A

RESEARCH REPORT

ON

“IMPACT OF REFORMS ON

PUBLIC SECTOR BANKS IN INDIA”

SUBMITTED TO:

SRM UNIVERSITY, MODINAGAR(UP)

IN THE PARTIAL FULFILLMENT FOR THE DEGREE OF Masters in Business Administration

(Session 2010 – 2012) – M.B.A. 4th Semester

Under supervision of:

Ms. Nidhi Arora KumarFacultySRM UNIVERSITY

Submitted by:

Pawan Kumar Pandey Regn.No. – 3511030060MBA(2010-12) batchSRM UNIVERSITY

INTRODUCTION

OBJECTIVES OF THE STUDY

LITRATURE REVIEW

RESEARCH METHODOLOGY

LIMITATIONS OF THE STUDY

CONCLUSION

BIBLIOGRAPHY

ANNEXURES

//DECLARATION//

I hereby certify that the work which is presented in this project report entitled

“IMPACT OF REFORMS ON PUBLIC SECTOR BANKS IN INDIA” in

partial fulfillment of the requirement for the award of the degree of Masters

in Business Administration (MBA), SRM Uni.versity, SRM, is an authentic

record of my original work carried out during the 4th semester.

I have not submitted the matter embodied in the project report for the award

of any other degree.

Place: Modinagar Name: Pawan Kumar Pandey

Date: / / Reg. No. 3511030060

ACKNOWLEDGEMENT

“Gratitude is not a thing of expression; it is more a matter of feeling.”

There is always a sense of gratitude which one express for others for their help and

supervision in achieving the goals. I too express my deep gratitude to each and everyone

who has been helpful to me in completing the project report successfully.

I would also like to thank almighty God for blessing showered on me during the

completion of Dissertation Report.

First of all, I am highly thankful to for allowing me to pursue my Dissertation Report on

”Impact Reforms On Public sector Banks in India”..

I give my regards and sincere thanks to Ms. Nidhi Arora Kumar (Project guide)who

has devoted her precious time in guiding me & helping me complete it within time.

I feel self-short of words to thanks my parents and friends who had directly or

indirectly instrumental in the completion of the project. I am indebted to all respondents

for their time passion during the long conversations.

(Pawan Kumar Pandey)

EXECUTIVE SUMMARY

The core processes of a company may change over time in accordance with the shifting requirements of business competitiveness.

The financial development was given impetus with the adoption of social control over

banks in 1967 and subsequently nationalization of 14major scheduled banks in July in 1969.

Since then the banking system has formed the core of the Indian financial system. In the three

decades following the first round of nationalization, aggregate deposits of scheduled banks have

increased at a compound annual growth rate of 17.8%durin the period of (1969-99) while bank

credit expanded at the rate of 16.3% PA. with the branches of more than 67000 of which 48.7%

being rural, touching the lives of millions of people everyday, the Indian banking sector

constitutes the most significant segment of the financial system of India.

It is against the background of these circumstances, that the development of a sound

banking system was considered essential for the future growth of the financial system. Financial

sector reforms were initiated in the country in 1992 with a view to improving the efficiency in

the process of financial intermediation, enhancing the effectiveness in the conduct of monetary

policy and creating conductive environment for the integration of domestic financial sector with

the global system.

The banking system is, by far, the most dominant segment of the financial sector,

accounting as it does, for over 80 per cent of the funds flowing through the financial sector. The

aggregate deposits of the scheduled commercial banks (SCBs) rose from Rs.5,05,599 crore in

March 1997 to Rs.11,03,360 crore in March 2002 representing a rise of 17 per cent. During the

same period, the credit portfolio (food and non-food) of SCBs grew from Rs.2,78,401 crore to

Rs. 5,89,723 crore, i.e. by 16 per cent. The net profits of SCBs witnessed a noticeable upturn

from Rs.6,403 crore in 2000-01 to Rs.11, 572 crore in 2001- 02. The extent and coverage of the

banking system can be gauged from the fact that the number of branches of SCBs grew from

8045 in 1969 to 66,186 in June 2002. While rural branches constituted 49 per cent of the total in

2002, semi-urban branches accounted for 22 per cent, urban branches accounted for 16 per cent

and metropolitan branches accounted for 13 per cent.

Financial sector reforms introduced in the early 1990s as a part of the structural reforms

have touched upon almost all aspects of banking operations. For a few decades preceding the

onset of banking and financial sector reforms in India, banks operated in an environment that

was heavily regulated and characterised by sufficient barriers to entry, which protected them

against too much competition. This regulated environment set in complacency in the manner in

which banks operated and responded to the customer needs. The administered interest rate

structure, both on the liability and the assets sides, allowed banks to earn reasonable spread

without much efforts. Despite this, however, banks’ profitability was low and NPLs level was

high, reflecting lack of efficiency. Although banks operated under regulatory constraints in the

form of statutory holding of Government securities (statutory liquidity ratio or SLR) and the cash

reserve ratio (CRR) and lacked functional autonomy and operational efficiency, the fact was that

most banks did not operate efficiently.

