A

RESEARCH REPORT

ON

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

(Pre & Post Reform Analysis)

SUBMITTED TO:

KURUKSHETRA UNIVERSITY, KURUKSHETRA IN THE PARTIAL FULFILLMENT FOR THE DEGREE OF

Masters in Business Administration(Session 2006 – 2008) – M.B.A. 4th Semester

Under supervision of:

Ms. Reena AggarwalFaculty

Tilak Raj Chadha Institute of Management & Technology (TIMT)(Affiliated to Kurukshetra University, Kurukshetra & Approved by AICTE)M.L.N. College Educational Complex, Yamuna Nagar-135001 (Haryana)

Ph. 01732 – 220103, 234110. Fax: +91-1732 – 220103E-mail: info@timt.ac.in; Website: www.timt.ac.in

Submitted by:

Naveen KalraS/o Sh. R.S.Kalra Univ. Regn.No.03-cjh-970Univ. Roll. No.:__________Institute Roll No. 1155/06

INTRODUCTION

OBJECTIVES OF

THE STUDY

LITERATURE REVIEW

RESEARCH METHODOLOG

Y

LIMITATIONS OF THE STUDY

FINDINGS

BIBLIOGRAPHY

ANNEXURES

//DECLARATION//

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

“IMPACT OF FINANCIAL SECTOR REFORMS ON PUBLIC SECTOR

BANKS IN INDIA”(Pre & Post Reform Analysis) in partial fulfillment of the

requirement for the award of the degree of Masters in Business

Administration (MBA), Kurukshetra University, Kurukshetra, 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: Yamuna Nagar Name: Naveen Kalra

Date: / / S/o: Sh. R.S. Kalra

Univ. Reg. No. 03-cjh-970

Univ.Roll No.: ________

Class Roll No. 1155/06

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 Dr. Vikas Daryal(Director, TIMT-YNR) for

allowing me to pursue my Dissertation Report on ”Impact of Financial sector Reforms

On Public sector Banks in India”(Pre & Post Reform Analysis).

I give my regards and sincere thanks to Ms.Reena Aggarwal (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.

(NAVEEN KALRA)

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 JUSTIFICATION OF STUDY

OBJECTIVE OF THE STUDY

LITERATURE REVIEW

RESEARCH METHODOLOGY & ANALYTICAL TOOLS

SAMPLING AND SAMPLING DESIGN

ANALYTICAL TOOLSSTATISTICAL TOOLS

DATA COLLECTIONHYPOTHESIS TESTING

LIMITATIONS OF THE STUDY

RESULTS AND DISCUSSIONS/FINDINGS

RECOMMENDATIONS

BIBLIOGRAPHY

ANNEXURES

“Theory without practice is

sterile,

Practice without theory is blind”

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).

PROFILE OF THE STUDY

As the economy grows and becomes more sophisticated, the banking sector has to

develop pari pasu in a manner that it supports and stimulates such growth. With

increasing global integration, the Indian banking system and financial system has as a

whole had to be strengthened so as to be able to compete. India has had more than a

decade of financial sector reforms during which there has been substantial

transformation and liberalization of the whole financial system. It is, therefore, an

appropriate time to take stock and assess the efficacy of our approach. It is useful to

evaluate how the financial system has performed in an objective quantitative manner.

This is important because India’s path of reforms has been different from most other

emerging market economies: it has been a measured, gradual, cautious, and steady

Process, devoid of many flourishes that could be observed in other countries.

The phase of nationalisation and ‘social control’ of financial intermediaries,

however, was not without considerable positive implications as well. The sharp

increase in rural branches of banks increased deposit and savings growth considerably.

There was a marked rise in credit flow towards economically important but hitherto

neglected activities, most notably agriculture and small-scale industries. The urban-bias

and marked preference of banks to lend to the industrial sector, especially large

industrial houses, was contained. The implicit guarantee emanating from public

ownership created an impression of infallibility of these institutions and the expectation

was self-fulfilling - there was no major episode of failure of financial intermediaries

in this period.

Starting from such a position, it is widely recognised that the Indian financial

sector over the last decade has been transformed into a reasonably sophisticated, diverse

and resilient system. However, this transformation has been the culmination of extensive,

well-sequenced and coordinated policy measures aimed at making the Indian

Financial sector efficient, competitive and stable.

The main objectives, therefore, of the financial sector reform process in India

initiated in the early 1990s have been to:

Remove financial repression that existed earlier;

Create an efficient, productive and profitable financial sector industry;

Enable price discovery, particularly, by the market determination of interest rates

that then helps in efficient allocation of resources;

Provide operational and functional autonomy to institutions;

Prepare the financial system for increasing international competition;

Open the external sector in a calibrated fashion;

Promote the maintenance of financial stability even in the face of domestic and

external shocks.

India’s pre-reform period and financial reform

Since 1991, India has been engaged in banking sector reforms aimed at increasing

the profitability and efficiency of the then 27 public-sector banks that controlled about 90

per cent of all deposits, assets and credit. The reforms were initiated in the middle of a

“current account” crisis that occurred in early 1991. The crisis was caused by poor

macroeconomic performance, characterized by a public deficit of 10 per cent of GDP, a

current account deficit of 3 per cent of GDP, an inflation rate of 10 per cent, and growing

domestic and foreign debt, and was triggered by a temporary oil price boom following

the Iraqi invasion of Kuwait in 1990.

Prior to the reforms, India’s financial sector had long been characterized as highly

regulated and financially repressed. The prevalence of reserve requirements, interest rate

controls, and allocation of financial resources to priority sectors increased the degree of

financial repression and adversely affected the country’s financial resource mobilization

and allocation. Moreover, it was perceived that banks should be utilized to assist India’s

planned development strategy by mobilizing financial resources to strategically important

sectors.

