Chapter 1 Introduction
It is necessary for any economy to have various financial intermediaries that help in the accumulation of the funds that are available with various people for diverting it for productive or investment purposes. In modern economies bank have a very crucial role to play as they are mainly earning on account of the gap in the interest charges which they are taking from the borrowers and the interest which they are paying on the savings made in their accounts. But this is getting a more complex kind of operations ever since the world market has experienced globalization due to which there is de regulation that is seen in the market.
It has made even this sector a very competitive one in which the interest rates are also being framed in a manner that is helping mainly the customers as more and more facilities are being provided to them for retaining them with their organization. It is this stiff competition in the market that has made the whole situation changes drastically as a result people in the banking industry are experiencing lesser returns and irregular incomes but even after all this they are using whatever they have got to remain in the business.
Global Economy - The recent developments in 2007
During the 2006 the GDP growth in the world economies was seen to be rising at 5.4% in the initial quarter also of 2007. But this was mainly seen in the booming economies and the widening industrial markets only.
As per the IMF’s WEO or the World Economic Outlook October, 2007 latest release showed that there was a projection that the growth of the real GDP on the global level is expected to fall from 5.4% in 2006 to 4.8% by 2008. Even in 2007 it would be having a marginal fall to the level of 5.2%. Even though the U.S. market is not showing any signs of quick recovery or fast pace of growth in the initial quarter but there are expectations that by the end of the quarter it will be able to pick up marginally.
It is been especially witnessed that there are some economies like that of Japan, Russia, India and China etc. due to which it is attracting the attention of other countries as there projected growth in the times to come is expected to be really good. But for the Euro markets and Japanese markets it is the good domestic demand pattern that has helped the organizations to grow at a rapid pace because of this.
Even the problem of inflation is to be handled carefully so that the economies are able to take the benefit of the boom that is seen in the expanding economies. But it is mainly the rise in the fuel and food prices that are adversely affecting the economies of U.S. it is this headline inflation that is being witnessed in the developed nation that is the concern of these nations. Even though to some extent it has lowered in case of Britain because of its reduced internal energy price rise which later on picked up again in 2007.
In case of the core inflation it has almost been the same in most of the big economies showing that there has not much change from the demand side. After the 2006 situations of the subprime mortgage industry of America has gone worse due to which the investors are losing their confidence in the organizations and their various products. It was seen that by the end of the third quarter of 2007 the markets on the global equities were making substantial profits even though the process of intermittent rectifying is going on. Moreover the rise in the organizations profits and the growing number of acquisitions and mergers worldwide coupled with the rise in the demand pattern has helped in improvisation of the condition of the equity market especially in the booming markets like:
- China with 69.8%
- South Korea with 32.2%
- Hong Kong with 30.7%
- Brazil with 28.7%
- Indonesia with 28.5%
- Turkey with 25.1%
- Lastly by Thailand with 21.3%.
Another reason behind these economies boom is not only due to the domestic reasons but also on account of the sluggish economies of the developed nations like US, Britain etc. it is the higher mortgage of US and the rising lending industry at the corporate level coupled with the rise of petrol and other such fuel prices has helped to reduce the market situation for Japan and has raised the market of China.
By 2007 September the value of the US Dollar has suffered adversely due to which the investors are losing their confidence in their organizations or the mortgage market is suffering adversely along with the reduction in the number of houses being sold in U.S.
Chapter 2 Literature Review
Indian Economy Macro environment
Even the economy of India has shown substantial growth since 2006 as the country’s GDP has risen to 9.4% during this time period. It is mainly because of the industrial and the services sector growth that has helped the Indian economy to have a higher GDP. According to the tenth five year plan the real GDP is expected to rise by 7.6% which would be much better than that of the other economies. Even the sector wise there has been growth in the agriculture and allied sector which was only 2.7% in comparison to 6% in the last year.
But it is the industrial sector that has shown the good improvement from the previous 8.2% to 11.5% in the present year. Since 1995 to 96 it has been the first time that the industrial sector has shown such a good rate of growth. This is mainly because of the improvement in the country’s infrastructure facilities that has helped in the growth of the industrial sector. Even in the case of service industry it has improvised from 10.3% in 2005-06 to reach out to the figure of 11% by 2007.
Even in case of inflation of headline it has remained somewhere around 3.7% to 6.7% during the period of 2006-07. Even the whole sale price index inflation on an average has risen by 1% since last year.
It is not only the improvement in the infrastructure facilities that has helped in booming the economy but also due to the fiscal reforms that the government of India introducing time after time with the aim of boosting the rate of growth of the economy. It is due to this all the financial sector or its financial intermediaries has gained substantially to such an extent that there has been a rise by 25.7% in the net foreign exchange assets of the banking sector in India.
Even the securities market has shown good growth in the year 2006 to 07. Even the primary market has shown good improvement. It is on account of the foreign institutional investors that have helped in improvising the liquidity position and also because of the good profit margins of the corporate sector that the economy’s securities market has improvised substantially.