While the broad objectives of the financial sector reforms, thus, were to enhance

efficiency and productivity, the process of reforms were initiated in a gradual and properly

sequenced manner so as to have a reinforcing effect. The approach has been to consistently

upgrade the financial sector by adopting the international best practices through a consultative

process. Financial sector reforms were carried out in two phases. The first phase of reforms was

aimed at creating productive and profitable financial institutions operating within the

environment of operational flexibility and functional autonomy. The focus of the second phase of

financial sector reforms starting from the second-half of 1990s has been on strengthening of the

financial system consistent with the movement towards global integration of financial services.

CONTENTS

INTRODUCTION PROFILE OF STUDY RATIONAL OF STUDY

LITERATURE REVIEW

OBJECTIVE OF THE STUDY

RESEARCH METHODOLOGY

SAMPLING AND SAMPLING DESIGN

ANALYTICAL TOOLS

STATISTICAL TOOLS

DATA COLLECTIONHYPOTHESIS TESTING

CONCLUSION AND RECOMMENDATION

LIMITATIONS OF THE STUD

BIBLIOGRAPHY

ANNEXURES

INTRODUCTION

Financial sector reforms introduced in the early 1990s as a part of the structural

reforms have touched upon almost all aspects of banking operations. For a few decades

preceding the onset of banking and financial sector reforms in India, banks operated in an

environment that was heavily regulated and characterised by sufficient barriers to entry,

which protected them against too much competition. This regulated environment set in

complacency in the manner in which banks operated and responded to the customer

needs. The administered interest rate structure, both on the liability and the assets sides,

allowed banks to earn reasonable spread without much efforts. Despite this, however,

banks’ profitability was low and NPLs level was high, reflecting lack of efficiency.

Although banks operated under regulatory constraints in the form of statutory holding of

Government securities (statutory liquidity ratio or SLR) and the cash reserve ratio (CRR)

and lacked functional autonomy and operational efficiency, the fact was that most banks

did not operate efficiently.

Indian banking system operated for a long time with high reserve requirements

both in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This

was mainly to accommodate the high fiscal deficit and its monetisation. The efforts in the

recent period have been to lower both the CRR and SLR. The SLR has been gradually

reduced from a peak of 38.5 per cent to 25 per cent. The CRR was reduced from its peak

level of 15.0 per cent maintained during 1989 to 1992 to 4.5 per cent of NDTL in June

2003. Although the Reserve Bank continues to pursue its medium-term objective of

reducing the CRR, in recent years, on a review of macroeconomic and monetary

conditions, the CRR has been revised upwards to 6.0 per cent (to be effective from March

3, 2007).

IMPACT OF REFORMS ON THE BANKING SECTOR

These reform measures have had major impact on the overall efficiency and

stability of the banking system in India. The present capital adequacy of Indian banks is

comparable to those at international level. There has been a marked improvement in the

asset quality with the percentage of gross non-performing assets (NPAs) to gross

advances for the banking system reduced from 14.4 per cent in 1998 to 7.2 per cent in

2004.

With the commencement of the New Economic Policy, a few new generation

techno-savvy banks such as ICICI bank and HDFC bank came into operation and

changed the whole banking concept in India was considered fairly mature in terms of

variety of services provided assets quality.. We can measure the performance of Indian

public sector banks by using the some significant indicators such as Non-performing

assets, profitability, capital position and assets quality.

It is difficult to obtain permissions to start a bank. Foreign banks are practically banned

from opening new branches. Even domestic banks have to take permission from the RBI,

to open one branch at a time. Many rules have been designed to favour public sector

banks. These weaknesses in policy have led to poor competition in banking. Table 6

compares the biggest 10 banks in the country in 2004-05 against the situation 13 years

earlier, in 1991-92. The 10-firm concentration ratio did drop significantly, from 92.86%

to 62.99%. This suggests high growth on the part of smaller banks. However, the names

of the biggest banks are remarkably alike. The new names of 2004-05 are shown in

boldface. Of these, ICICI was always a big bank, and is not in the list for 1991-92 purely

on account of not being classified as a bank. Apart from this, there are only two new

names in 2004-05. The domination of the public sector is also highly visible. There are

no private or foreign banks in the 2004-05 list, other than ICICI Bank

PUBLIC SECTORE REFORMS

Commercial banking constitutes the largest segment of the Indian financial

system. Despite the general approach of the financial sector reform process to establish

regulatory convergence among institutions involved in broadly similar activities,

given the large systemic implications of the commercial banks, many of the

regulatory and supervisory norms were initiated first for commercial banks and were later

extended to other types of financial intermediaries. After the nationalisation of major

banks in two waves, starting in 1969, the Indian banking system became

predominantly government owned by the early 1990s. Banking sector reform

essentially consisted of a two pronged approach. While nudging the Indian banking

system to better health through the introduction of international best practices in

prudential regulation and supervision early in the reform cycle, the idea was to increase

competition in the system gradually. The implementation periods for such norms

were, however, chosen to suit the Indian situation. Special emphasis was placed on

building up the risk management capabilities of the Indian banks. Measures were also

initiated to ensure flexibility, operational autonomy and competition in the banking

sector. Active steps have been taken to improve the institutional arrangements

including the legal framework and technological system within which the financial

institutions and markets operate. Keeping in view the crucial role of effective supervision

in the creation of an efficient and stable banking system, the supervisory system has been

revamped.