In the period 1969-1991, the number of banks increased slightly, but savings were

successfully mobilized in part because relatively low inflation kept negative real interest

rates at a mild level and in part because the number of branches was encouraged to

expand rapidly. Nevertheless, many banks remained unprofitable, inefficient, and

unsound owing to their poor lending strategy and lack of internal risk management under

government ownership. Joshi and Little (1996) have reported that the average return on

assets in the second half of the 1980s was only about 0.15 per cent, while capital and

reserves averaged about 1.5 per cent of assets.Given that global accounting standards

were not applied, even these indicators are likely to have exaggerated the banks’ true

performance. Further, in 1992/93, non-performing assets (NPAs) of 27 public-sector

banks amounted to 24 per cent of total credit, only 15 public-sector banks achieved a net

profit, and half of the public-sector banks faced negative net worth.

Against this background, the first wave of financial liberalization took place in the

second half of the 1980s, mainly taking the form of interest rate deregulation. Prior to

this period, almost all interest rates were administered and influenced by budgetary

concerns and the degree of concessionality of directed loans. To preserve some

profitability, interest rate margins were kept sufficiently large by keeping deposit rates

low and non-concessional lending rates high.

Following the 1991 report of the Narasimham Committee, more comprehensive

reforms took place that same year. The reforms consisted of (a) a shift of banking

sector supervision from intrusive micro-level intervention over credit decisions toward

prudential regulations and supervision; (b) a reduction of the CRR and SLR; (c) interest

rate and entry deregulation; and (d) adoption of prudential norms.

Further, in 1992, the Reserve Bank of India issued guidelines for income

recognition, asset classification and provisioning, and also adopted the Basle Accord

capital adequacy standards. The government also established the Board of Financial

Supervision in the Reserve Bank of India and recapitalized public-sector banks in order

to give banks sufficient financial strength and to enable them to gain access to capital

markets.

In 1993, the Reserve Bank of India permitted private entry into the banking

sector, provided that new banks were well capitalized and technologically advanced, and

at the same time prohibited cross-holding practices with industrial groups. The Reserve

Bank of India also imposed some restrictions on new banks with respect to opening

branches, with a view to maintaining the franchise value of existing banks. As a result

of the reforms, the number of banks increased rapidly.

In 1991, there were 27 public-sector banks and 26 domestic private banks

with 60,000 branches, 24 foreign banks with 140 branches, and 20 foreign banks with a

representative office. Between January 1993 and March 1998, 24 new private banks

(nine domestic and 15 foreign) entered the market; the total number of scheduled

commercial banks, excluding specialized banks such as the Regional Rural Banks rose

from 75 in 1991/92 to 99 in 1997/98. Entry deregulation was accompanied by

progressive deregulation of interest rates on deposits and advances. From October

1994, interest rates were deregulated in a phased manner and by October 1997,

banks were allowed to set interest rates on all term deposits of maturity of more than

30 days and on all advances exceeding Rs 200,000. While the CRR and SLR, interest

rate policy, and prudential norms have always been applied uniformly to all commercial

banks, the Reserve Bank of India treated foreign banks differently with respect to the

regulation that requires a portion of credit to be allocated to priority sectors. In 1993,

foreign banks – which used to be exempt from this requirement while all other

commercial banks were required to earmark 40 per cent of credit - were required to

allocate 32 per cent of credit to priority sectors.

POLICY REFORMS IN THE FINANCIAL SECTOR BANKING

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.

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.

MAJOR REFORMS IN THE BANKING SECTOR

A. Prudential Measures

Introduction and phased implementation of international best practices

and norms on risk-weighted capital adequacy requirement, accounting, income

recognition, provisioning and exposure.

Measures to strengthen risk management through recognition of different

components of risk , assignment of risk-weights to various asset classes, norms

on connected lending , risk concentration , application of marked -to -market

principle for investment portfolio and limits on deployment of fund in sensitive

activities.

B. Competition Enhancing Measures

Granting of operational autonomy to public sector Banks, reduction of public

ownership in public sector Banks by allowing them to raise capital from equity

Market up to 49 per cent of paid-up capital.

Transparent norms for entry of Indian private sector, foreign and joint -venture

banks and insurance companies, permission for foreign investment in the

financial sector in the form of Foreign Direct Investment (FDI) as well as

portfolio investment, permission to banks to diversify product portfolio and

business activities.

C. Measures Enhancing Role of Market Forces

Sharp reduction in pre -emption through reserve requirement, market

determined pricing for government securities, disbanding of administered interest

rates with a few exceptions and enhanced transparency and disclosure norms to

facilitate market discipline.

Introduction of pure inter-bank call money market, auction -based repos -

reverse repos for short -term liquidity management , facilitation of improved

payments and settlement mechanism.

D.Institutional and Legal Measures

Settling up of Lok Adalats (people’s courts), debt recovery tribunals, asset

reconstruction companies, settlement advisory committees , corporate debt

restructuring mechanism, etc . For quicker recovery/ restructuring. Promulgation

of Securitisation and Reconstruction of Financial Assets and Enforcement of

Securities Interest (SARFAESI ) , Act and its subsequent amendment to ensure

creditor rights.

Setting up of Credit Information Bureau for information sharing on defaulters as

also other borrowers.

Setting up of Clearing Corporation of India Limited (CCIL) to act as central

counter party for facilitating payments and settlement system relating to fixed

income securities and money market instruments.

E. Supervisory Measures

Establishment of the Board for Financial Supervision as the apex supervisory

authority for commercial banks, financial institutions and non-banking financial

companies.

Introduction of CAMELS supervisory rating system, move towards risk-based

supervision, consolidated supervision of financial conglomerates, strengthening of

off-site surveillance through control returns.

Recasting of the role of statutory auditors, increased internal control through

strengthening of internal audit.

Strengthening corporate governance, enhanced due diligence on important

shareholders, fit and proper tests for directors.

Technology Related Measures

Setting up of INFINET as the communication backbone for the financial

sector, introduction of Negotiated Dealing System (NDS) for screen-based

trading in government securities and Real Time Gross Settlement (RTGS)

System.

JUSTIFICATION 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.

OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE

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.

SECONDARY OBJECTIVE

To evaluate the relative changes in the performance of various banks and bank

groups within the public and public and private sector in selected aspects as a

result of implementation of reform measures.

