a project on basel accords 3

8/10/2019 A project on BASEL Accords 3

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BASEL ACCORDS WITH SPECIAL REFRENCE

TO BASEL III.

By

AASIM AHMED KHANDAY

REG. No: 125860701

Submitted to Mangalore University

I n partial fu lf ilment of the requirement of the

Master of Business Administration Degree course

Under the valuable guidance of

Coll ege Guide: Company Guide:

Prof. Amit Menzes Mr. Riyaz ul Rahman Wani

Faculty SIMS, Associate Executive, J&k

Bank.

Pandeshwar, Mangalore

Department of Business Management

Srinivas institute of management studies

Pandeshwar, Mangalore.


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DECLARATION

I Aasim Ahmed Khanday (Reg no.125860701) Second year MBA student of

Srinivas Institute of Management Studies, Mangalore hereby declare that this

project report entitled A study on impact of Basel Accords with special

reference to Basel-III is my original work and has been prepared by me under

the guidance of MR Amit Menzees, Faculty, Srinivas Institute of Management

studies in partial fulfilment of the requirement of the award of the degree of

Master of Business Administration of Mangalore University and has not beenpart of any other degree or diploma of any other University or institution.

Aasim Ahmed Khanday.


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ACKNOWLEDGEMENT

The success of the project depends on a contribution of many people, especially

those who take time to share their thoughtful criticism and suggestions to

improve the project work.

At the very beginning I would like to thank Almighty the guiding light of my

life for granting me the potency and courage to complete this project work

successfully.

My immense gratitude to our beloved Principal Dr. P.S.Aithaland to rest of the

faculty and staff during the project course.

I am very grateful to J&K bank for having given me an opportunity to undertake

the project and Mr. RIYAZ UL RAHMAN WANI, Associate Executive,

Integrated Risk Management Department, CHQs,for guiding and inspiring me

at every point of time.

My heartful thanks to my project guide Mr. AMIT MENZEES who gave

valuable Inputs right from the start and was constantly motivating and

appreciating my Performance.

Last but never the least, I express my deep gratitude to my adorable parents,

encouraging friends and all those unsung heroes who have been indirectly or

directly responsible for the successful completion of the dissertation report.

Aasim Ahmed Khanday


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Executive summary

With the financial crisis of 2008 in the hindsight, the Basel Committee on Banking

Supervision has put forward the guidelines which impose stringent capital and liquidity

requirements through Basel III. Basel III is focused on increase in capital, especially equitycapital to absorb the impact of market, credit and operational risk. As was evident from the

recent crisis, the social cost of the failure of a large bank was much larger than the loss to the

owner of capital.

Increase in the requirement of capital will affect the ROE of the banks, financial ratios would

be hurt and the public sector banks will not be able to expand their loan book due to

unavailability of capital. According to ICRA, increase in the core Tier1 capital from 6% to

8% will reduce the return on equity percentage points from 18% to 15%. Public sector banks

with core capital less than 7% will be severely impacted whereas the earnings of the private

sector banks will not be affected much as they are already well capitalized but would reduceleveraging. Cost of capital for the banks would increase with the increase in equity in the

capital structure as equity is an expensive form of capital. As capital costs increase credit will

become more expensive. Banks will impose tougher conditions for granting credit to small

and medium sized firms and for start-up businesses. Also with deposit rates rising lower than

expectations at 14% will put further pressure of credit costs. With the credit becoming

costlier the investment activity in the country will be severely impacted. This will also

increase the cost of other off-balance items like Letter of Credit. Thus, though BASEL III

will make banks more capable of handling a financial crisis, it will have a negative impact on

the GDP of the economies like India, which should be a matter of concern.

It is more relevant at an economy's macro level to address issues such as systemic risk,

market discipline, liquidity and transparency in the risk-management framework. It is

interesting to note that though risk capital may be the necessary safety cushion for banks,

capital alone may not be sufficient to protect them from any extreme unexpected loss events.

In reality, risk capital will remain only a number and may not be effective if banks do not

assess their risk periodically and take timely corrective action when the risk exceeds the

threshold limit. Thus, whether it is Basel II or Basel III, it is crucial that a bank does not

depend solely on "regulatory capital". What is needed is a dynamic risk mitigation strategy,

where all employees act as risk managers in their own area. A proper risk culture needs to be

developed across the organization and "risk" should be an input for future business decision-

making. Risk management should not merely be an activity to comply with regulatory

requirements.


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Table of contents

Chapter

No

Title Page No

Research methodology 01-02

1 Introduction-Banking 03-07

2 Industry and company profile 08-59

3 Risk overview and Basel

committee

60-93

4 Basel III 94-112

5 Impact of Basel III on India 113-133

6 Findings, Recommendationsand conclusion 134-145

Bibliography 146


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RESEARCH

METHODOLOGY


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RESEARCH METHODOLOGY:

IMPORTANCE OF THE PROJECT

The project helps in understanding the clear meaning of Risk Management. It helps to

understand how Basel committee came into existence. It has framed regulations for banks in

series called Basel Accords. The latest Accord is Basel III, which had amended Basel II, and

framed new capital regulations, so that banks can survive and face times of depression easily.

This project helps to understand regarding the impact of Basel III on banking and on the

economy as whole.

OBJECTIVES OF PROJECT

To Study the complete structure and history of Jammu and Kashmir Bank.

To understand the risk and different risk management approaches in bank.

To gain insights into the credit risk management.

To know/understand the need of Basel Accords.

To understand the Basel Accords and more particularly Basel-III in detail.

To understand the RBI guidelines regarding Basel-III.

To estimate the additional capital requirements of PSBs and Pvt. Sector.

To examine the impact of Latest Basel Accord on Indian banking.

Scope of the study:

The purpose of the study is to evaluate, analyze and examine the risk management. The Basel

Committee is raising the resilience of the banking sector by strengthening the regulatory

capital framework, building on the three pillars of the Basel II framework. The reforms raise

both the quality and quantity of the regulatory capital base and enhance the risk coverage of

the capital framework. They are underpinned by a leverage ratio that serves as a backstop to

the risk-based capital measures, is intended to constrain excess leverage in the banking

system and provide an extra layer of protection against model risk and measurement error.

Finally, the Committee is introducing a number of macroprudential elements into the capital

framework to help contain systemic risks arising from procyclicality and from the

interconnectedness of financial institutions. The study aims to find out the strategy used by


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the Basel committee to maintain the risk management procedure, so that banks are well

positioned and can face the tough times at very ease.

DATA COLLECTION METHOD: To fulfill the objectives of my study, I have taken both

into considerations viz. primary & secondary data.

Primary data:Primary data has been collected through personal interview by direct contact

method. The method which was adopted to collect the information is Personal Interview

method.

Personal interview and discussion was made with manager and other personnel in the

organization for this purpose.

Secondary data:

The data is collected from the Magazines, Annual reports, Internet, Text books.

The various sources that were used for the collection of secondary data are

Internal files & materials.

Websites

LIMITATIONS:

The time constraint was a limiting factor, as more in depth analysis could not be

carried.

Some of the information is confidential in nature that could not be divulged for the

study.

Because of secrecy, it becomes difficult to obtain actual facts and figures of advances

of branches,

.