The banking sector in India has also shown a substantial growth since 2006-07. It is basically the growth in the services being provided by the sector that has helped to push our economy substantially and also their assets. It was mainly seen that the credit has grown substantially in this area due to which the commercial real estate and housing sector has made good improvement. There have been also some of the major mergers that have been witnessed in the banking sector also. All though the number of the scheduled commercial banks has fallen from 85 to 82 in 2006 but the extent of services or operations has improvised all together.
In 2006-07 there was certain underpinning of the SCB’s financial performance mainly because of the stiff interest rates, both from the assets and the liability aspects. The banks have improvised on their equity returns but their assets returns have remained more or less the same.
In case of the cooperative banks that are based in cities there has been a medium level of growth. They have been able to improvise their advances and loans in comparison to their deposits. But still these cooperative banks are not able to meet up their targets.
But in case of the cooperative banks operating in the rural areas have shown good improvement leaving aside its primary agricultural credit society.
Non-Banking Financial Companies
In 2005-06 the assets/ liabilities of these companies was at 5.1% but by 2006-07 it made a substantial rise to 26.9%.
In case of these NBFCs -D borrowing is the borrowing is the main source from where it gets its funds and this has risen by 30.6% in 2006-07. In case of the public deposits there has been a fall by 16.5%. These companies have experienced a rise in their operating but also in their net profits. Even the quality of assets being held by them has shown a rise significantly. But there has been a fall in the NBFCs – D as the CRAR which was above 30% has fallen.
According to the estimates made by Central Statistical Organization (CSO) the rate of growth of the real GDP is still experiencing a 9.3% growth in its initial quarter in comparison to the 9.6% since the first quarter of 2007. It was mainly because of the rise in the service and the industrial sectors double digit growth along with the agricultural sector showing a promise of making improvements in its contributions to the country’s GDP.
The CPI (Consumer Price Inflation) has continued to remain more than the WPI (Whole Sale Price inflation) due to which the influence of more food prices can be easily seen.
In the year 2007-08 there has been a rise by 9% in the money supply that is M3 in comparison to the last year’s 7.9%. Even the Net Bank Credit flowing to the government has risen by 1.7% in 2007 comparison to the rise of 5.6% during the last year.
Even the country’s liquidity pressure that was more due to the cash reserve ratios arise was somehow gradually decreased by may 2007 due to which there has been a rise in the expenditure of the government and also the foreign exchanges net purchase that is being done on account of the authorized dealers of the RBI.
By 17th August 2007 the data concerning the sect oral deployment portrayed the growth in the credit to non food or the agricultural sector by about 41% which was taken up by the industrial sector.
There has been a rise in the amount of credit being demanded by the industrial sector mainly because of the growth of the infrastructural facilities such as telecommunications, port, power etc. and other industries like the construction, automobiles, chemicals, food processing, petroleum, engineering, iron and steel and textiles etc.
But the main contribution has been from the infrastructure only which is having a contribution of 27% to the whole industries demand.
In case of the real estate business the loan growth has been on a rise.
Due to the better liquidity position it was seen that the rates of the call money from April to July in 2007 were continuing to be lesser than the rate of the reverse repo that was somewhere in June to July 2007.
In case of the balance of payments situation of India it has almost remained on a easy situation in 2007 -08. In case of the merchandize exports there has been a moderate growth from April to September in 2007 but the imports have continued to remain high as it was there in the previous years. There has been however decline in the imports of oil as compared to the last year. In case of the invisibles account there was a surplus in 2007 to 08 first quarter owing to the rise in the private transfers which was somehow balanced the deficit o the current account in the first quarter of 2007-08 to reach the level which was seen in 2006-07 first quarter.
PEST analysis is done in order to understand the various macroeconomic variable impacts on the performance of the various organizations in any economy. This would help in knowing the banking industry’s performance and also to find out the different influential factors that are influencing the banking industry in a big way.
The political setup of any nation has a substantial influence over the working of any organization. The more the stable conditions the better the banking industry would develop and lesser the stable conditions more adverse effects would be seen. Stamp Act (1908) and Registration Act (1899) are linked directly. It is important that the stamp duty is paid on the registered documents but the rate depends on the place to place. India is counted in those countries that have highest stamp duties all over the world. Some developed markets for example Europe etc. pay the stamp duty at the rate of 2 to 3% whereas in India it is very high like in UP it is 12.5%. Orissa has 14.7% etc. It is seen that some states charge two stamp duties for example they charge on land as well as on development.
The chances are that the current account deficit is likely to fall on account of the fall in the prices of the crude oil. This has also helped in raising the savings of the nations. Moreover due to the improvisation of the infrastructural facilities even the real estate has improvised. The inflationary situations have also improvised with the GDP situation improvising. Inflation has been under control at 4 .5 to 5.2%. It is likely that the inflationary situation under controlled has also helped in the improvisation of the purchasing power of the Indian customers.