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

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

To examine the customer’s perception towards the services offered by banks and

compare public and private bank’s service quality.

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 financial 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.

JOURNALS

7) 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.

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

Act.

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

Restructuring Scheme.

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

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

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

change in banking sector

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

Borrower’s Special Investigation Audits

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

concept of financial reforms.

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

credit rating

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

Adverse effect of Financial norms.

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

behind huge level of NPAs in the Indian Banking System

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

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

not be classified as NPAs

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

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

treating various advances as NPAs

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

Committee’s recommendation

23) Data quest , April 2005 pp-19 Gross NPAs expressed as % of gross advances

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

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

to the reforms.

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

of the micro level impact of reforms.

Websites

27) www.centurionbop.co.in/news/press_190505.html1 :- Summarized RBI

guidelines for reforms classification and provisioning.

28) www.domain-b.com/management/m_a/20060904_vijay_kalantri.html2 :- RBI

guidelines for recognition.

29) www.twincitiesbbs.com/php/subra/corporat.htm3 :- Non Performing Assets of

Public Sector Banks.

30) www.blonnet.com/2002/08/07/stories/2002080700050800.htm4 :- NPAs and

recoveries of Public Sector Banks

31) www.adroitquest.com/mgmt_team.htm5 :- Estimates of erosion of profits of

Public Sector Banks

32) www.rbi.org/guidelines/speeches.php :- various guidelines regarding the

financial reforms.

33) www.ibef.org :- various information regarding the financial sector reforms and its

impact on banking in India.

34) www.financialexpress.com/news/Financial-reforms-unlikely-to-take-place-

before-LS-polls/273055: Pending reforms in the financial sectors such as

banking, insurance and ... India Inc has shown its discomfort over this

uncertainty.

35) www.findarticles.com/p/articles/mi_m0254/is_n1_v56/ai_19266182: India Reforms Its

Economy: 1991-1994 ... and Chief Minister and Governor of the state of Andhra

Pradesh in south India before moving on to represent his performance...

36) www.financialexpress.com/news/Pending-financial-reforms-spooks-India: Pending

reforms in the financial sector including pension, ... which got going with the

boards of the State Bank of India and State Bank of ...

37) www.banknetindia.com/banking/rbip3.htm: scheduled commercial banks

(excluding regional rural banks), PDs and all-India financial institutions were

allowed to undertake forward rate

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.

ASSETS GROWTH AND QUALITY

Bank credit of scheduled commercial banks registered a growth of 30.2%as on January 5,

2007 as compared with 29.7% a year ago. Also one of the most visible developments is

the declining NPA ratio in the industry. The NPAs of all SCBs which stood at 15.7% of

gross advances and 7.0%of total assets in 1995-96, declined to 3.3% of gross advances

and 1.9% of total assets in 2005-06, reflecting the better recoveries and better allocation

of funds.

Year Non-Performing Assets Gross Net

As %of Gross As % of total As % of As % Of Advances Assets NA TA1996-97 15.7 7.0 8.1 3.31999-00 12.7 5.5 6.8 2.72002-03 8.8 4.0 4.4 1.92005-06 3.3 1.9 1.2 0.7

Financial indicators

The financial performance pf SCBs has improved in recent years, especially in

terms of their profitability. The operating profit to assets ratio of SCBs remained in the

range of 0.47t0 1.13 during the period 1995-96 to 2005-06 the improved performance is

mainly the result of greater competition and improved efficiency of the Indian banking

system.

i)Enhance efficiency and profitability: one of the major objectives of banking sector

reforms was to enhance efficiency and productivity through increased competition. That

the competition has intensified could be gauged from the decline in the share of the

public sector banks in the total income, expenditure and assets to the commercial banking

system since the mid 1990s, and increase in the share of new private sector banks.

ii) Resolution of NPAs: the Narsimah Committee had recommended the setting up of the

asset creation fund to which the public sector banks would transfer their NPA with

certain safeguards.

iii) Ownership Structure: the government holding in these banks range from 51%

(OBC, Dena) to 76% (BoM). Of the privately held equity, significant portion (15-20%)

was held by foreign investors in quite a few public sector banks as on sep.30, 2006. all

new private banks are listed and there is considerable foreign investment both (FDI &

FII) in these banks. Even among the private banks, all significant banks are listed.

IV) Reform Coverage: the reform process was extended to other institutions such as

regional rural banks, cooperative banks, all India financial institutions and non banking

financial companies. The strategy has started showing results which is crucial for

sustaining their role in financial intermediation among the rural and urban poor and small

savers.

Source: Reserve Bank Of India

This table shows the data regarding the important financial Indicators of Scheduled

Commercial Banks according to the operating profit assets, net profit to assets, income to

assets etc. it signifies about the important indicators that effect the efficiency of banking

in India.

Important Financial indicators-SCBs

Years Operating net income Exp. To Operating Prov. Spread Prft.to asts prft. To to assets Assets Exp To & (NII) Assets Assets Cont. to asset

1995-96 1.69 0.68 - - 2.94 1.54 3.131999-00 1.66 0.66 10.4 9.74 2.50 1.00 2.732002-03 2.39 1.01 10.14 9.14 2.24 1.39 2.772005-06 2.03 0.88 7.97 7.09 2.11 1.15 2.73

Bank group wise shares: selected indicators %Year 1995-96 1999-00 2002-03 2005-06 PuSB Prsb FB PuSB PrSB FB PuSB PrSB FB Pusb Prsb FB

Income 82.5 8.2 9.4 78.8 12.3 9.0 74.5 18.5 7.0 72.4 19.7 7.8Expenditure 84.2 7.4 8.3 79.4 12.0 8.7 74.8 18.6 6.6 73.1 19.7 7.3Total Assets 84.4 7.7 7.9 80.2 12.3 7.5 75.7 17.5 6.9 72.3 20.5 7.2Net Profit -39.1 59.3 79.8 70.0 16.8 13.2 64.8 15.6 19.6 67.3 20.3 12.3Gross Profit 74.3 10.1 15.6 70.9 14.5 14.6 76.6 18.7 4.7 69.2 19.0 11.8

Note:PuSB: Public sector Banks,PrsB:Private sector Banks, FB: Foreign Banks.