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INTRODUCTION


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Chapter-I Banking

Introduction

A bank is a financial institution that provides banking and other financial services to their

Customers. A bank is generally understood as an institution which provides fundamental

Banking services such as accepting deposits and providing loans. There is also nonbanking

Institutions that provide certain banking services without meeting the legal Definition of a

bank. Banks are a subset of the financial services industry. A banking system also referred as

a system provided by the bank which offers cash Management services for customers,

reporting the transactions of their accounts and Portfolios, throughout the day. The banking

system in India should not only be hassle Free but it should be able to meet the new

challenges posed by the technology and any other external and internal factors. For the past

three decades, Indias banking system has several outstanding achievements to its credit. The

Banks are the main participants of the financial system in India. The Banking sector offers

several facilities and opportunities to their customers. All the banks safeguard the money and

valuables and provide loans, Credit, and payment services, such as checking accounts, money

orders, and cashiers Cheques. The banks also offer investment and insurance products. As a

variety of models For cooperation and integration among finance industries have emerged,

some of the Traditional distinctions between banks, insurance companies, and securities firms

have Diminished. In spite of these changes, banks continue to maintain and perform their

Primary roleaccepting deposits and lending funds from these deposits.

Banking is today an integral part of our everyday life: At home, at school, at office, at

business, on travel everywhere we counter some aspect of banking. The significance of

banking in our day to day life is being felt increasingly. What are the institutions, so

inevitable in the present day set up? How do they transact? How did the concept emerge?

These are some of the simple queries that do not surface in our minds but are lurking deep

down. Money plays a dominant role in todays life. Forms of money have evolved from coin

to paper currency notes to credit cards. Commercial transactions have increased in content

and quantity from simple banker to speculative international trading. Hence the need arose

for a third party who will assist smooth banding of transaction, mediate between the seller

and buyer, hold custody of money and goods, remit funds and also to collect proceeds. He

was the banker. As the number of such mediators grew there is need to control. Such

mediating agencies gave birth to the concept of banks and banking. With the exception


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of the extremely wealthy, very few people buy their homes in all-cash transactions. Most of

us need a credit in form of loans, to make such a large purchase. In fact, many people need

financial support from Bank to fulfill the financial requirement. The world as we know it

wouldn't run smoothly without credit and banks to issue it. In this article we'll, explore the

birth of this flourishing industry.

Need of the Banks

Before the establishment of banks, the financial activities were handled by money lenders and

individuals. At that time the interest rates were very high. Again there were no Security of

public savings and no uniformity regarding loans. So as to overcome such Problems the

organized banking sector was established, which was fully regulated by the Government. The

organized banking sector works within the financial system to provide Loans accept deposits

and provide other services to their customers. The following Functions of the bank explain

the need of the bank and its importance:

To provide the security to the savings of customers.

To control the supply of money and credit

To encourage public confidence in the working of the financial system, increase Savingsspeedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals and Institutions.

To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of

customers.

Services provided by banking organizations

Bank essentially performs the following functions:-

Accepting Deposits or savings functions from customers or public by providing bank

account, current account, fixed deposit account, recurring accounts etc.

The payment transactions like lending money to the public. Bank provides an effective

credit delivery system for loan able transactions.


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Provide the facility of transferring of money from one place to another place. For

performing this operation, bank issues demand drafts, bankers cheques, and money orders

etc. for transferring the money. Bank also provides the facility of Telegraphic transfer or tele-

cash orders for quick transfer of money.

A bank performs a trustworthy business for various purposes.

A bank also provides the safe custody facility to the money and valu ables of the general

public. Bank offers various types of deposit schemes for security of money. For keeping

valuables bank provides locker facility. The lockers are small compartments with dual

locking system built into strong cupboards. These are stored in the banks strong room and

are fully secured.

Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the

government disbursements like pension payments and tax refunds also take place through

banks.

Users of Banking Services:

The emerging trends in the level of expectation affect the formulation of marketing mix.

Innovative efforts become essential the moment it finds a change in the level of expectations.There are two types of customers using the services of banks, such as general customers and

the industrial customers.

General Users:

Persons having an account in the bank and using the banking facilities at the terms and

conditions fixed by a bank are known as general users of the banking services. Generally,

they are the users having small sized and less frequent transactions or availing very limited

services of banks.

Industrial Users:

The industrialists, entrepreneurs having an account in the bank and using credit facilities and

other services for their numerous operations like establishments and expansion, mergers,

acquisitions etc. of their businesses are known as industrial users. Generally, they are found a

few but large sized customers.


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Economic functions of banks

Banks in any country are very important to the growth and prosperity of the

economy. So their role in the economy is very vital. The various important economic

functions of the banks are as under:

1. Credit Creation: The creation of credit or deposits is one of the most vital operations

of the commercial bank. Credit creation is the multiple expansions of banks demand

deposits. Banks advance a major portion of their deposits to the borrowers and keep

smaller parts of deposits to the customers on demand. Even then the customers of the

banks have full confidence that the depositors lying in the banks is quite safe and can

be withdrawn on demand. The banks utilize this trust of their clients and expand loans

by much more time than the amount of demand deposits possessed by them. This

tendency on the part of the commercial banks to expand their demand deposits as a

multiple of their excess cash reserve is called creation of credit.

2. Settlement of payments: Banks act as both collection and paying agents for

customers. It includesthe offsetting of payment flows between geographical areas

there by reducing the cost of settlement between them.

3. Credit intermediation:Banks borrow from one individual or institution and lend

back to other individuals and institutions there by act as credit Intermediary (middle

men).

4. Credit quality improvement: Banks lend money to commercial and personal

individuals and institutions. The improvement comes from diversification of thebank's assets and capital which provides a buffer to absorb losses without defaulting

on its obligations.

5. Promoting capital formation: A developing economy needs a high rate of capital

formation to accelerate the economic development, but the rate of capital formation

depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving

is very low. But banks encourage savings in the underdeveloped countries by

providing very attractive services. Banks also mobilize the idle capital of the country

and make it available for productive purposes.

6. Maturity transformationbanks borrow more on demand debt and short term debt,

but provide more long term loans. In other words, they borrow short and lend long.

With a stronger credit quality than most other borrowers, banks can do this by

aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions

(e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash,

investing in marketable securities that can be readily converted to cash if needed, and

raising replacement funding as needed from various sources (e.g. wholesale cash

markets and securities markets).

7. Facilitator of monetary policy: A well-developed banking system is on essential

pre-condition to the effective implementation of monetary policy. Under-developed

countries cannot afford to ignore this fact. Banks follow monetary policy of centralbank to bring out the necessary change in economy.


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8. Influence economic activity: Banks are in a position to influence economic activity

in a country by their influence on the rate interest; they do it by influencing the rate of

interest in the money market through its supply of funds.


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INDUSTRY PROFILE

AND COMPANY

PROFILE


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Chapter 2- industrial profile and company profile

Evolution of Banking System

The banking history is interesting and reflects evolution in trade and commerce. It also

throws light on living style, political and cultural aspects of civilized mankind. The strongest

faith of people has always been religion and God. The seat of religion and place of worship

were considered safe place for money and valuables. Ancient homes didn't have the benefit of

a steel safe, therefore, most wealthy people held accounts at their temples. Numerous people,

like priests or temple workers were both devout and honest, always occupied the temples,

adding a sense of security. There are records from Greece, Rome, Egypt and Ancient

Babylon that suggest temples loaned money out, in addition to keeping it safe. The fact that

most temples were also the financial centers of their cities and this is the major reason that

they were ransacked during wars. The practice of depositing personal valuables at these

places which were also functioning as the treasuries in ancient Babylon against a receipt was

perhaps the earliest form of Banking.