Further Reform Areas

Extension of Risk management practices: Banks use statistical models to

measure and manage the financial risks to which they are exposed. Since models

cannot incorporate all possible risk outcomes and generally are not capable of

capturing event risks and sudden/dramatic changes, banks need to supplement

models with stress test.

Basel II implementation: The RBI intended to implement Basel II

recommendations with effect from march31, 2008. All SCBs are encouraged to

adopt it not later than March 31, 2009. The Basel committee on Banking

Supervision had undertaken the fifth quantitative impact study to assess the

impact of adoption of the revised framework.

Mortgage Guarantee Companies: As amounted in the budget, the RBI has now

placed in public domain draft guidelines on mortgage guarantee companies. This

will be a new category under the NBFC sector and the activities will ne in

thenature of mortgage guarantees and not mortgage insurance. Mortgage

insurance falls with in the jurisdiction of the insurance regulator.

FSAP-Self Assesment: a commitment on financial sector assessment to

undertake a self-assesment of financial sector stability and development has been

constituted. For the purpose of carrying out the task under the terms of reference,

the committee has decided to set up four advisory panels which will be assisting

the committee in its assessment exercise and will be drawn from non official

experts relevant areas related to financial stability assessment and stress testing

transparency standards, financial regulation and supervision and institutions and

market structure respectively.

Draft Guidelines on Accounting Aspects: Recognizing the importance of a

robust accounting framework in the banking sector, the RBI had undertaken an

exercise a few years back to assess the gaps in compliance by banks with the

accounting standards issued by the Institute of Chartered Accountants Of India.

PERFORMANCE OF THE PUBLIC SECTOR UNDER

THE REFORM PROCESS

BANKING SECTOR

Banking sector reform has established a competitive system driven by market

forces. The process, however, has not resulted in disregard of social objectives such as

maintenance of the wide reach of the banking system or channelisation of credit towards

disadvantaged but socially important sectors. At the same time, the reform period

experienced strong balance sheet growth of the banks in an environment of operational

flexibility. A key achievement of the banking sector reform has been the sharp

improvement in the financial health of banks, reflected in significant improvement in

capital adequacy and improved asset quality. This has been achieved despite

convergence of the prudential norms with the international best practices. 2 There have

also been substantial improvements in the competitiveness of the Indian banking

sector reflected in the changing composition of assets and liabilities of the banking sector

across bank groups. In line with increased competitiveness, there has been improvement

in efficiency of the banking system reflected inter alias in the reduction in interest

spread, operating expenditure and cost of intermediation in general .

Contemporaneously there have been improvements in other areas as well

including technological deepening and flexible human resource management . A

more detailed discussion on the performance analysis of the banking sector under

the reform process is given below.

Special features of the reforms in the financial sector

The reforms were not driven by any banking crisis nor were they an outcome of

any external support package. They were undertaken much before the importance

of the financial sector to prevent crisis was recognized by international agencies

and other countries in early 1990s before the Asian financial crisis.

The reforms were carefully sequenced in terms of instruments and objectives.

Thus, prudential norms and supervisory strengthening were introduced early in

the reform cycle, followed by interest rate deregulation and gradually lowering of

statutory preemptions. The more complex aspects of legal and accounting

measures were ushered in subsequently when the basic tenets of the reforms were

already in place. More recently, the regulatory framework has also focused on

ensuring good governance through “fit and proper” owners, directors and senior

managers of the banks. The preference has been for diversified ownership.

While the focus of the first generation of reforms was to create an efficient,

productive and profitable financial services industry, the second phase of

financial sector reforms, beginning from the second-half of the 1990s, was aimed

at strengthening of the financial system and introduction of structural

improvements.

The need to prepare the financial system in a more globalised environment

and to promote financial stability in the face of domestic and external shocks was

on top of agenda of reforms. With increasing globalisation of the Indian economy,

the reform process witnessed a significant move towards adoption of international

best practices in several crucial areas of importance such as prudential norms,

banking supervision, data dissemination and corporate governance.

With a view to increasing competition in the banking sector new private sector

banks were licensed. A prerequisite for grant of the licence was that these banks

had to be fully automated from day one. The results are self-evident as these

banks have become high-tech banks. This has had a “demonstration” effect on the

entire system. The Government ownership in nationalized and State Bank of India

was brought down by allowing them to raise capital from the equity market up to

49/45 per cent of paid-up capital.

A unique feature of the reform of public sector banks, which dominated the Indian

banking sector, was the process of financial restructuring. Banks were

recapitalised by the government to meet prudential norms through recapitalisation

bonds. The mechanism of hiving off bad loans to a separate government asset

management company was not considered appropriate in view of the moral

hazard. The overhang of non-performing loans had to be managed by the banks

themselves.