Source: Reserve Bank Of India

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 FINANCIAL 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.

Social Objectives and Balance Sheet Management

The Indian banking system has acquired a wide reach, judged in terms of

expansion of branches and the growth of credit and deposits (Tables 1 and 2). The

expansion of branch network peaked in the phase of social banking during the

1970s and 1980s. Despite the slowdown in branch expansion since the 1990s, the

population per bank branch, however, has not changed much since the 1980s, and has

remained at around 15,000. It is often asserted that the Indian banking sector is saddled

with too many branches, adding to its high intermediation costs. In fact, at about 8-

10,000, the population per branch in developed countries is lower than that in India.

Therefore, the reform process has maintained the gains in terms of the outreach of bank

branches achieved in the phase of social banking.

Table 1: Progress of Commercial Banking in India

Indicators June June March March March March

1991 1993 1995 1997 2002 2005

1. No. of Commercial Banks 73 154 272 284 298 292

2. No. of Bank Offices 8,262 34,594 60,570 64,234 67,868 68,561

Of which

Rural and semi-urban bank offices 5,172 23,227 46,550 46,602 47,693 47,496

3. Population per Office (’000s) 64 16 14 15 15 16

4. Per capita Deposit (Rs.) 88 738 2,368 4,242 8,542 12,253

5. Per capita Credit (Rs.) 68 457 1,434 2,320 4,555 7,275

6. Priority Sector Advances@ (per cent) 15.0 37.0 39.2 33.7 35.4 33.7 *

7. Deposits (per cent of National Income) 15.5 36.0 48.1 48.0 53.5 51.8

Source: Reserve Bank Of India

Capital Position and Asset Quality

A set of micro-prudential measures have been stipulated since the onset of

reforms aimed at imparting strength to the banking system as well as ensuring safety

and soundness in order to fix ‘the true position of bank’s balance sheet and…to arrest its

deterioration’ (Rangarajan, 1998). With regard to prudential requirements, norms for

income recognition and asset classification (IRAC), introduced in 1992, have been

strengthened over the years in line with international best practices. A strategy to

attain CRAR of 8 per cent in a phased manner was put in place and subsequently the

level was raised to 9 per cent with effect from 1999-2000.

The overall capital position of commercial sector banks has witnessed a marked

improvement during the reform period (Table 3). Illustratively, as at end-March 2003, 91

out of the 93 commercial banks operating in India maintained CRAR at or above 9

per cent. The corresponding figure for 1995-96 was 54 out of 92

banks.

Table 3: Distribution of Commercial Banks According toRisk-weighted Capital Adequacy

Year Below 4 Between Between Above Totalper cent 4-9 9-10 10

per cent* per cent@ per cent

1995-96 8 9 33 42 92

1996-97 5 1 30 64 100

1997-98 3 2 27 71 103

1998-99 4 2 23 76 1051999-00 3 2 12 84 101

2000-01 3 2 11 84 100

2001-02 1 2 7 81 91

2002-03 2 0 4 87 93

*: Relates to 4-8 per cent before 1999-2000, @: Relates to 8-10 per cent before 1999-2000.

Note: According to supervisory returns, only 2 banks failed to maintain statutory minimum CRAR of 9 per cent as at end-March 2004. Out of these two, one is scheduled to achieve the minimum CRAR level by September 2004 and other has since been placed under moratorium and merged with another bank.Source: Reserve Bank of India.

The reform period also witnessed considerable improvements in the asset

quality of banks. Non- performing loans (NPLs) as ratios of both total advances and

assets declined substantially and consistently since the mid-1990s. Moreover, for the

first time since the initiation of reforms, in 2002-03, the absolute amount of NPLs in

both gross and net terms witnessed declines. This improved recovery performance

raises a Few interesting issues.

First, from the pattern of NPLs over the years, it can be argued that to a large

extent the NPL problems faced by Indian banks are legacy problems emanating

from credit decisions taken before the full implementation of the banking

sector reforms.

Second, there has been a distinct improvement in the credit appraisal

process in the Indian banking system under the reform process whereby

incremental NPLs have been low despite the fact that Indian industry has gone

through a relatively low-growth phase since the mid-1990s.

Finally, in recent years, the recovery performance of public sector banks has been

better than private sector banks - both old and new - in terms of net NPL (i.e.

net of provisioning).

Foreign banks, however, exhibited the best recovery performance and lowest NPL levels

among the reflects the success of new initiatives for resolution of NPLs including

promulgation of the SARFAESI5 Act in containing NPLs. Greater provisioning and

write-off of NPLs in the face of greater profitability also helped keeping the NPLs

low during 2003-04.

Table 5: NPL of Scheduled Commercial Banks

NPL: Non-performing loans, *: Based on supervisory returns, ..: not available.

Competition and Efficiency

Gross NPL/ Gross NPL/ Net NPL/ Net NPL/

advances Assets advances Assets

Scheduled commercial banks 

1996-97 15.7 7.0 8.1 3.3

1997-98 14.4 6.4 7.3 3.0

1998-99 14.7 6.2 7.6 2.9

1999-00 12.7 5.5 6.8 2.7

2000-01 11.4 4.9 6.2 2.52001-02 10.4 4.6 5.5 2.3

2002-03 8.8 4.0 4.4 1.9

2003-04* 7.3 . . 3.0 . .

