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Performance of Indian Banking System
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IntroductionEfficiency and profitability of the banking sector in India
has assumed primal importance due to intense competition, greater customer demands and changing banking reforms. This study attempts to measure the relative performance of Indian banks.
For this study, we have used public sector banks, old private sector banks, new private sector banks and foreign sector banks. We know that in the service sector, it is difficult to quantify the output because it is intangible. Hence different proxy indicators are used for measuring productivity of banking sector. Segmentation of the banking sector in India was done along the following basis: number of banks, offices, number of employees, business per employees, deposits per employee, advances per employee, bank assets size, non-performing assets etc.
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Indian Financial SectorThe Indian financial sector comprises a large
network of commercial banks, financial institutions, stock exchanges and a wide range of financial instruments. It has undergone a significant structural transformation since the initiation of financial liberalization in 1990s. Before financial liberalization, since mid 1960’s till the early 1990’, the Indian financial system was considered as an instrument of public finance. The evolution of Indian financial sector in the post independent period can be divided in to three distinct periods. During the first period (1947-68), the Reserve Bank of India (RBI) consolidated its role as the agency in charge of supervision and banking control.
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Banking System of IndiaThe present banking system can be classified
into the following categories:(i) Public Sector Banks (ii) Private Sector Banks (iii) Foreign Banks(iv) Regional Rural Banks(v) Co-operative Sector Banks (vi) Development Banks.
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Phases of Indian Banking
The Indian banking system and its regulations can be better understood when divided into the following two phases:
Post-NationalisationPost-Liberalization
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Liberalization
The Government of India framed its policies in the year 1991-92, keeping in view the benefits of liberalization
Some of the root causes that were behind the dull performance of the banks prompted the initiation of the banking sector reforms. Some of these causes were:
Greater emphasis on directed credit programmes Regulated interest rate structure Excessive regulations on organization's structure and
managerial resources; Lack of focus on profitability Lack of competition Lack of proper Accounting and Risk Management
System Lack of operational transparency Excessive support from government
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Financial Liberalization Measures Some of the important financial liberalization measures
are: Reduction in pre-emption of funds through reduction of
CRR and SLR Introduction of prudential provisioning and Capital
Adequacy norms. Phasing out the directed credit programmes Deregulation of interest rates Infusion of competition (Entry of Private Sector Banks) Imparting transparency Introduction of universal banking Mergers and Acquisitions Development of technology Emphasis on corporate governance
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Performance of Banking Sector
Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
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Information Technology and Bank Transformation
E-BankingAutomated Teller Machines EFTPoSRemote Banking Services Services Not Available Through Remote
BankingSmart Cards Internet Banking
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Commercial Bank Expansion
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Branch Expansion
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Employee’s Position
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Labour Productivity
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Branch Productivity
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Profitability Ratio
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Non-Interest Income as Percentage of Total Income
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Net NPA as Percentage of Net Advances
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Areas of Future Research
Disinvestments of PSBsRaising capital from the marketForeign direct investment (FDI)An appropriate banking model for India:Universal banking Vs. Narrow bankingAdopting international best practices i.e.
Basel – II
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Re-engineering OperationsMarketing of financial services: Product,
Process and PricingRetail BankingRisk Management including regulatory and
environmental risks Legal challenges
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Harnessing FacilitatorsTechnologyIssues in identification and cost-benefit
analysis of appropriate technology – Case Studies
Disaster Recovery Management
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Human Resource DevelopmentPreparing for the cultural transformationKnowledge management