The subsequent divestment of equity and offer to private shareholders was

undertaken through a public offer and not by sale to strategic investors.

Consequently, all the public sector banks, which issued shares to private

shareholders, have been listed on the exchanges and are subject to the same

disclosure and market discipline standards as other listed entities.

The cost of recapitalization to GDP has been low relative to experience in other

countries. On a cumulative basis it worked out to about one percent of the GDP.

Furthermore, the market value of equity held by Government now far exceeds the

recapitalization cost. With a view to carry the reform process further, as

announced in the Budget last year the Government decided to convert the recap

bonds issued as special securities (basically non-negotiable) to marketable

securities indistinguishable from other Government securities . The process has

already started and in 2006-07 the Government converted nearly Rs 80 billion to

SLR securities. The balance special securities will be phased out over a period.

Banks were also allowed to diversify into various financial services and are now

offering a whole range of financial products like universal banks.

RATIONAL OF THE STUDY

The Reforms in the Indian Banking system have assumed large proportions and

are a continuing deterrent to the smooth flow of credit to the productive sector of industry

and agriculture.

The high level committee on financial system constituted by RBI to make

recommendation on financial sector reforms also observed that serious problem are

plaguing the financial sector which is reflected in decline in productivity and efficiency

and erosion of profitability due to deterioration in the quality of loan portfolio restricting

income generation and enhancement of capital funds, accompanied by inadequate loan

loss provisions.

A high figure of loan defaults put question marks on the credit appraisal. Along

with other causes, improper evaluation of the credit requirements or repaying capacity of

the borrowers results in under financing or over financing and affects the cost and

revenue structure of the activity and may render the activity unviable. Non-recovery

affect the profitability of banks.

LITERATURE REVIEW

Literature Review is the way to express background of ideas that come to mind

during the research formulation. I asked various employees of the bank about the new

technological initiative taken by the banks.

The research being conducted was "to evaluate the impact of reforms on public sector

& commercial banks."

Once the problem is formulated, the researcher undertakes an extensive literature review

connected with the problem.

BOOKS

1) “C.R Kothari 4: The information regarding the basics of research and research

methodology, what are the different types of research designs, problem statement,

sources of data collection and methods of data collection are given in this

section.6

2) “S.P Gupta 6: The information regarding the statistical tools and their limitations

in different fields the research is given in this section. This section explains, why

to use correlation and the situations in which correlation can be used, and

meaning of correlation . This section also explains the Trend Analysis Technique..

3) S.C. Gupta3: Information regarding various statistical & analytical tools is given

in this section.

4) Wilkinson & Bhandarkar5: In this section various parts of research and research

methodology is given which tells about the techniques of doing research.

5) Tripathi P.C1: this book helped me in knowing about the change.

6) Gupta C.B.-7, "Management theory and practice”: this book helped me in

finding the factors affecting the organization’s change.

OBJECTIVES OF THE STUDY

The major objective of the study is to assess the impact of reform measures on the

efficiency, profitability and overall performance of banks vis-à-vis bank groups in

public and private sector.

To make a comparative analysis of the performance of public and private sector

commercial banks during the course of implementation of banking sector reforms.

RESEARCH METHODOLOGY

SECONDARY DATA

The secondary data on the other hand, are those which have already been collected by

someone else and which have already been passed through the statistical processes. When

the researcher utilizes secondary data then he has to look into various sources from where

he can obtain them. For e.g. Books, magazine, newspaper, Internet, publications and

reports. In the present study I have made use of secondary data collected from various

websites, Journals & Various RBI’s Bulletins etc...

STATISTICAL TOOLS

Introduction:-

An educated citizen needs an understanding of basic statistical tool to

function in a world that is becoming increasingly dependant on quantitative

information. Statistics means numerical description to most people. In fact the term

statistics is generally used to mean numerical facts and figures such as agriculture

production during a year, rate of inflation and so on. However as a subject of study,

statistics refers to the body of principles and procedures developed for the collection,

classification, summarization and interpretation of numerical data and for the use of

such data.

MEANING:-

Broadly speaking, the term statistics has been generally used in two senses:-

Plural Sense

Singular Sense

Plural sense refers to the numerical data. Singular Sense refers to a Science in

which we deals with the techniques of collecting, classifying, presenting, analyzing

and interpreting the data, the concept in its singular sense, refers to Statistical

Method.

PURPOSE:-

Without the assistance of Statistical Method, an organization would find it

impossible to make sense of the huge data. The purpose of statistics is to:-

Manipulate

Summarize

investigate

the data so that useful decision making information results could be found out. In fact,

every business manager needs a sound background of statistics. Statistics is a set of

Decision Making techniques which aids businessman in drawing inferences from the

available data.

STATISTICAL TOOLS:-

Statistical tools are the basic measures, which helps in defining the relation

between different items, present, past and future trend of the future trend of the

particular business etc. A wide variety of statistical tools are available and any of

them can be used by any businessman depending upon the nature of his trade.