Public sector banks

1996-97 17.8 7.8 9.2 3.6

1997-98 16.0 7.0 8.2 3.3

1998-99 15.9 6.7 8.1 3.1

1999-00 14.0 6.0 7.4 2.92000-01 12.4 5.3 6.7 2.7

2001-02 11.1 4.9 5.8 2.4

2002-03 9.4 4.2 4.5 1.9

Old private sector banks 

1996-97 10.7 5.2 6.6 3.1

1997-98 10.9 5.1 6.5 2.9

1998-99 13.1 5.8 9.0 3.6

1999-00 10.8 5.2 7.1 3.32000-01 10.9 5.1 7.3 3.3

2001-02 11.0 5.2 7.1 3.2

2002-03 8.9 4.3 5.5 2.6

New private sector banks 

1996-97 2.6 1.3 2.0 1.0

1997-98 3.5 1.5 2.6 1.1

1998-99 6.2 2.3 4.5 1.6

1999-00 4.1 1.6 2.9 1.12000-01 5.1 2.1 3.1 1.2

2001-02 8.9 3.9 4.9 2.1

2002-03 7.6 3.8 4.6 2.2

Foreign banks in India

1996-97 4.3 2.1 1.9 0.9

1997-98 6.4 3.0 2.2 1.0

1998-99 7.6 3.1 2.9 1.1

1999-00 7.0 3.2 2.4 1.02000-01 6.8 3.0 1.8 0.8

2001-02 5.4 2.4 1.9 0.8

2002-03 5.2 2.4 1.8 0.8

One of the major objectives of banking sector reforms has been to enhance

efficiency and productivity through enhanced competition . Such policies have led to

considerable and consistent reduction in the shares of public sector banks in the total

income, expenditure and assets of the commercial banking system (Table 6). Shares of

Indian private sector banks, especially new private sector banks established in the

1990s, in the total income and assets of the banking system have improved

considerably since the mid-1990s. A number of new private sector banks have

emerged as dynamic

components of the Indian banking system, reducing not only the market share of public

sector banks but also those of foreign banks. The reduction in the asset share of foreign

banks, however, is partially due to their increased focus on off-balance sheet non-

fund based business.

Notwithstanding such transformation, the position of public sector banks in the Indian

banking system continues to be predominant as these banks account for all bank-groups.

This raises a question mark on the applicability of the argument that links erformance

of banks with ownership pattern in the context of Indian banking.

Table 6: Bank Group-wise Shares: Select Indicators

1995-96 2000-01 2002-03

Public Sector Banks

Income 82.5 78.4 74.5

Expenditure 84.2 78.9 74.8

Total Assets 84.4 79.5 75.7

Net Profit -39.1 67.4 64.8

Gross Profit 74.3 69.9 76.6

Private Sector Banks

Income 8.2 12.6 18.5

Expenditure 7.4 12.3 18.6

Total Assets 7.7 12.6 17.5

Net Profit 59.3 17.8 15.6

Gross Profit 10.1 14.4 18.7

Foreign Banks

Income 9.4 9.1 7.0

Expenditure 8.3 8.8 6.6

Total Assets 7.9 7.9 6.9

Net Profit 79.8 14.8 19.6

Gross Profit 15.6 15.7 4.7

Table 7: Earnings and Expenses of Scheduled Commercial Banks (Rs. billion)

Year Total Assets

Total Earnings

Interest Earnings

Total Expenses

Interest Expenses

Establishment

Net Interest

Expenses Earning

1955 12 1 0 0 0 0 0(3.8) (3.1) (2.6) (0.9) (1.3) (2.2)

1975 68 4 4 4 2 1 2(6.2) (5.3) (5.5) (2.8) (2.1) (2.5)

1990 582 42 38 42 27 10 10(7.3) (6.4) (7.2) (4.7) (1.7) (1.8)

1995 3,275 304 275 297 190 76 86(9.3) (8.4) (9.1) (5.8) (2.3) (2.6)

2000 11,055 1,149 992 1,077 690 276 301(10.4) (9.0) (9.7) (6.2) (2.5) (2.7)

2002 15,355 1,510 1,270 1,395 875 337 395(9.8) (8.3) (9.1) (5.7) (2.2) (2.6)

2003 16,989 1,724 1,407 1,553 936 3,809 471(10.2) (8.3) (9.1) (5.5) (2.2) (2.8)

Note : Figures in brackets are ratios to total assets. Source : Reserve Bank of India.

Table 8: Important Parameters for Indian Banking Sector(Per cent)

Bank Group 1996-97 2001-02 2002-03

Operating Expenses/Total AssetsScheduled Commercial Banks 2.9 2.2 2.2

Public Sector Banks 2.9 2.3 2.3

Old Private Sector Banks 2.5 2.1 2.0

New Private Sector Banks 1.9 1.1 2.0

Foreign Banks 3.0 3.0 2.8

Spread/Total Assets

Scheduled Commercial Banks 3.2 2.6 2.8

Public Sector Banks 3.2 2.7 2.9

Old Private Sector Banks 2.9 2.4 2.5

New Private Sector Banks 2.9 1.2 1.7

Foreign Banks 4.1 3.2 3.4

Net Profit/Total Assets

Scheduled Commercial Banks 0.7 0.8 1.0

Public Sector Banks 0.6 0.7 1.0

Old Private Sector Banks 0.9 1.1 1.2

New Private Sector Banks 1.7 0.4 0.9

Foreign Banks 1.2 1.3 1.6

Note : Spread = interest income-interest expenditure. Source : Reserve Bank of India

Table: Cross-Country Performance Analysis of Banks (Per cent)

Country 2001

2002 2003

Latest

Gross Non-Performing Loans to Total Loans

Latin America

Argentina1 13.2 17.5 22.7 November

Brazil 5.7 5.3 5.7 June

Mexico 5.1 4.6 3.7 September

Asia China 29.8 25.5 22.0 June

India 11.410.4 8.8 MarchIndonesia 11.9 5.8 . .

Malaysia 17.8 15.9 14.8 June

Philippines 16.9 15.4 15.2 September

Singapore 3.6 3.4 3.5 September

Thailand 10.5 15.8 15.5 August

Memo US3 1.4 1.6 1.3 September

UK 2.6 2.6 2.2 June

Japan 6.6 8.9 7.2 September

Profitability of Major Banks

Latin America

Argentina -0.2 -9.7 -2.5 August

Brazil 0.2 1.9 1.9 June

Mexico 0.8 -1.1 1.6 September

Asia China 0.1 0.1 . .

India 0.5 0.8 1.0 March

Indonesia 0.8 1.3 . .

Malaysia 1.0 1.3 . .