Gradually as the personal possession got evaluated in term of money, in form of coins made

of precious metal like gold and silver, these were being deposited in the temple treasuries. As

these coins were commonly accepted form of wealth, lending activity to those who neededit and were prepared to borrow at an interest began. The person who conducted this

lending activity was known as the Bankerbecause of the bench he usually set. It is also

observed that the term bankrupt got evolved then as the irate depositors broke the bench and

table of the insolvent banker. With the expansion of trade the concept of banking gained

greater ground. The handling of banking transcended from individual to groups to

companies. Issuing currency was one of the major functions of the banks. The earliest from

of money coins, were a certificate of value stamped on a metal, usually gold, silver, and

bronze or any other metal, by an authority, usually the king. With the increasing belief and

faith in such authority of their valuation and the necessities of wider trade a substitute to

metal was found in paper. The vagaries of monarchical rule led to the issues of currency

being vested with the banks since they enjoyed faith, controlled credit and trading. All forms

of money were a unit of value and promised to pay the bearer of specified value. Due to

failure on account of unwise loans, to rule and organize, a stable banking system arose. The

words earliest bank currency notes were issued in Sweden by stock holms Banco in July

1661.


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History of Indian Banking System

In ancient India there is evidence of loans from the vedic period (beginning 1750BC). Later

during the mayura dynasty (321 to 185BC,), an instrument called adesha was in use, which

was an order on a banker desiring him to pay the money of the note to a third person, whichcorresponds to the definition of a bill of exchange as we understand it today. During the

Buddhist period, there was considerable use of these instruments.

In fact, the history of Indian banking can be easily understood under three main phases which

are as:

1. Colonial / Pre-independence period

2. Nationalization Period

3. Liberalization period

1. Colonial /Pre-independence period

During the period of British rule merchants established the union bank of Calcutta in 1829,

first as a private joint stock association, then partnership. Its proprietors were the owners of

the earlier commercial bank and the Calcutta bank, who by mutual consent created union

bank to replace these two banks. In 1840 it established an agency at Singapore, and closed the

one at Mirzapore that it had opened in the previous year. Also in 1840 the bank revealed that

it had been the subject of a fraud by the banks accountant. Union bank was incorporated in

1845 but failed in 1848, having been insolvent for some time and having used money fromdepositors to pay its dividends.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest joint stock

bank in India; it was not the first though. That honor belongs to the bank of Upper India,

which was established in 1863, and which survived until 1913, when it failed, with some of

its assets and liabilities being transferred to the Alliance Bank of Simla.

Foreign banks too started to appear, particularly in Calcutta, in the 1860s. the comptoir

dEscompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;

branches in Madras and Pondicherry, then a French possession, followed HSBC establisheditself in Bengal in 1869. Calcutta was the most active trading port, mainly due to the trade of

British Empire, and so became a banking centre.

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi

movement. The Swadeshi movement inspired local businessmen and political figures to

found banks of and for the Indian community. A number of banks established then have

survived to the present such as Bank of Baroda, Corporation Bank, Bank of India, Canara

Bank and Central Bank of India.

During the First World War through the end of the second world war and two years thereafteruntil the independence of India were challenging for Indian banking. The years of the First


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World War were turbulent, and it took its toll with banks simply collapsing despite the Indian

economy gaining indirect boost due to war-related economic activities. At least 94 banks in

India failed between 1913 and 1918.

Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. Indias independence marked the end of regime of

the laissez-faire for the Indian banking. The Government of India initiated measures to play

an active role in the economic life of the nation, and the industrial policy resolution adopted

by the government in 1948 envisaged a mixed economy. This resulted into greater

involvement of the state in different segments of the economy including banking and finance.

The major steps to regulate banking included:

The Reserve Bank of India, Indias central banking authority, was established in April

1935, but was nationalized on January 1949 under the terms of the Reserve Bank of

India Act, 1948.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India to regulate, control, and inspect the banks in India

The Banking Regulation Act also provided that no new bank or branch of an existing

bank could be opened without a license from the RBI, and no two banks could have

common directors.

2. Nationalization Period

By the 1960s, the Indian banking industry has become an important tool to facilitate the

Development of the Indian economy. At the same time, it has emerged as a large Employer,

and a debate has ensured about the possibility to nationalise the banking Industry. Indira

Gandhi, the-then Prime Minister of India expressed the intention of the Government of India

(GOI) in the annual conference of the All India Congress Meeting In a paper entitled " Stray

thoughts on Bank Nationalisation" . The paper was received with positive enthusiasm.

Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised

the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash

Narayan, a national leader of India, described the step as a " Masterstroke of poli tical

sagacity" Within two weeks of the issue of the Ordinance, the Parliament passed the Banking

Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential

approval on 9 August, 1969. A second step of nationalisation of 6 more commercial banks

followed in 1980. The stated reason for the nationalisation was to give the government more


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control of credit Delivery. With the second step of nationalisation, the GOI controlled around

91% of the Banking business in India. Later on, in the year 1993, the government merged

New Bank of India with Punjab National Bank. It was the only merger between nationalised

banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After

this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the

Average growth rate of the Indian economy. With the nationalization there were a lot of positive

changes in Indian banking system. These are discussed as under:

a) The ownership of the govt. gave a new confidence to the savers and being backed by a

sovereign the normal suspicions associated with the capabilities of the bankers in the private

sector were gone.

b) Banking ceased to be selective. The entry barriers that existed for customers to bank,

social economic and political were lowered. This resulted in a massive quantitative expansion

of the bank customer base as well as in the nature of services provided.

c) The expansion of banks also expanded the economy.

d) A large employment base was created.

e) The quality of credit assets fell because of liberal credit extension policy.

f) The credit facilities extended to the priority sector at concessional rates.

3. Liberalization Period

By the beginning of 1990, the social banking goals set for the banking industry made most of

the public sector resulted in the presumption that there was no need to look at thefundamental financial strength of this bank. Consequently they remained undercapitalized.

The banking industry is of extreme importance, as the health of the financial sector in

particular and the economy was a whole would be reflected by its performance. The need for

restructuring the banking industry was felt greater with the initiation of the real sector reform

process in 1991.The reforms have enhanced the opportunities and challenges for the real

sector making them operate in a borderless global market place. However, to harness the

benefits of globalization, there should be an efficient financial sector to support the structural


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reforms taking place in the real economy. Hence, along with the reforms of the real sector,

the banking sector reformation was also addressed

The root cause of banking reforms was:

Regulated interest rate structure.

Lack of focus on profitability.

Lack of transparency in the banks balance sheet.

Lack of competition.

Excessive regulation on organization structure and managerial

resource.

Excessive support from government

In the early 1990s, the then Narsimha Rao government embarked on a policy of

Liberalisation, licensing a small number of private banks. These came to be known as New

Generation tech-savvy banks, and included Global Trust Bank (the first of such new

generation banks to be set up), which later amalgamated with Oriental Bank of Commerce,

Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move Along with the

rapid growth in the economy of India revolutionized the banking sector in India which has

seen rapid growth with strong contribution from all the three sectors of Banks, namely,

government banks, private banks and foreign banks. The next stage for The Indian banking

has been setup with the proposed relaxation in the norms for Foreign Direct Investment,

where all Foreign Investors in banks may be given voting rights which could exceed the

present cap of 10%, at present it has gone up to 49% with some Restrictions. The new policy

shook the banking sector in India completely. Bankers, till this time, were used to the 4-6-4

method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in

a modern outlook and tech-savvy methods of working for the Traditional banks. All this led

to the retail boom in India. People not just demanded more from their banks but also received

more. Currently (2007), banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India Still remains a challenge for the

private sector and foreign banks. In terms of quality of Assets and capital adequacy, Indian

banks are considered to have clean, strong and transparent balance sheets as compared to

other banks in comparable economies in its Region. The Reserve Bank of India is an

autonomous body, with minimal pressure from the government. The stated policy of the Bankon the Indian Rupee is to manage Volatility but without any fixed exchange rate-and this has


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To help sectors of the economy that they have special credit needs for eg. Housing, small

business and agricultural loans etc.