Various statistical tools are:-

1. Correlation

2. Regression

3. Index Numbers

4. Probability Distribution

5. Hypothesis Testing

DATA COLLECTION

Performance Analysis –Banking

(a) Reach & Deepening

Wide reach of banking system maintained

after reforms,

Despite slight decline share of direct flow

towards disadvantaged sectors continued

Considerable increase in per branch business

since the initiation of reforms

Substantial deepening of financial sector

88738

2,368

4,242

8,542

12,253

68 4571,434

2,320

4,555

7,275

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1969 1980 1991 1995 2000 2003

(Rup

ees)

Per capita Deposit Per capita Credit

64

16 14 15 15 1615

37 39.233.7 35.4 33.7

15.5

36

48.1 4853.5 51.8

0

10

20

30

40

50

60

70

1969 1980 1991 1995 2000 2003

(Rup

ees)

Population per Office (‘000s) Priority Sector Advances (per cent) Deposits (per cent of NI)

Performance Analysis –Banking – (b) Balance Sheet

• Deposits remained stable and predominant source of funds.• Share of loans in total liabilities declined in mid-1990s, but revived in recent

years• Strong increase in investment activities• Despite sharp decline in SLR large Gilt holdings• Despite some increase non-SLR investment remains low

77.7 76.481.5 79.8 80.5

46.842.1 40.6

43.6 45

30

40

50

60

70

80

90

1991-92 1995-96 2000-01 2002-03 2003-04

(per

cen

t of a

sset

s)

Deposits Loans and advances

28.931

3840.8 41.7

3.5

8.9 8.1

0

5

10

15

20

25

30

35

40

45

1991-92 1995-96 2000-01 2002-03 2003-04

(per

cen

t of a

sset

s)

Total Investments Non-SLR Investment

Performance Analysis –Banking – (c) Capital Structure (1)

RESEARCH METHODOLOGY

• Distinct improvement in CRAR of banks

• In public sector banks recapitalisation by government initially (about 1% of GDP)

Capital Structure (2)

83 1 2

92 2

33

127 4

42

84 8187

010

2030

4050

6070

8090

100

1995-96 1999-00 2001-02 2002-03

(per

cen

t)

CRAR below 4 CRAR 4-9 CRAR 9-10 CRAR above 10

27.7

2023.2

252525

26.526.8

28.829

30.533.233.5

37.538.839.2

40.342.8

46.1

0 10 20 30 40 50

State Bank of IndoreState Bank of MysorePunjab National BankBank of Maharashtra

UCO BankState Bank of Bikaner & Jaipur

State Bank of TravancoreSyndicate Bank

Canara BankAllahabad Bank

Dena BankBank of India

Bank of BarodaOriental Bank of Commerce

Andhra BankIndian Overseas Bank

Union Bank of IndiaState Bank of IndiaCorporation Bank

Vijaya Bank

(per cent)Share of Private Sector

(d) Asset Quality

• Marked improvements in asset quality• Public sector banks showed more credible performance in NPL management than

private sector banks

(e) Competition

15.7

11.4

8.87.37

4.94

0

2

4

6

8

10

12

14

16

18

1996-97 2000-01 2002-03 2003-04

(per

cen

t)

Gross NPL/Advances Gross NPL/Assets

Share in Assets

9.4 9.1 7.0

82.5 78.4 74.5

8.2 12.618.5

0.0

20.0

40.0

60.0

80.0

100.0

1995-96 2000-01 2002-03

Per c

ent

Foreign Banks Private Sector Banks Public Sector Banks

(f) Efficiency

• Clear improvement in profitability in the post-reform period

• Reduction in spread and operating expenditure

• Improvement in efficiency across the bank groups

Net Profits as % of Total Assets

0.600.90

1.70

1.20

0.70

1.10

0.40

1.301.00

1.200.90

1.60

0.00

0.50

1.00

1.50

2.00

Pub. Sec. Banks Old Pvt. Banks New Pvt. Banks Foreign Banks

1996-97 2001-02 2002-03

Regression

Linear regression is without doubt the most frequently used statistical method. A

distinction is usually made between simple regression (with only one explanatory

variable) and multiple regression (several explanatory variables) although the overall

concept and calculation methods are identical.

The principle of linear regression is to model a quantitative dependent variable Y though

a linear combination of p quantitative explanatory variables, X1, X2, …, Xp. The

determinist model (not taking randomness into account) is written for observation i as

follows:

  Deposits TotalINVESTMENTNon-SLR INVESTMENT

Loans and ADVANCES

1991-92 77.7 28.9 . . 46.81992-93 78.4 30.5 . . 451993-94 80.3 35.4 5 38.71994-95 78.9 33.6 4.6 40.51995-96 76.4 31 3.5 42.11996-97 79.9 33.3 5 411997-98 81 34.2 7.1 40.81998-99 81.1 35.7 8.6 38.8

1999-00 81.1 37.3 9.1 40.22000-01 81.5 38 8.9 40.62001-02 78.5 38.2 8.7 422002-03 79.8 40.8 8.1 43.62003-04* 80.5 41.7 7.2 45

Here in this table deposits are independent variables and Investment and Loans and

advances are dependant on deposits therefore we can use Regression analysis for this data

with the help of XLSTAT.