Philippines 0.4 0.8 1.0 September

Singapore 0.8 0.8 0.8 September

Thailand -0.1 0.4 1.1 August

Memo US 1 1.1 1.4 1.4 September

UK 2,3 0.5 0.9 0.5 June

Japan 2 0.1 0.0 . . September

.. Not available. 1. With asset exceeding US $ 1 billion, 2. Before tax, 3. Includes mortgage banks Source : Global Financial Stability Report, April 2004

The following are the figures of gross and net NPAs of public sector banks from the period 1993 – 2002

(Table – 1)NPAs in Public Sector BanksEnd March Gross NPAs %of Gross

Advances% to Total Assets

Net NPAs % of Net Advances

% of Total Assets

1993 39,253 23.2 11.8 18,077 11.3 4.61994 41,041 24.8 10.8 18,903 12.87 5.11995 38,385 19.5 8.7 17,567 10.7 4.01996 41,661 18.0 8.2 18,297 8.9 3.61997 43,577 17.8 7.8 20,285 9.2 3.61998 45,653 16.0 7.0 21,232 8.2 3.31999 58,554 15.6 6.8 24,211 8.85 3.12000 59,952 14.0 6.6 26,188 7.97 3.02001 68,238 13.1 6.4 28,032 6.8 2.62002 81,889 12.8 6.0 29,874 6.1 2.2

A distinction is often made between Gross NPA and Net NPA. Net NPA is obtained by deducting items like interest due but not recovered, part payment received and kept in suspense account etc., from Gross NPA.

As shown in the above

table –1 over the years the NPAs as a percentage of net advances and total assets have been declining but actual numbers is increasing.

Dealing with NPAs involves two sets of policies

1.Relating to existing NPAs

2. To reduce fresh NPA generation.

As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to

AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank itself should

adopt proper policies.

Causes for Non Performing Assets

A strong banking sector is important for a flourishing economy. The failure of the

banking sector may have an adverse impact on other sectors. The Indian banking system,

which was operating in a closed economy, now faces the challenges of an open economy.

On one hand a protected environment ensured that banks never needed to develop

sophisticated treasury operations and Asset Liability Management skills.

On the other hand a combination of directed lending and social banking relegated

profitability and competitiveness to the background. The net result was unsustainable

NPAs and consequently a higher effective cost of banking services.

One of the main causes of NPAs into banking sector is the directed loans system under

which commercial banks are required a prescribed percentage of their credit (40%) to

priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core'

doubtful and loss assets, accumulated over the years.

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

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

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

iii. Manipulation of debtors using political influence.

There are several reasons for an account becoming NPA.

* Internal factors

* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.

2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

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

instrument from capital markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc.,

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.,

External factors:

1. Sluggish legal system -

Long legal tangles Changes that had taken place in labour laws Lack of sincere effort.

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

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.

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

APPRAISAL OF THE PERFORMANCEOF THE BANKING SECTOR

India’s financial market has been gradually developing, but still remains bank-

dominated in the reform period. The extent of financial deepening measured by total

deposits in GDP has risen only modestly from 30 per cent in 1991 to 38 per cent in 1999.

Capital market development has also been quite sluggish. Outstanding government and

corporate bonds as a share of GDP rose from 14 per cent in 1991 to 18 per cent in 1999

and from only 0.7 per cent in 1996 to 2 per cent in 1998, respectively, while equity

market capitalization dropped from 37 per cent in 1995 to 28 per cent in 1999.

Nevertheless, the government’s commitment on restructuring the highly regulated

banking sector appears strong. Since financial reforms were launched in 1991 and

particularly when the entry of new banks was permitted in 1993, public-sector banks

appear to have become more conscious of the need for greater profitability and

efficiency, suggesting that the reform has had a favourable impact on India’s financial

market.

According to an analysis of the overall performance of state-owned, domestic and

foreign banks based on trend patterns in 1993-2000, the overall performance of

publicsector banks appears comparable with foreign and private domestic banks (table

1). In general, foreign banks performed better than domestic banks (public-sector

and private domestic banks) in terms of cost, earnings efficiency and soundness.

However, domestic banks overtook foreign banks in terms of profitability in 1999-2000.

Moreover, all banks are comparable in terms of the scale of medium- to long-term credit

and liquidity.

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

68457

1,434

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

(R

upees)

Per capita Deposit Per capita Credit

64

1614 15 15 1615

3739.2

33.735.4

33.7

15.5

36

48.1 48

53.551.8

0

10

20

30

40

50

60

70

1969 1980 1991 1995 2000 2003

(R

upees)

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 76.4

81.5 79.8 80.5

46.8

42.1 40.643.6 45

30

40

50

60

70

80

90

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

(per cent of assets)

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 cent of assets)

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

9

2 2

33

127

4

42

8481

87

0

10

20

30

40

50

60

70

80

90

100

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

(per

cent)

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

8.8

7.37

4.94

0

2

4

6

8

10

12

14

16

18

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

(per cent)

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

0.60

0.90

1.70

1.20

0.70

1.10

0.40

1.30

1.001.20

0.90

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

RESEARCH METHODOLOGY

What is Research?

Research is an organized and systematic way of finding answers to the questions.

SYSTEMATIC because there is a definite set of procedures and steps which you will

follow. There are certain things in the research process which are always done in order to

get the most accurate results.

ORGANIZED in that there is a structure or method in going about doing research. It is a

planned procedure, not a spontaneous one. It is focused and limited to a specific scope.

FINDING ANSWERS is the end of all research. Whether it is the answer to a hypothesis

or even a simple question, research is successful when we find answers. Sometimes the

answer is no, but it is still an answer.

QUESTIONS are central to research. If there is no question, then the answer is of no use.

Research is focused on relevant, useful, and important questions. Without a question,

research has no focus, drive, or purpose.

“Research is common parlance refers to search for a knowledge.”

Research can also be defined as a scientific & systematic search for pertinent information

on specific topic.Then research methods which mean all those methods which are used by

the researcher during the course of studying his research problem.

Research methodology is a way to systematically solve the research problem. It may be

understood as science of studying how research is done scientifically. In this we study the

various steps that are generally adopted by the researcher in studying his research

problem along with the logic behind them.