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and unorganized sectors.

The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative

Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The unorganized sector,

which is not homogeneous, is largely made up of money lenders and indigenous bankers. An

outline of the Indian Banking structure may be presented as follows:-

Reserve bank of India

At the apex level of Indian banking industry, there is Reserve Bank of India (RBI) as central

Bank. Reserve bank of India is a central bank and was established in April 1, 1935 in

accordance with the provisions of reserve bank of India act 1934. The central office of RBI is

located at Mumbai since inception. Though originally the reserve bank of India was privately

owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was

inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid


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up. RBI is governed by a central board (headed by a governor) appointed by the central

government of India. RBI has 22 regional offices across India. The reserve bank of India was

nationalized in the year 1949. The general superintendence and direction of the bank is

entrusted to central board of directors of 20 members, the Governor and four deputy

Governors, one Governmental official from the ministry of Finance, ten nominated directors

by the government to give representation to important elements in the economic life of the

country, and the four nominated director by the Central Government to represent the four

local boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Board

consists of five members each central government appointed for a term of four years to

represent territorial and economic interests and the interests of cooperative and indigenous

banks. The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the

statutory basis of the functioning of the bank. The bank was constituted for the need of

following:

- To regulate the issues of banknotes.

- To maintain reserves with a view to securing monetary stability

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

Functions of RBI as a central bank of India are explained briefly as follows:

Bank of I ssue: The RBI formulates, implements, and monitors the monitory policy. Its main

objective is maintaining price stability and ensuring adequate flow of credit to productive

sector.

Regulator-Supervisor of the financial system: RBI prescribes broad parameters of banking

operations within which the countrys banking and financial system functions. Their main

objective is to maintain public confidence in the system, protect depositors interest and

provide cost effective banking services to the public.

Manager of exchange control : The manager of exchange control department manages the

foreign exchange, according to the foreign exchange management act, 1999. The managers

main objective is to facilitate external trade and payment and promote orderly development

and maintenance of foreign exchange market in India.


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helped a great deal in improving the standard of banking in India to develop on sound lines

and to improve the methods of their operation.

Promotional Functions: With economic growth assuming a new urgency since

independence, the range of the Reserve Banks functions has steadily widened. The bank now

performs a variety of developmental and promotional functions, which, at one time, were

regarded as outside the normal scope of central banking. The Reserve bank was asked to

promote banking habit, extend banking facilities to rural and semi-urban areas, and establish

and promote new specialized financing agencies.

Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled commercial banks, andunscheduled banks.

Scheduled Banks: Scheduled Banks in India constitute those banks which have been

included in the second schedule of RBI act 1934. RBI in turn includes only those banks in

this schedule which satisfy the criteria laid down vide section 42(6a) of the Act. Scheduled

banks in India means the State Bank of India constituted under the State Bank of India Act,

1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (subsidiary banks)

Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking

companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other

bank being a bank included in the Second Schedule to the Reserve bank of India Act, 1934 (2

of 1934), but does not include a co-operative bank. For the purpose of assessment of

performance of banks, the Reserve Bank of India categories those banks as public sector

banks, old private sector banks, new private sector banks and foreign banks, i.e. private

sector, public sector, and foreign banks come under the umbrella of scheduled commercial

banks.

Commercial Banks: Commercial banks may be defined as, any banking organization that

deals with the deposits and loans of business organizations. Commercial banks issue bank

checks and drafts, as well as accept money on term deposits. Commercial banks also act as

moneylenders, by way of installment loans and overdrafts.


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Commercial banks also allow for a variety of deposit accounts, such as checking, savings,

and time deposit. These institutions are run to make a profit and owned by a group of

individuals.

Public Sector Banks: These are banks where majority stake is held by the Government of

India.

Examples of public sector banks are: SBI, Bank of India, Canara Bank, etc.

Private Sector Banks: These are banks majority of share capital of the bank is held by

private individuals. These banks are registered as companies with limited liability.Examples

of private sector banks are: ICICI Bank, Axis bank, HDFC, etc.

Foreign Banks: These banks are registered and have their headquarters in a foreign country

but operate their branches in our country. Examples of foreign banks in India are: HSBC,

Citibank, Standard Chartered Bank, etc.

Cooperative Banks: A co-operative bank is a financial entity which belongs to its members,

who are at the same time the owners and the customers of their bank. Co-operative banks are

often created by persons belonging to the same local or professional community or sharing a

common interest. Co-operative banks generally provide their members with a wide range of

banking and financial services (loans, deposits, banking accounts, etc).

Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs) on

October 2, 1975. The banks provide credit to the weaker sections of the rural areas,

particularly the small and marginal farmers, agricultural labourers, and small entrepreneurs.

Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank,

State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of

India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs.

5 Crores. There are several concessions enjoyed by the RRBs by Reserve Bank of India such

as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower

statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks,

managerial and staff assistance from the sponsoring bank and reimbursement of the expenses

on staff training. The RRBs are under the control of NABARD. NABARD has the

responsibility of laying down the policies for the RRBs, to oversee their operations, provide

refinance facilities, to monitor their performance and to attend their problems.


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Unscheduled Banks

Unscheduled commercial banks are those banks which are not included in Second

schedule of the RBI Act of 1934.

Banking structure in I ndia

At the end of September 2013, The Branch and ATM wise position of different categories of

banks in India is tabulated as under:

S.No Name Branches ATMs

Rural Semi-

urban

Urban Metro

Politian

total ON

Site

OFF

Site

Total

1. Scheduled

commercial banks

23776 22468 17878 17118 81240 47545 48141 95686

2 Public sector banks 22188 17773 14248 13257 67466 34012 24181 58193

3 Nationalized banks 15606 12154 10744 10132 48636 18227 12773 31050

4 State bank group 6582 5619 3504 3125 18830 15735 11408 27143

5 Private sector 1581 4687 3569 3615 13452 13249 22830 36079

6 Old private sector 881 2025 1395 1085 5386 3342 2429 5771

7 Foreign sector 07 08 61 246 322 284 1130 1414

Source: (Reserve Bank of India)

BANKING IN INDIA

Indian banking is the lifeline of the nation and its people. Banking has helped in developing

the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon.

The sector has translated the hopes and aspirations of millions of people into reality. But to

do so, it has had to control miles and miles of difficult terrain, suffer the indignities of foreign

rule and the pangs of partition. Today, Indian banks can confidently compete with modern

banks of the world. Before the 20th century, usury, or lending money at a high rate of


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interest, was widely prevalent in rural India. Entry of Joint stock banks and development of

Cooperative movement have taken over a good deal of business from the hands of the Indian

money lender, who although still exist, have lost his menacing teeth. In the Indian Banking

System, Cooperative banks exist side by side with commercial banks and play a

supplementary role in providing need-based finance, especially for agricultural and

agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc.

along with some small industries and self-employment driven activities. Generally, co-

operative banks are governed by the respective co-operative acts of state governments. But,

since banks began to be regulated by the RBI after 1st March 1966, these banks are also

regulated by the RBI after amendment to the Banking Regulation Act 1949. The Reserve

Bank is responsible for licensing of banks and branches, and it also regulates credit limits to

state co-operative banks on behalf of primary co-operative banks for financing SSI units.