  TotalINVESTMENT Deposits1991-92 28.9 77.71992-93 30.5 78.41993-94 35.4 80.31994-95 33.6 78.91995-96 31 76.41996-97 33.3 79.91997-98 34.2 811998-99 35.7 81.11999-00 37.3 81.12000-01 38 81.52001-02 38.2 78.52002-03 40.8 79.82003-04* 41.7 80.5

Evaluating the information brought by the variables (H0 = Y=Moy(Y)):                     

Source DFSum of squares

Mean square

Fisher's F Pr > F

Model 1 65.542 65.542 6.209 0.030Residuals 11 116.121 10.556    Total 12 181.663      

Loans and ADVANCES Deposits

1991-92 46.8 77.71992-93 45 78.41993-94 38.7 80.31994-95 40.5 78.91995-96 42.1 76.41996-97 41 79.91997-98 40.8 811998-99 38.8 81.11999-00 40.2 81.12000-01 40.6 81.52001-02 42 78.52002-03 43.6 79.82003-04* 45 80.5

Evaluating the information brought by the variables (H0 = Y=Moy(Y)):                     

Source DFSum of squares

Mean square

Fisher's F Pr > F

Model 1 19.223 19.223 3.821 0.077Residuals 11 55.345 5.031    Total 12 74.568      

Data and regression line

0

5

10

15

20

25

30

35

40

45

50

76 77 78 79 80 81 82Deposits

Observations P redictionsConf. on pred (95.00%) Conf. on mean (95.00%)

Standardized residuals

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Obs1Obs2Obs3Obs4Obs5Obs6Obs7Obs8Obs9

Obs10Obs11Obs12Obs13

Standardized residuals

Data and regression line

0

10

20

30

40

50

60

76 77 78 79 80 81 82Deposits

Observations P redictionsConf. on pred (95.00%) Conf. on mean (95.00%)

Standardized residuals

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Obs1

Obs2Obs3Obs4

Obs5Obs6

Obs7Obs8Obs9

Obs10Obs11

Obs12Obs13

Standardized residuals

Trend Analysis Of NPA’s in Public Sector Banks During Period

(1992-02)

1:Gross NPAs to Gross Advances:

 Year Gross NPAs / Gross Advances Trend Line1.     1992-93 23.2 -2.     1993-94 24.8 22.53.     1994-95 19.5 20.84.     1995-96 18.0 18.435.     1996-97 17.8 17.266.     1997-98 16.0 16.567.     1998-99 15.9 15.338.     1999-00 14.0 14.19.     2000-01 12.4 12.510.   2001-02 11.1 -

Note: Series – 1: Gross NPAs to Gross AdvancesSeries – 2: Trend Line

ANALYSIS

During the year 1992-93 to 2001-02, there has been a sharp decline in Gross NPAs to

Gross Advances. The Trend Line also shows a continues decreasing trend. From this, it

can be concluded that over the next three years (i.e 2002-03 to 2004-05), Gross NPAs to

Gross Advances of public sector banks would decrease.

2. Gross NPAs to Total Advances:

Year Gross NPAs / Total Advances Trend Line1.     1992-93 11.8 -2.     1993-94 10.8 10.433.     1994-95 8.7 9.234.     1995-96 8.2 8.235.     1996-97 7.8 7.666.     1997-98 7.0 7.167.     1998-99 6.7 6.568.     1999-00 6.0 6.009.     2000-01 5.3 5.410.   2001-02 4.9 -

FINDI

Note:    Series – 1: Gross NPAs to Total Advances

Series – 2: Trend Line

ANALYSIS

During the year 1992-93 to 2001-02 , there has been considerable decline in GNPAs to

Total Assets. The Trend Line too says the same story. Therefore the GNPAs to Total

Assets of public sector banks will decline in the next three years to come (i.e 2002-03 to

2004-05).

3. Net NPAs to Net Advances:

Year Net NPAs / Net Advances

Trend Line

1.     1992-93 11.3 -2.     1993-94 12.87 11.623.     1994-95 10.7 10.824.     1995-96 8.9 9.65.     1996-97 9.2 8.766.     1997-98 8.2 8.57.     1998-99 8.1 7.98.     1999-00 7.4 7.49.     2000-01 6.7 6.6310.   2001-02 5.8 -

Note: Series - 1: Net NPAs to Net Advances

Series – 2: Trend Line

ANALYSIS

During the year 1992-93 to 2001-02, there has been a steady and considerable decrease in

percentage of Net NPAs to Net Advances. The Trend Line also shows that there is a

decreasing trend and Net NPAs over next three years (i.e 2002-03 to 2004-05) would

decrease considerably.

