needs to be revamped and the skill sets of existing

staff needs to be strengthened. The banks have to suitably realign their existing

human resources from surplus to deficit pockets Surplus staffs and readjust

staffing pattern in a computerised environment.

FOR TALENT MANAGEMENT

y Public Sector Banks should not only take care of the sum total of its individual

human capital, but also how effectively it draws out the best from its talent

Banks have an excellent pool of competent personnel at any point of time .

y Personnel in all the cadres. Such personnel need to be identified, nurtured andmotivated through a systematic organizational plan to enable them to accept

Suitable changes in the promotion, challenging roles early in the career. Loops in customerservices Facts about customers Ninety five percents of customers do not complain even if

they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and

accept such bad service as part of human nature.

Because do customers want

1-Customers want control over their decisions


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2- Customers want to achieve their goals

3- Customers want to preserve their self respect.

4- Customers want to be treated fairly

5- Customers want friendly welcome and reception

6- Customers want to know whats going on

7- Customers want a feeling of security and safety

8- Customers want to feel like VIPs

9- Customers want honesty

y The may I help you counter could not come up to the level of expectation as

there is a lack of spirit in implementing it. This can be a vital customer care

capsule in the panacea kit of the bank to heal al wounds.

y Many times the complaints could relate to discourteous behavior of counter staff-

this should be handled carefully. If the customer is correct and has too many such

complaints against the staff, a stern action is called for and client must be

advised. In sum and substance a good customer service means a broad smile oncustomers face as they leave the bank after finishing their business.

For PSBs, the major problems are in the form of security risks, network downtime,

scarcity of trained personnel, expensive system upgrades and recurring costs given

the massive scale of their current operations. Banks rely on innovative ideas to

increase their earnings.

Naturally, idea generators (human capital) become an even more important

resource than the physical and financial ones. The entry of new generation private

sector banks and evolving technology has been changing the face of the Indian

banking industry. It is necessary for PSBs to adopt a standardized customer

services code to remain competitive and profitable.

Conclusion

The growth of the banking sector will be one of the most important inputs that shall

go into making sure that India progresses and becomes a global economic super

power.

With the collapse of Lehman Brothers and other Wall Street icons, there was

growing recession which affected the US, the European Union (EU) and Japan. Thiswas the result of large scale defaults in the US housing market as the banks went on

providing risky loans without adequate security and the repaying capacity of the

borrower. The industries most affected by weakening demand were airlines, hotels, real

estate. Besides this, Indian exports suffered a setback and there was a setback in the

production of export-oriented sectors.


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The boom in the field of retail banking and the intense competition among the

banks to increase the customer base has resulted in the large disbursement of

consumer loans, home loans, loans on credit cards, auto loans, educational loans etc.

on easy terms without much scrutiny. This has brought with it an increase in the no. of

cases of default in loan repayment thus increasing the banks NPAs. Managing

customers is one of the main issues faced by banks. The demands and expectations of

the customers grow at a much faster rate than the banks can equip themselves to be

with them. If the service levels of the product levels are not up to the 60 customer

satisfaction, there is always a danger that the customer might shift his transactions

elsewhere. So always give customers more than they expect to get. Multiple regulations

are the main weakness for PSBs. It has not the single controlling system while private

banks have. PSBs are also guided by govt. and controlled by RBI and it has also their

union. So there is trice controlling system thats why any policy takes time in being

implemented. This is the main reason of delayed progress of PSBS.

But in this critical situation the Indian public sector banks handled that problem.

Banks act as important players in the financial markets. They play a vital role in the

economy of a country. Indian public sector banks have not only been able to weather

the storm of global recession but have been able to moderate its impact on the Indian

economy as well, compared to its peers among the foreign and private banks. The

banking sector faces profitability pressures due to higher funding costs, mark-to-market

requirements on investment portfolios, and asset quality pressures due to a slowing

economy. But Indian banks global exposure is relatively small, with international assets

at about 6 per cent of the total assets. The strong economic growth in the past, lowdefaulter ratio, absence of complex financial products, regular intervention by central

bank, proactive adjustment of monetary policy and so called close banking culture has

favored the banking industry in India in recent global financial turmoil.

There is need for continuous improvement in asset quality by strengthening skill

at the grass root level, adopting regular inter-face with borrowers, ascertaining

periodical operating performance of the firm etc.

Assessment of technology to choose the most appropriate model should be

taken up.

Technology strengthening should be done to provide a reliable backbone fordelivery of products and services and to get business intelligence data. Public

sector banks were more likely to be seen as an older generation organisation

wherethe average age group would be 50 years, somebody said, Public sector

banks thereforeneed to implement right strategies to woo young techno-savvy

customers that prefer alternative channels to traditional banking methods. the

financial sector services is undergoing a rapid change in terms of the


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demographics, regulatory requirements and technology because of the high

revenues generated.

Training of identified staff in these services should be done in the right earnest. The requirements of the customers should be recorded and the existing product

modified and enhanced.

Teams of experts should be organized to develop models of asset allocation tosuit the requirements of customers belonging to different life-stages, risktolerances etc.

Systems and procedures are being toned up to ensure standardization ofproducts and services so that the customer has a uniformly good experiencethroughout the bank.

Customers are being made aware of the enhanced offerings through multi-mediaadvertisements.

Above all, large-scale and concerted efforts are on to bring about the mind set inthe frontline staff desirable for delivery of the Financial Planning service.Furthermore, the interference of the central government with the functioning of

PSBs should stop. Public Sector Banks in India needs to tackle these challenges successfully to

keep growing and strengthen the Indian financial system.

With all these steps the success of PSBs should be assured.

BIBLIOGRAPHY

1. A Profile of Banks : 2010-11, by Reserve bank of India2. Economic & Political Weekly.3. Principles of Banking (MC Million).4. RBIs Annual Report for the year 2010-11.5. The Financial Express Trend and Progress of Banking in India 2008-2009,

published by R.B.I.6. www.rbi.org.in7. www.theeconomictimes.com8. www.thehindubusinessline.com

9. www.wikipedia.com

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