During the last 30 years since nationalization tremendous changes have taken place in the

financial markets as well as in the banking industry due to financial sector reforms. The

banks have shed their traditional functions and have been innovating, improving and coming

out with new types of services to cater emerging needs of their customers. Banks have been

given greater freedom to frame their own policies. Rapid advancement of technology has

contributed to significant reduction in transaction costs, facilitated greater diversification of

portfolio and improvements in credit delivery of banks. Prudential norms, in line with

international standards, have been put in place for promoting and enhancing the efficiency of

banks. The process of institution building has been strengthened with several measures in the

areas of debt recovery, asset reconstruction and securitization, consolidation, convergence,

mass banking etc. Despite this commendable progress, serious problem have emerged

reflecting in a decline in productivity and efficiency, and erosion of the profitability of the

banking sector. There has been deterioration in the quality of loan portfolio which, in turn,

has come in the way of banks income generation and enhancement of their capital funds.

Inadequacy of capital has been accompanied by inadequacy of loan loss provisions resulting

into the adverse impact on the depositors and investors confidence. The Government,

therefore, set up Narsimhan Committee to look into the problems and recommend measures

to improve the health of the financial system. The acceptance of the Narsimhan Committee

recommendations by the Government has resulted in transformation of hitherto highly

regimented and over bureaucratized banking system into market driven and extremely

competitive one. The massive and speedy expansion and diversification of banking has not

been without its strains. The banking industry is entering a new phase in which it will be


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facing increasing competition from non-banks not only in the domestic market but in the

international markets also. The operational structure of banking in India is expected to

undergo a profound change during the next decade. With the emergence of new private

banks, the private bank sector has become enriched and diversified with focus spread to the

wholesale as well as retail banking. The existing banks have wide branch network and

geographic spread, whereas the new private banks have the clout of massive capital, lean

personnel component, the expertise in developing sophisticated financial products and use of

state-of-the-art technology. Gradual deregulation that is being ushered in while stimulating

the competition would also facilitate forging mutually beneficial relationships, which would

ultimately enhance the quality and content of banking. In the final phase, the banking system

in India will give a good account of itself only with the combined efforts of cooperative

banks, regional rural banks and development banking institutions which are expected to

provide an adequate number of effective retail outlets to meet the emerging socio-economic

challenges during the next two decades. The electronic age has also affected the banking

system, leading to very fast electronic fund transfer. However, the development of electronic

banking has also led to new areas of risk such as data security and integrity requiring new

techniques of risk management. Cooperative (mutual) banks are an important part of many

financial systems. In a number of countries, they are among the largest financial institutions

when considered as a group. Moreover, the share of cooperative banks has been increasing in

recent years; in the sample of banks in advanced economies and emerging markets analyzed

in this paper, the market share of cooperative banks in terms of total banking sector assets

increased from about 9 percent in mid-1990s to about 14 percent in 2004.

Bank Marketing In the Indian Perspective:

The formulation of business policies is substantially influenced by the emerging trends in the

national and international scenario. The GDP, per capita income, expectation, the rate of

literacy, the geographic and demographic considerations, the rural or urban orientation, the

margins in economic systems, and the spread of technologies are some of the key factors

governing the development plan of an organization, especially banking organization. In ours

developing economy, the formulation of a sound marketing mix is found a difficult task. The

nationalization of the Reserve Bank of India (RBI) is a landmark in the development of

Indian Banking system that have paved numerous paths for qualitative-cum quantities

improvements in true sense. Subsequently, the RBI and the policy makers of the public sectorcommercial banks think in favour of conceptualizing modern marketing which would bring a


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radical change in the process of quality up gradation and village to village commercial

viability.

Bank Marketing Mix and Strategies:

The first task before the public sector commercial Banks is to formulate that Bank marketing

mix which suits the national socio-economic requirements. Some have 4 P's and some have 7

P's of marketing mix. The common four Ps of Marketing mix are as follows:-

Product:

To be more specific the peripheral services need frequent innovations, since this would be

helpful in excelling competition. The product portfolio designing is found significant to

maintain the commercial viability of the public sector banks. The banks professionals need to

assign due weightage to their physical properties. They are supposed to look smart active and

attractive.

Price:

Price is a critical and important factor of bank marketing mix due numerous players in the

industry . Most consumers will only be prepared to invest their money in search of

extraordinary or higher returns. They are ready to pay additional value if there is a perception

of extra product value. This value may be improved performance, function, services,

reliability, and promptness for problem solving and of course, higher rate of return

Promotion:

Bank Marketing is actually is the marketing of reliability and faith of the people. It is the

responsibility of the banking industry to take people in favour through Word of mouth

publicity, reliability showing through long years of establishment and other services.

Place:

The choice of where and when to make a product available will have significant impact on

the customers. Customers often need to avail banking services fast for this they require the

bank branches near to their official area or the place of easy access.


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Current Scenario and Future Landscape of Indian Banking

The industry is currently in a transition phase. On the one hand, the PSBs, which are the

mainstay of the Indian Banking system, are in the process of shedding their flab in terms of

excessive manpower, excessive non Performing Assets (NPAS) and excessive governmental

equity, while on the other hand the private sector banks are consolidating themselves through

mergers and acquisitions. PSBs, which currently account for more than 78 percent of total

banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000),

falling revenues from traditional sources, lack of modern technology and a massive

workforce while the new private sector banks are forging ahead and rewriting the traditional

banking business model by way of their sheer innovation and service. The PSBs are of course

currently working out challenging strategies even as 20 percent of their massive employee

strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS)

schemes. The private players however cannot match the PSbs great reach, great size and

access to low cost deposits. Therefore one of the means for them to combat the PSBs has

been through the merger and acquisition (M& A) route. Over the last two years, the industry

has witnessed several such instances. For instance, Hdfc Banks merger with Times Bank

Icici Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura, Centurion

Bank, Induslnd Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTIbank- Global Trust Bank merger however opened a Pandoras box and brought about the

realization that all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and

mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other

services and integrated them into the mainstream banking arena, while the PSBs are still

grappling with disgruntled employees in the aftermath of successful VRS schemes. Also,

following Indias commitment to the WTO agreement in respect of the services sector,

foreign banks, including both new and the existing ones, have been permitted to open up to

12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches.

Talks of government diluting their equity from 51 percent to 33 percent in November 2000

have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules

being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M&

A route to acquire willing Indian partners. Meanwhile the economic and corporate sector

slowdown has led to an increasing number of banks focusing on the retail segment. Many ofthem are also entering the new vistas of Insurance. Banks with their phenomenal reach and a


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regular interface with the retail investor are the best placed to enter into the insurance sector.

Banks in India have been allowed to provide fee-based insurance services without risk

participation invest in an insurance company for providing infrastructure and services support

and set up of a separate joint venture insurance company with risk participation.

Liberalization and de-regulation process started in 1991-92 has made a sea change in the

banking system. From a totally regulated environment, we have gradually moved into a

market driven competitive system. Our move towards global benchmarks has been, by and

large, calibrated and regulator driven. The pace of changes gained momentum in the last few

years. Globalization would gain greater speed in the coming years particularly on account of

expected opening up of financial services under WTO. Four trends change the banking

industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2)

Globalization of operations, 3) Development of new technology and 4)Universalisation of

banking. With technology acting as a catalyst, we expect to see great changes in the banking

scene in the coming years. The Committee has attempted to visualize the financial world 5-10

years from now. The picture that emerged is somewhat as discussed below. It entails

emergence of an integrated and diversified financial system. The move towards universal

banking has already begun. This will gather further momentum bringing non-bankingfinancial institutions also, into an integrated financial system.