Sampling and sample design

Sampling involves any procedure using a small number of items or part of the whole

population to make conclusion regarding the whole population. A sample, is a subset or

some part of a larger population.

Sample Design

A sample design is a definite plan for obtaining a sample from the sampling frame. It

refers to the technique or the procedure that is adopted in selecting the sampling units

from which inferences about the population is drawn. Sampling design is determined

before the collection of the data.

The sample size of 2003-2007 is taken for present study due to time limitation

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data in a

manner that aims to combine relevance to the research purpose with economy in

procedure.

The research design with help to answer the following questions:

Why the study is being made?

From where the data needed can be collected?

What time is required for the study to be competed & how much material is needed.

What will be the technique for data collections?

How the data can be analyzed?

Exploratory Research Design: The main purpose of such studies is that of

formulating a problem for more precise investigation. The major emphasis in such

studies is on the discovery of ideas and insights. As such the research design

appropriate for such studies must be flexible enough to provide opportunity for

considering different aspects of a problem under study.

Descriptive Research Design: Descriptive Research studies are those which are

concerned with describing the characteristics of a particular individual, or of a

group. In descriptive studies the researcher must be able to define clearly, what he

wants to measure and must find adequate methods for measuring it along with a

clear cut definition of ‘population’ he wants to study.

Research design in this case is Descriptive Research

DATA COLLECTION

TYPES OF RESEARCH DESIGN

EXPLORATORY RESEARCH DESIGN

DESCREPTIVERESEARCH DESIGN

EXPERIMENTAL RESEARCH DESIGN

TYPES OF DATA

PRIMARY DATA SECONDRY DATA

PRIMARY DATA

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...

METHODS OF PRIMARY DATA

OBSERVATION METHOD

QUETIONAIRE METHOD

INTERVIEW METHIOD

SCHEDULE METHOD

LIMITATIONS OF THE STUDY

As 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.

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

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 38.81999-00 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      

Data and regression line

0

5

10

15

20

25

30

35

40

45

50

76 77 78 79 80 81 82

Deposits

Observations P redictions

Conf. 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

Obs2

Obs3

Obs4

Obs5

Obs6

Obs7

Obs8

Obs9

Obs10

Obs11

Obs12

Obs13

Standardized residuals

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

10

20

30

40

50

60

76 77 78 79 80 81 82

Deposits

Observations P redictions

Conf. 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

Obs2

Obs3

Obs4

Obs5

Obs6

Obs7

Obs8

Obs9

Obs10

Obs11

Obs12

Obs13

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 Line

1.     1992-93 23.2 -

2.     1993-94 24.8 22.5

3.     1994-95 19.5 20.8

4.     1995-96 18.0 18.43

5.     1996-97 17.8 17.26

6.     1997-98 16.0 16.56

7.     1998-99 15.9 15.33

8.     1999-00 14.0 14.1

9.     2000-01 12.4 12.5

10.   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 Line

1.     1992-93 11.8 -

2.     1993-94 10.8 10.43

3.     1994-95 8.7 9.23

4.     1995-96 8.2 8.23

5.     1996-97 7.8 7.66

6.     1997-98 7.0 7.16

7.     1998-99 6.7 6.56

8.     1999-00 6.0 6.00

9.     2000-01 5.3 5.4

10.   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 Line

1.        1992-93 4.6 -

2.        1993-94 5.1 4.56

3.        1994-95 4 4.23

4.        1995-96 3.6 3.76

5.        1996-97 3.7 3.53

6.        1997-98 3.3 3.36

7.        1998-99 3.1 3.1

8.        1999-00 2.9 2.9

9.        2000-01 2.7 2.66

10.      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

values

No. of values used

No. of values ignored

Sum 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 Mean Fisher's Pr >

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

Factor Deposits

38

39

4041

42

43

4445

46

47

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

CORRELATION

Three 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.

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 2500

Total Earnings

FINDINGS&DISCUSSIONS

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.

BIBLIOGRAPHY

BOOKS

“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.

Websites

www.centurionbop.co.in/news/press_190505.html1 :- Summarized RBI

guidelines for reforms classification and provisioning.

www.domain-b.com/management/m_a/20060904_vijay_kalantri.html2 :- RBI

guidelines for recognition.

www.twincitiesbbs.com/php/subra/corporat.htm3 :- Non Performing Assets of

Public Sector Banks.

www.blonnet.com/2002/08/07/stories/2002080700050800.htm4 :- NPAs and

recoveries of Public Sector Banks

www.adroitquest.com/mgmt_team.htm5 :- Estimates of erosion of profits of

Public Sector Banks

www.rbi.org/guidelines/speeches.php :- various guidelines regarding the

financial reforms.

www.ibef.org :- various information regarding the financial sector reforms and its

impact on banking in India.

www.financialexpress.com/news/Financial-reforms-unlikely-to-take-place-

before-LS-polls/273055: Pending reforms in the financial sectors such as

banking, insurance and ... India Inc has shown its discomfort over this

uncertainty.

www.findarticles.com/p/articles/mi_m0254/is_n1_v56/ai_19266182: India Reforms Its

Economy: 1991-1994 ... and Chief Minister and Governor of the state of Andhra

Pradesh in south India before moving on to represent his performance...

www.financialexpress.com/news/Pending-financial-reforms-spooks-India: Pending

reforms in the financial sector including pension, ... which got going with the

boards of the State Bank of India and State Bank of ...

www.banknetindia.com/banking/rbip3.htm: scheduled commercial banks

(excluding regional rural banks), PDs and all-India financial institutions were

allowed to undertake forward rate

ANNEXURES

Regression Analysis

Modeling variable TotalINVESTMENT:                         Summary for the dependent variable:                         

VariableTotal no. of values

No. of values used

No. of values ignored

Sum of weights Mean

Standard deviation

TotalINVESTMENT 13 13 0 1335.27

7 3.891

Summary for the quantitative variables:         