4. Net NPAs to Total Assets:Year Net NPAs / Total Assets Trend Line1.        1992-93 4.6 -2.        1993-94 5.1 4.563.        1994-95 4 4.234.        1995-96 3.6 3.76

5.        1996-97 3.7 3.536.        1997-98 3.3 3.367.        1998-99 3.1 3.18.        1999-00 2.9 2.99.        2000-01 2.7 2.6610.      2001-02 2.4 -

Note: Series -1: Net NPAs to Total AssetsSeries – 2: Trend Line

Analysis

During the year 1992-93 to 2001-02, there has been a marginal decline in Net NPAs to

Total Assets. The Trend Line shows that there has been a steady decline and it can be

inferred that over next three years (i.e 2002-03 to 2004-05), Net NPAs to Total Assets of

public sector banks would decrease but at a marginal rate.

FINAL ANALYSIS

The future picture of Commercial banks more so the public sector banks seem to be rosy.

As the Trend Line suggests that the NPAs of public sector banks will decline marginally

both in terms of Gross and Net figures over next three years. This may be due to higher

provisions, which the public sector banks have been providing. The real issue to be

identified is though the NPAs, as a percentage seems to be declining over the years but

the absolute figures seems to be increasing. In this vein it would be interesting to see the

NPAs both in terms of absolute figures and in terms of percentage of public sector banks

in the coming three years.

ANCOVA

ANCOVA (ANalysis of COVAriance) can be seen as a mix of ANOVA and linear

regression as the dependent variable is of the same type, the model is linear and the

hypotheses are identical. In reality it is more correct to consider ANOVA and linear

regression as special cases of ANCOVA.

Interactions between quantitative variables and factors

One of the features of ANCOVA is to enable interactions between quantitative variables

and factors to be taken into account. The main application is to test if the level of a factor

(a qualitative variable) has an influence on the coefficient (often called slope in this

context) of a quantitative variable. Comparison tests are used to test if the slopes

corresponding to the various levels of a factor differ significantly or not.

Loans and ADVANCES Deposits

1991-92 46.8 77.71992-93 45 78.41993-94 38.7 80.31994-95 40.5 78.91995-96 42.1 76.41996-97 41 79.91997-98 40.8 811998-99 38.8 81.11999-00 40.2 81.12000-01 40.6 81.52001-02 42 78.52002-03 43.6 79.82003-04* 45 80.5Summary for the dependent variable:                         

VariableTotal no. of

valuesNo. of

values usedNo. of values

ignoredSum of weights Mean

Standard deviation

Loans and ADVANCES 13 13 0 13 41.931 2.493

Evaluating the information brought by the variables (H0 = Y=Moy(Y)):

Source DF Sum of squares Mean squareFisher's

FPr >

FModel 11 73.588 6.690 6.826 0.291Residuals 1 0.980 0.980Total 12 74.568      

Factor Deposits

38394041424344454647

Deposits

Loans and ADVANCES / Standardized residuals

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

38 40 42 44 46

Loans and ADVANCES

CORRELATIONThree correlation coefficients are proposed to compute the correlation between a set of

quantitative variables, whether continuous, discrete or ordinal (in the latter case, the

classes must be represented by values that respect the order):

Pearson correlation coefficient: this coefficient corresponds to the classical linear

correlation coefficient. This coefficient is well suited for continuous data. Its value ranges

from -1 to 1, and it measure the degree of linear correlation between two variables. Note:

the squared Pearson correlation coefficient gives an idea of how much of the variability

of a variable is explained by the other variable. The p-values that are computed for each

coefficient allow testing the null hypothesis that the coefficients are not significantly

different from 0. However, one needs to be cautions when interpreting these results, as if

two variables are independent, their correlation coefficient is zero, but the reciprocal is

not true.

Spearman correlation coefficient (rho): this coefficient is based on the ranks of the

observations and not on their value. This coefficient is adapted to ordinal data. As for the

Pearson correlation, one can interpret this coefficient in terms of variability explained,

but here we mean the variability of the ranks.

Kendall correlation coefficient (tau): as for the Spearman coefficient, it is well suited for

ordinal variables as it is also based on ranks. However, this coefficient is conceptually

very different. It can be interpreted in terms of probability: it is the difference between

the probabilities that the variables vary in the same direction and the probabilities that the

variables vary in the opposite direction.

Correlation between Earnings & Expenses of Public Sector Banks

Year Total Earnings Total

Expenses   

 1955 1

01975 4

41990 42

421995 304

2972000 1,149

10772002 1,510

13952003 1,724

15532004 2,345

1895

Decision:At the level of significance Alpha=0.050 the decision is to reject the null hypothesis of absence of correlation. Result of correlation is high Degree Positive CorrelationIn other words, the correlation is significant.

CONCLUSION AND RECOMMENDATION

Pearson's correlation coefficient test (parametric test):

Observed value 0.996Two-tailed p-value < 0.0001Alpha 0.05

Scattergram of the data

0

200

400

600

800

1000

1200

1400

1600

1800

2000

0 500 1000 1500 2000 2500Total Earnings

Since the financial reforms of 1991, there have been significant favourable

changes in India’s highly regulated banking sector. This study has

assessed the impact of the reforms by examining seven hypotheses.

It concludes that the financial reforms have had a moderately positive impact on

reducing the concentration of the banking sector (at the lower end) and improving

performance.