The traditional banking functions would give way to a system geared to meet all the financial

needs of the customer. We could see emergence of highly varied financial products, which

are tailored to meet specific needs of the customers in the retail as well as corporate

segments. The advent of new technologies could see the emergence of new financial players

doing financial intermediation. For example, we could see utility service providers offering

say, bill payment services or supermarkets or retailers doing basic lending operations. The

conventional definition of banking might undergo changes.

The competitive environment in the banking sector is likely to result in individual players

working out differentiated strategies based on their strengths and market niches. For example,

some players might emerge as specialists in mortgage products, credit cards etc. whereas

some could choose to concentrate on particular segments of business system, while

outsourcing all other functions. Some other banks may concentrate on SME segments or high

net worth individuals by providing specially tailored services beyond traditional banking


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offerings to satisfy the needs of customers they understand better than a more generalist

competitor.

International trade is an area where Indias presence is expected to show appreciable increase.

Presently, Indian share in the global trade is just about 0.8%. The long term projection for

growth in international trade is placed at an average of 6% per annum. With the growth in IT

sector and other IT Enabled Services, there is tremendous potential for business

opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian

exports can be expected to grow at a sustainable rate of 15% per annum in the period ending

with 2010. This again will offer enormous scope to Banks in India to increase their Forex

business and international presence. Globalization would provide opportunities for Indian

corporate entities to expand their business in other countries.

Banks in India wanting to increase their international presence could naturally be expected to

follow these corporate and other trade flows in and out of India.

Retail lending will receive greater focus. Banks would compete with one another to provide

full range of financial services to this segment. Banks would use multiple delivery channels

to suit the requirements and tastes of customers. While some customers might value

relationship banking (conventional branch banking), others might prefer convenience banking(e-banking).

One of the concerns is quality of bank lending. Most significant challenge before banks is the

maintenance of rigorous credit standards, especially in an environment of increased

competition for new and existing clients. Experience has shown us that the worst loans are

often made in the best of times. Compensation through trading gains is not going to support

the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring,

controlling and monitoring as also revamp operating procedures. Credit evaluation may have

to shift from cash flow based analysis to borrower account behaviour, so that the State of

readiness of Indian banks for Basel II regime improves. Corporate lending is already

undergoing changes. The emphasis in future would be towards more of fee based services

rather than lending operations. Banks will compete with each other to provide value added

services to their customers.

Structure and ownership pattern would undergo changes. There would be greater presence of

international players in the Indian financial system. Similarly, some of the Indian banks


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would become global players. Government is taking steps to reduce its holdings in Public

sector banks to 33%. However the indications are that their PSB character may still be

retained.

Mergers and acquisitions would gather momentum as managements will strive to meet the

expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks.

As Banks seek niche areas, we could see emergence of some national banks of global scale

and a number of regional players.

Corporate governance in banks and financial institutions would assume greater importance in

the coming years and this will be reflected in the composition of the Boards of Banks.

Concept of social lending would undergo a change. Rather than being seen as directedlending such lending would be business driven. With SME sector expected to play a greater

role in the economy, Banks will give greater overall focus in this area. Changes could be

expected in the delivery channels used for lending to small borrowers and agriculturalists and

unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as

means to reduce transaction costs.

Technology as an enabler is separately discussed in the report. It would not be out of place,

however, to state that most of the changes in the Landscape of financial sector discussed

above would be technology driven. In the ultimate analysis, successful institutions will be

those which continue to leverage the advancements in technology in reengineering processes

and delivery modes and offering state-of-the-art products and services providing complete

financial solutions for different types of customers.

Human Resources Development would be another key factor defining the characteristics of a

successful banking institution. Employing and retaining skilled workers and specialists, re-

training the existing workforce and promoting a culture of continuous learning would be a

challenge for the banking institutions.

Challenges to Indian Banking:

The banking industry in India is undergoing a major change due to the advancement in Indian

economy and continuous deregulation. These multiple changes happening in series has a

ripple effect on banking industry which is trying to be organized completely, regulated sellers

of market to completed deregulated customers market.


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1. Deregulation:

This continuous deregulation has given rise to extreme competition with greater autonomy,

operational flexibility, and decontrolled interest rate and liberalized norms and policies for

foreign exchange in banking market. The deregulation of the industry coupled with decontrol

in the interest rates has led to entry of a number of players in the banking industry. Thereby

reduced corporate credit off which has resulted in large number of competitors battling for

the same pie.

2. Modified new rules:

As a result, the market place has been redefined with new rules of the game. Banks are

transforming to universal banking, adding new channels with lucrative pricing and freebeesto offer. New channels squeezed spreads, demanding customers better service, marketing

skills heightened competition, defined new rules of the game pressure on efficiency. Need for

new orientation diffused customer loyalty. Bank has led to a series of innovative product

Offerings catering to various customer segments, specifically retail credit.

3. Efficiency:

Excellent efficiencies are required at banker's end to establish a balance between thecommercial and social considerations Bank need to access low cost funds and simultaneously

improve the efficiency and efficacy. Owing to cutthroat competition in the industry, banks

are facing pricing pressure; have to give thrust on retail assets.

4. Diffused customer loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more

demanding and the loyalties are diffused. Value added offerings bound customers to change

their preferences and perspective. These are multiple choices; the wallet share is reduced per

bank with demand on flexibility and customization. Given the relatively low switching costs;

customer retention calls for customized service and hassle free, flawless service delivery.

5. Misaligned mindset:

These changes are creating challenges, as employees are made to adapt to changing

conditions. The employees are resisting changing and the seller market mindset is yet to be

changed. These problems coupled with fear of uncertainty and control orientation. Moreover


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banking industry is accepting the latest technology but utilization is far below from

satisfactory level.

6. Competency gap:

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

opportunities. Placing the right skill at the right place will determine success. The focus of

people will be doing work but not providing solutions, on escalating problems rather than

solving them and on disposing customers instead of using the opportunity to cross sell.

Strategic options to cope withthe challenges:

Dominant players in the industry have embarked on a series of strategic and tactical

initiatives to sustain leadership. The major initiatives incorporate:

a) Focus on ensuring reliable service delivery through Investing on and implementing right

technology.

b) Leveraging the branch networks and sales structure to mobilize low cost current and

savings deposits.

c) Making aggressive forays in the retail advances segments of home and personal loans.

d) Implementing initiatives involving people, process and technology to reduce the fixed

costs and the cost per transaction.

e) Focusing on fee based income to compensate foe squeezed spread.

f) Innovating products to capture customer 'mind share' to begin with and later the wallet

share.

g) Improving the asset quality as Basel II norms.

Swot analysis of Indian banking industry

The bank marketing is than an approach to market the services profitability. It is a device to

maintain commercial viability. The changing perception of bank marketing has made it a

social process. The significant properties of the holistic concept of management and

marketing has made bank marketing a device to establish a balance between the commercial

and social considerations, often considered to the be opposite of each other. A collaborationof two words banks and marketing thus focuses our attention on the following:


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* Bank marketing is a managerial approach to survive in highly competitive market as well as

reliable service delivery to target customers.

* It is a social process to sub serve social interests.

* It is a fair way of making profits

* It is an art to make possible performance-orientation.