Variable MeanStandard deviation

Deposits 79.623 1.541

Goodness of fit coefficients:         R (coefficient of correlation) 0.601  R² (coefficient of determination) 0.361  R²adj. (adjusted coefficient of determination) 0.303  SSR 116.121  

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      

Data and regression line

0

5

10

15

20

25

30

35

40

45

50

76 77 78 79 80 81 82

Deposits

Observations P redictions

Conf. on pred (95.00%) Conf. on mean (95.00%)

Deposits / Standardized residuals

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

76 77 78 79 80 81 82

Deposits

TotalINVESTMENT / Standardized residuals

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

20 25 30 35 40 45 50

TotalINVESTMENT

Standardized residuals

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

Obs1

Obs2

Obs3

Obs4

Obs5

Obs6

Obs7

Obs8

Obs9

Obs10

Obs11

Obs12

Obs13

Standardized residuals

Summary statistics:                             

VariableObservatio

ns

Obs. with missing

dataObs. without missing data

Minimum

Maximum Mean

Std. deviati

onLoans and ADVANCES 13 0 13 38.700 46.800

41.931 2.493

Deposits 13 0 13 76.400 81.50079.62

3 1.541

Regression of variable Loans and ADVANCES:     Goodness of fit statistics:     Observations 13.000Sum of weights 13.000DF 11.000R² 0.258Adjusted R² 0.190MSE 5.031RMSE 2.243MAPE 4.038DW 0.841Cp 2.000AIC 22.832SBC 23.962PC 1.012

Analysis of variance:

Source DFSum of squares

Mean squares F Pr > F

Model 1 19.223 19.223 3.821 0.077Error 11 55.345 5.031Corrected Total 12 74.568      Computed against model Y=Mean(Y)

Model parameters:

Source ValueStandard

error t Pr > |t|Lower bound

(95%)Upper bound

(95%)Intercept 107.342 33.471 3.207 0.008 33.674 181.010Deposits -0.822 0.420 -1.955 0.077 -1.747 0.104

Regression of Loans and ADVANCES by Deposits (R²=0.258)

30

35

40

45

50

55

76 77 78 79 80 81 82

Deposits

Lo

ans

and

AD

VA

NC

ES

Active Model

Conf. interval (Mean 95%) Conf. interval (Obs. 95%)

Standardized residuals / Deposits

-1.5

-1

-0.5

0

0.5

1

1.5

2

76 77 78 79 80 81 82

Deposits

Sta

nd

ard

ized

res

idu

als

Pred(Loans and ADVANCES) / Standardized residuals

-1.5

-1

-0.5

0

0.5

1

1.5

2

40 41 42 43 44 45

Pred(Loans and ADVANCES)

Stan

dard

ized

resi

dual

s

Pred(Loans and ADVANCES) / Loans and ADVANCES

38

39

40

41

42

43

44

45

46

47

38 39 40 41 42 43 44 45 46 47

Pred(Loans and ADVANCES)

Loan

s an

d A

DVA

NC

ES

Table 2: Select Balance Sheet Indicators of Commercial BanksOperating in India

As a Ratio of Total Assets/Liabilities Deposits Total Non-SLR Loans and

Investments Investment Advances

1991-92 77.7 28.9 . . 46.8

(17.1) (28.4) . . (13.7)

1992-93 78.4 30.5 . . 45.0

(13.9) (19.0) . . (8.6)

1993-94 80.3 35.4 5.0 38.7

(15.5) (31.1) . . -(3.0)

1994-95 78.9 33.6 4.6 40.5

(16.3) (12.2) (9.4) (24.0)

1995-96 76.4 31.0 3.5 42.1

(12.7) (7.4) -(11.7) (20.9)

1996-97 79.9 33.3 5.0 41.0

(17.5) (20.6) (60.2) (9.2)

1997-98 81.0 34.2 7.1 40.8

(19.8) (21.5) (69.3) (17.6)

1998-99 81.1 35.7 8.6 38.8

(19.7) (24.9) (45.3) (13.9)

1999-00 81.1 37.3 9.1 40.2

(16.3) (21.3) (22.4) (20.3)

2000-01 81.5 38.0 8.9 40.6

(17.7) (19.3) (14.2) (18.5)

2001-02 78.5 38.2 8.7 42.0

(14.3) (19.4) (16.5) (22.7)

2002-03 79.8 40.8 8.1 43.6

(12.4) (18.1) (3.3) (14.7)

2003-04* 80.5 41.7 7.2 45.0

(17.5) (19.7) (2.9) (15.3)

Source: Reserve Bank Of India

Table 4: Ownership Structure of Public Sector Banks(as at end-March 2004, Per cent)

Government/ Share of Others

RBI Share

Nationalised Banks

Vijaya Bank 53.9 46.1

Corporation Bank 57.2 42.8

Union Bank of India 60.9 39.2

Indian Overseas Bank 61.2 38.8

Andhra Bank 62.5 37.5

Oriental Bank of Commerce 66.5 33.5

Bank of Baroda 66.8 33.2

Bank of India 69.5 30.5

Dena Bank 71.0 29.0

Allahabad Bank 71.2 28.8

Canara Bank 73.2 26.8

Syndicate Bank 73.5 26.5

UCO Bank 75.0 25.0

Bank of Maharashtra 76.8 23.2

Punjab National Bank 80.0 20.0

Central Bank of India 100.0 0.0

Indian Bank 100.0 0.0

Punjab & Sind Bank 100.0 0.0

United Bank of India 100.0 0.0

State Bank Group

State Bank of India 59.7 40.3

State Bank of Bikaner & Jaipur 75.0 25.0

State Bank of Travancore 75.0 25.0

State Bank of Mysore 92.3 7.7

State Bank of Indore 98.1 2.0

State Bank of Hyderabad 100.0 0.0

State Bank of Patiala 100.0 0.0

State Bank of Saurashtra 100.0 0.0

This table indicates about the ownership structure of public sector banks as per govt. /

RBI share & Share of others with Nationalized Banks and State Bank Group this table

shows that State Bank Group Holds Maximum share with Govt. & RBI. Apart from That

United Bank Of India & Indian Bank Holds maximum Share with Govt..