The empirical estimation showed that regulation lowered the profitability and cost

efficiency of public-sector banks at the initial stage of the reforms, but such a

negative impact disappeared once they adjusted to the new environment.

Moreover, allowing banks to engage in non-traditional activities has contributed

to improved profitability and cost and earnings efficiency of the whole banking

sector, including public-sector banks.

Lending to priority sectors and the public-sector has not had a negative effect on

profitability and cost efficiency, contrary to our expectations.

Further, foreign banks (and private domestic banks in some cases) have generally

performed better than other banks in terms of profitability and income efficiency.

This suggests that ownership matters and foreign entry has a positive impact on

banking sector restructuring.

A further reduction of SLR and more encouragement for non-traditional activities

(under the bank subsidiary form) may also make the banking sector more resilient

to various adverse shocks.

For the continuous growth of the Indian economy, continuation of the banking

and financial reforms will always be a critical issue.

It boosts investment and growth throughout the economy.

The response of the banks to the reforms has been impressive. The banks have

been adjusting very well to the new environment.

The level of NPA of public sector banks remained high; a noteworthy

development has been their significant reduction in relation to net advances in

recent years.

LIMITATIONS OF THE STUDYAs we all know that every work that has to be performed by someone includes some

hurdles or says limitation. There are always some problems in each and every work. If

there were no problems the performing each task is so easy that everyone that does not

have any knowledge about the can also performs that work without and hurdle.

So the following are the some limitations or problems that are faced during the

dissertation report.

1. Lack of knowledge:- about conducting the research makes it very difficult for

us to perform out task. As it was our first time that we indulge in dissertation

report. The lack of experience made the task difficult.

2. Shortage of time:-As the time period that is given to us for doing dissertation

study was also too less. In a short time period that is very difficult that we can

get the knowledge about each and everything related to our project.

3. Secondary data:-I used secondary data in my study that is not a reliable

source of information for doing research work.

4. Limited Area:- The study is restricted to the limited areas of search.

5. Nature:- The study is suggestive in nature and not much conclusive.

6. Unavailability of information:- Some of the information in banks is not to

be disclosed to any resource of information. Even I was unable to access that

information.

BIBLIOGRAPHYBOOKS

“C.R Kothari 4: The information regarding the basics of research and

research methodology, what are the different types of research designs,

problem statement, sources of data collection and methods of data

collection are given in this section.6

“S.P Gupta 6: The information regarding the statistical tools and their

limitations in different fields the research is given in this section. This

section explains, why to use correlation and the situations in which

correlation can be used, and meaning of correlation . This section also

explains the Trend Analysis Technique..

S.C. Gupta3: Information regarding various statistical & analytical tools is

given in this section.

Wilkinson & Bhandarkar5: In this section various parts of research and

research methodology is given which tells about the techniques of doing

research.

Tripathi P.C1: this book helped me in knowing about the change.

Gupta C.B.-7, "Management theory and practice”: this book

helped me in finding the factors affecting the organization’s change.

JOURNALS

Finance India15, September 2005 pp-957-961:- Impact of NPAs on strategic

banking variables i.e. impact on profitability, Productivity, Capital Adequacy,

Credit Deployment and Mobilisation.

Chartered Financial Analysis17, December 2005 pp-52:- Concept of

SARFAESI Act.

Southern Economist20, February 2006 pp-15:- Details of Corporate Debt

Restructuring Scheme.

Management Accountant24, May 2006 pp- 359:- Early Warning System

Chartered Financial Analysis29, October 2005 pp-64 :-Types of banking risk

Chartered Financial Analysis32, October 2007 pp-31-31:-Growth and structural

change in banking sector

Chartered Financial Analysis34, November 2007 pp-8-9:-Concept of

Borrower’s Special Investigation Audits

Economic and political weekly30, October 16, 2004 pp-10:-Meaning and

concept of financial reforms.

Chartered Secretary24, Feburary 2003, V.S.Datey pp-22-24 :- Importance of

credit rating

Treasury Management , December 2004, MPM Vinay Kumar pp-14-1610 :-

Adverse effect of Financial norms.

Chartered Financial Analysis, August 2004, B.P.Dhaka pp-47-5211 :- Reason

behind huge level of NPAs in the Indian Banking System

Paradigm, July 2005 pp-12-1412 :- Indian economy and Banking

Management Accountant, September 2007 pp-48-5013 :- Accounts which need

not be classified as NPAs

Business Today, May 2006 pp-3414 :- Measures in case of non payment of NPAs

Chartered Financial Analysis-29, December 2005 pp-25-28 :- Norms for

treating various advances as NPAs

Financial Risk Management, February 2006 pp-50-55:- Narsimhan

Committee’s recommendation

Data quest35 , April 2005 pp-19 Gross NPAs expressed as % of gross advances

RBI Bulletin, July 1999 pp-34-36 :- RBI guidelines on income generation

IBA Bulletin, January 2004 pp-17-19:- Magnitude of gross NPAs post and prior

to the reforms.

Chartered Financial Analysis, February 2004 pp-12-140 :-Qualitative aspects

of the micro level impact of reforms.