* It is a professionally tested skill to excel competition.

STRENGTH

emerging economies banks over the last few years.

the sector. These changes include strengthening prudential norms, Enhancing the payments

system and integrating regulations between commercial and co-operative banks.

banking system has reached even to the remote corners of the country.

uality of assets and capital adequacy, Indian banks are considered to have

clean, strong and transparent balance sheets relative to other banks in Comparable economies

in its region.

Foreign banks will have the opportunity to own up to 74 per cent of Indian private Sector

banks and 20 per cent of government owned banks.

WEAKNESS

marketing, service operations, risk management and the overall organisational performance

ethic & strengthen human capital.

The cost of intermediation remains high and bank penetration is limited to only a few

customer segments and geographies.

al weaknesses such as a fragmented industry structure, restrictions on Capitalavailability and deployment, lack of institutional support infrastructure, Restrictive labour


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laws, weak corporate governance and ineffective regulations Beyond Scheduled Commercial

Banks (SCBs)

: The government has refused to dilute its Stake in

PSU banks below 51% thus choking the headroom available to these banks for raining equity

capital.

OPPORTUNITY

The market is seeing discontinuous growth driven by new products and services that

include opportunities in credit cards, consumer finance and wealth management on the retail

side, and in fee-based income and investment banking on the wholesale banking side. These

require new skills in sales & marketing, Credit and operations.

Given the demographic shifts resulting from changes in age profile and household Income,

consumers will increasingly demand enhanced institutional capabilities and service levels

from banks.

New private banks could reach the next level of their growth in the Indian Banking sector

by continuing to innovate and develop differentiated business Models to profitably serve

segments like the rural/low income and affluent/HNI Segments; actively adopting

acquisitions as a means to grow and reaching the Next level of performance in their service

platforms. Attracting, developing and retaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternative

Approaches to win the race for the customer and build a value-creating Customer franchise

in advance of regulations potentially opening up post 2009. At the same time, they should

stay in the game for potential acquisition opportunities as and when they appear in the near

term, maintaining a fundamentally long-term value-creation mindset.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail banking,

mortgages and investment services are expected to be strong.

rnment to amend the

Banking Regulation Act to permit banks to trade in commodities and Commodity derivatives.

: In an attempt to relieve banks of their capital crunch, the RBI has allowed

them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If


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the new instruments find takers, it would help PSU banks, left with little headroom for raising

equity.

THREATS

stability of the system.

private players.


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COMPANY PROFILE

BACKGROUND OF THE COMPANY

Jammu and Kashmir Bank Limited was incorporated on 1st October, 1938 and commenced

its business from 4th July, 1939 in Kashmir (India). The Bank was first in the country as a

State owned bank. According to the extended Central laws of the state, Jammu & Kashmir

Bank was defined as a govt. Company as per the provision of Indian companies act 1956. In

the year 1971, the Bank received the status of scheduled bank. It was declared as "A" Class

Bank by RBI in 1976. Today the bank has more than 750 branches across the country and has

recently become a billion Dollar Company.

PROFILE

1. Incorporated in 1938 as a limited company.

2. Governed by the Companies Act and Banking Regulation Act of India.

3. Regulated by the Reserve Bank of India and SEBI.

4. Listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)

5. 53 per cent owned by the Government of J&K.

6. Rated "P1+" by Standard and Poor- CRISIL connoting highest degree of safety.

7. Four decades of uninterrupted profitability and dividends.

Unique Characteristics: One of a kind

1. Private sector Bank despite government holding 53 per cent of equity.

2. Sole banker and lender of last resort to the Government of J&K.

3. Plan and non -plan funds, taxes and non-tax revenues routed through the bank.

4. Salaries of Government officials disbursed by the Bank.

5. Only private sector bank designated as agent of RBI for banking.

6. Carries out banking business of the Central Government.

7. Collects taxes pertaining to Central Board of Direct Taxes in J&K.


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Brand Identity

The new identity for J&K Bank is a visual representation of the Banks philosophy and

business strategy. The three colored squares represent the regions of Jammu, Kashmir and

Ladakh. The counter-form created by the interaction of the squares is a falcon with

outstretched wingsa symbol of power and empowerment.

The synergy between the three regions propels the bank towards new horizons. Green

signifies growth and renewal, blue conveys stability and unity, and red represents energy and

power. All these attributes are integrated and assimilated in the white counter-form

NATURE OF THE BUSINESS

Banks safeguard money and valuables and provide loans, credit, and payment

services, such as checking accounts, money orders, and cashiers checks and offer

investment and insurance products, which they were once prohibited from selling.

There are several types of banks, which differ in the number of services they provide

and the clientele they serve.


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Commercial banks, which dominate this industry, offer a full range of services for

individuals, businesses, and governments. These banks come in a wide range of sizes,

from large global banks to regional and community banks.

Global banks are involved in international lending and foreign currency trading, in

addition to the more typical banking services.

Regional banks have numerous branches and automated teller machine (ATM)

locations throughout a multi-state area that provide banking services to individuals.

Banks have become more oriented toward marketing and sales.

Community banks are based locally and offer more personal attention, which many

individuals and small businesses prefer.

Savings banks and savings and loan associations, sometimes called thrift institutions,

are the second largest group of depository institutions.

Federal Reserve banks are Government agencies that perform many financial services

for the Government. Their chief responsibilities are to regulate the banking industry

and to help implement Nations monetary policy.

Interest on loans is the principal source of revenue for most banks, making their

various lending departments critical to their success. The money to lend comes

primarily from deposits in checking and savings accounts, certificates of deposit,

money market accounts

Technology is having a major impact on the banking industry. Electronic banking by

phone or computer allows customers to pay bills and transfer money from one

account to another. Through these channels, bank customers can also access

information such as account balances and statement history.

Use of check imaging, which allows banks to store photographed checks on the

computer, is one such example that has been implemented by some banks.

Many banks now offer their customers financial planning and asset management

services, as well as brokerage and insurance services, often through a subsidiary or

third party. Others are beginning to provide investment banking services that help

companies and governments raise money through the issuance of stocks and bonds


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VISION AND MISSION

Vision

To catalyze economic transformation and capitalize on growth.

Banks vision is to engender and catalyze economic transformation of Jammu and

Kashmir and capitalize from the growth induced financial prosperity thus engineered. The

bank aspires to make Jammu and Kashmir the most prosperous state in the country, by

helping create a new financial architecture for the J&K economy, at the center of which

will be the J&K Bank.

The Bank's vision is to be financially sound, profitable, growth and technology oriented,

committed to building and maximizing sustainable value for all its stakeholders. The

Bank is committed to achieve healthy growth in profitability and simultaneously to

remain consistent with the Bank's risk appetite and at the same time ensuring the highest

levels of ethical standards, professional integrity and regulatory compliance.

Mission

Our mission is two-fold: To provide the people of J&K international quality financial

service and solutions and to be a super-specialist bank in the rest of the country. The two

together will make us the most profitable bank in the country.

Quality Policy:

The bank begun its much-delayed expansion plan in 2011-12, improved its earnings and kept

the asset quality stable in the first half of this financial year. Recently, it sold a part of its

stake in MetLife for a profit of Rs 140-150 crore. This has made the banks share attractive to

investors, market analysts said.

At the current market price, J&K Bank is trading reasonably at 1.15x FY14 ABV. We

believe they deserve to get a better multiple, on the back of consistent performance on asset

quality as well as strong return ratios (RoA/RoE) over the last couple of years. Its superior

provision coverage ratio is icing on the cake and stands as one of the best in the industry

(greater than 93 per cent, including technical write-offs), providing cushion to its future


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Other Finances:-

Consumer Loan

Consumption Loan

Personal Loan to Pensioners

Mortgage loan for Trade and Service Sector

Loans against Mortgage of Immovable Property

Fair Price Shop Scheme

Travel and Tourist taxi operators

Specialized Finance:-

Help Tourism (For Kashmir valley only)

All purpose Agri term Loan

Fruit Advances Scheme (Apple)

Zaffron Finance

Roshni Financing Scheme

Craft Development Finance

Dastkar Finance

Giri Finance Scheme

Khatamband Craftsmen Finance

Commercial Premises Finance

Laptop/PC Finance

Saving and Deposits

CurrentAccounts

Gift ChequeSchemes

Value AddedServices

Term &Deposits

Saving BankDeposits


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Saving Bank Deposits:-

Saving Bank Deposit Scheme

SB Ujala- No Frills Account

Term Bank Deposits:-

Millennium Deposits Scheme

Flexi Deposits Scheme

Fixed Deposits Scheme

Child Care Scheme

Cash Certificates

Super Earner Deposits Scheme

Recurring Deposits Scheme

Recurring Plus Account

Smart Saver Scheme

Depositors Pension Scheme

Value Added Schemes:-

Tax Saver Term Deposit Scheme

Mehendi Deposit Certificate

Current Accounts:-

Platinum Account

Gold Account

Premium Plus Account

Premium Account

Basic Account


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Other Business of J&K Bank

AREA OF OPERATION

The Bank has its main market of operation in the state of Jammu and Kashmir. The

branch network of the bank is so dense that it has its branch every two kilometres.

The bank has also registered its presence in the main cities of India.

The bank is extensively supportive of small scale businesses and tourism in the state.

The bank constituted the J&K Bank Rural Self Employment Training Institutes

(JKBRSETI) Society, registered with Registrar of Society, Directorate of Industries

and Commerce (Kashmir), Srinagar for setting up JKBRSETIs in all the 12 lead

districts of the bank.

Non Life InsuranceMUTUAL FUNDLife Insurance

Bajaj Allianz

General Insurance

Co. Ltd

MetLife India

Insurance

CARDS

Empowerment

Credit Card

Merchant

Acquiring (Point of

Sale Equipment)

Global Access

Card


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The bank constituted a trust under the title Jammu and Kashmir Bank Social

Conscience Trust to prevent heritage and to take eco-preservation initiative.

The Bank operates a Regional Rural bank under the name J&K Grameen Bank.

The Bank is also active in the field of corporate social responsibility like providing

financial assistance for medical aid, supporting sports and educational institution.

OWNERSHIP PATTERN

SHARE HOLDING PATTERN AS ON 31.03.2013

SR.NO. PARTICULARS NO OF SHARES TOTAL %

PHYSICAL ELECTRONIC SHARESTO

CAPITAL

1 GOVERNMENT OF J&K 0 25775266 25775266 53.17

2 INDIAN MUTUAL FUNDS 0 2120006 2120006 4.37

3 INSURANCE COMPANIES 0 215608 215608 0.44

4 BANKS 0 2100 2100 0.00

5 NON RESIDENT INDIANS 1600 269352 270952 0.56

6FOREIGN INST.

INVESTORS0 10963479 10963479 22.62

7 BODIES CORPORATES 24094 3365353 3389447 6.99

8 RESIDENT INDIVIDUALS 2032949 3696908 5729857 11.82

9 CLEARING MEMBERS 0 11087 11087 0.02

TOTAL 2058643 46419159 48477802 100.00


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INFRASTRUCTURE FACILITIES

Head Office

J&K bank has its headquarter in Srinagar. Due to extreme cold during the winters it

becomes necessary to provide heating facilities.

The four storied building has several facilities for its employees and other customers.

The building houses the office of chairman and other important personnels of the

bank.

There is a cafeteria in the premises which serves the employees with quality food.

The Basement consists of parking facility.

There is a small park in the premises for employees.

The bank currently has 11 zonal office

1. Kashmir central.

2. Kashmir south .

3. Kashmir north

4. Ladakh

5. Jammu central.

6. Jammu west

7. Jammu north

8. Upper north Mohali

9. North Delhi

10.Mumbai

11.South Bangalore.

Besides J&K bank has RCCs in Kashmir(Srinagar),Jammu, Delhi and Mumbai

Branches

The bank has more than 750 branches all over the country, and 726 ATMs across the

country as on October 1, 2013.

The branches are fully computerized with latest technology.

All the CBS branches of the bank have been enabled for RTGS and NEFT facility.


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2.9 ACHIEVEMENTS AND AWARDS

J&K Banks Annual Report 2008-09 has won three awards at the prestigious LACP

2009 Vision Awards the worlds largest award programme for Annual Reports,

organized by California-based League of American Communications Professionals

(LACP), USA.

The LACP is a forum within the public relations industry that facilitates discussion of

best-in-class practices in public relations and recognizes exemplary communication

capabilities at a global level. The awards received include Rank 73 on the top

hundred list of annual reports from around the world, Platinum Award in the

Commercial Banks Up to $10billon annual revenue from the Asia Pacific Region

and Silver Award for Most Creative Report across all sectors from the Asia Pacific

Region.

J&K bank received the BANKING TECHNOLOGY 2009 Award presented by IBA

& TFCI on 28thJan 2010.

The Bank was awarded ASIAN BANKING AWARD 2005 for its development

project financing programme in recognition of contributing significantly to the

development of tourism industry of the J&K state. The Bank has won the ASIAN

BANKING AWARD for the second consecutive year. The J&K Bank has bagged the prestigious Financial Express Best Banks Award in the

Old Private Sector Banks category for scaling up its business and strengthening the

balance for the year ending March 2011.

The Bank has been awarded as the best Bank in the prestigious Dun & Bradstreet

(D&B) Polaris Software Banking Awards 2011. The award was conferred in the

category for Rural Reach- Private Sector.

J&k bank was conferred with the prestigious HR Leadership Award at IPE HRM

Congress Awards organized under the aegis Asia Pacific HRM Congress (APHC)

2012-13

J&K bank emerged as the Best Bank in the Old Private Sector Bank category at

the CNBC. TV18 Indias Best Bank and Financial Institution Awards 2012-13.

The Sunday Standard FINWIZ Best Bankers Award 2012-13

J&K Banks sustained focus on all the areas of banking during the past two years

enabled it to win four national awards at The Sunday Standard FINWIZ Best

Bankers Award.


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Conferred Best Banker in Financial Inclusion and Customer Friendliness

award

Runner-up for the Best Banker in priority Sector Growth and Agricultural

Credit

J&k Banks Chairman & CEO Mushtaq Ahmad were rated as the top ranked

CEO for being accomplished in all aspects of banking.

WORK FLOW MODEL

APPLICATION FROM THE CUSTOMER

DETAILED ANALYSIS OF THE APPLICATION AND DOCUMENTS

STUDY OF RESULTS BY THE CONCERNED DEPARTMENTS

APPROVAL / REJECTION FROM THE CONCERNED MANAGER

FINAL SANCTION/ISSUE OF PRODUCTS AND SERVICES

RECOMMENDATIONS BY THE DEPARTMENTS

MONITORING AND FOLLOW-UP

CONTROL


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FUTURE GROWTH AND PROSPECTUS

Over the last several years RBI has undertaken wide-ranging financial sector reforms

to improve financial

a project on basel accords 3

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