The social factors refer to the cultural values or the beliefs that are there in the society that is guiding the extent to which social value are influencing the performance of any organization. The extent of the infant mortality or the female infanticide or the literacy level that is influencing the kind of organizations are there in a particular economy. There has been a substantial change in the social setup of the Indian economy as the proportion of the people being employed in the agriculture or the primary activities seem to be declining and the more of population is trying to operate in the service sector or the manufacturing sector.
Internet plays a vital role in the banking sector. The recent trends shows that the technology is playing extensive role in the working of the organization in the modern business environment. The information is being provided that helps them to be up dated about the latest trends in the markets on the global levels. Moreover there are various web sites which also giving various analysis values or the recommendations for making improvisations etc. The last but not the least that the on line banking facilities and the universal one number for global banking is all dependent on the technological factors.
Chapter 3 Methodology
The modern business environment has changed all together after the globalization phase has initiated on the global level. Due to this the globalization has made a substantial impact on the lives of the people living in the various parts of the world. It is the MNCs that are using various strategies to reach out to its customers in a big way. MNCs are able to distinguish itself on account of the manner in which it is operating in numerous nations as compared to a local firm which is operating within the domestic territory only. Moreover the MNCs are helping the flow of FDI into any nation. It is beyond merely the exporting or importing of various items but the organization which is not able to make its present felt in the foreign market cannot be regarded as MNE. Geoffrey (1990)
The investigation is being done to find out the reason behind the banks operating in international markets. Geoffrey (1990)
Research and Problem Analysis
In the present dissertation the main aim is to evaluate the impact of the banks from abroad in the Indian market given the reforms or the regulations imposed by the government in India.
Thus the research problem is concerning the identifying of the profitable opportunities available to the various banks in the Indian banking industry.
In this research the targeted bank is the commercial bank and not an investment bank. Moreover the evaluation is being done on the industrial level rather than on a specific firm. Even by analyzing the performance of the two separate banks can possibly help in the analysis work which is to be conducted on the industry level. In this the stress would be merely regarding the market environment or the policies of the government or the regulatory framework instead of the mere functions being performed by the banks.
Aim of The Thesis
In this the initial step would be towards comprehending the past events in the Indian banking sector and what have been the drivers that have resulted in the privatization of the PSBs. Moreover it tries to focus on finding out if at all there is any requirement of the foreign banks in the Indian banking industry. This has been evaluated by two criteria’s as to the extent of offers being given by the foreign banks and the various risks involved by allowing these strong foreign banks to enter the Indian scenario. The influence of globalization has not been same in the various countries as it has revolutionized the financial service and the telecom industry in the Europe and United States.
In fact the globalization has made all the national economies to become a part of the global economy
As per Yin in 1994 suggested various research strategies like:
- Case study
- Archival analysis
In fact in 1998 Merriam stressed that it was the case study analysis that helps in getting the in-depth knowledge of the problem and also in figuring out the solutions to solve them.
Case study analysis is being preferred in comparison to the other techniques of qualitative research as it helps in providing a comprehensive detailed descriptions along with the evaluating of the single unit or the other attached systems. By analyzing the individual banks would help in the analyzing of the entire banking industry. The present research is incorporating even the historical and the archival analyzing tools for evaluating the banking sector in India. This would help in evaluating the trends in the banking sector in India and also in knowing the favorable impact in unfavorable ones. By analyzing the individual bank responses it helps in:
- In the research one PSB and bank from abroad would be considered for knowing the outcome.
- This would be providing the proper description concerning the Structure Conduct Performance relationships in the banking sector. Wendel and Osbore (1983) , Gibler (1984)
- It is the banking sector that has a substantial impact on the other sectors of any economy. Richard (1986) and the Charles (1988) are found to have a substantial control and restriction on the developing nations banking sector future.
- The present study is focusing on the collection of the data that has to be detailed in the coming section.
In any study there are the quantitative as well as qualitative information. But using the qualitative technique helps the analyst to investigate the various aspects intensively and in a detailed manner. As per Patton (1990) the qualitative technique helps the analyzing framework to extend beyond the limit set by the previous research works and their results. Thus increasing the comprehension of the various circumstances and the cases is really helpful in this regard. But the main shortcoming of the qualitative approach is that generalization prospects are lowered. Patton (1990) But some researchers like the Merriam (1998) have suggested that the case studies help in the generalization.
Using the quantitative method is requiring the utilization of the standard variables which can be estimated or quantified so that the different experiences or the opinions of the various people can be harmonized to form a part of the predetermined response divisions. As per Patton (1990) quantitative approach helps in estimating the responses of numerous respondents to the selected certain questions. This is assisting in making the comparative analyzing and the accumulating of the statistical accumulation of the information. Therefore it implies that the broader generalized observations can be easily summarized.
Thus it can be seen that qualitative and quantitative approaches are suitable to the research requirements of my study. It is due to the subjective and the objective information which is required for my research work. Thus by using a combination of both the methods it would help in providing an intensive research into the Indian banking sector. In fact the using of only one method would have given incomplete results. Therefore both the methods have been incorporated in my research efforts to get the comprehensive results.
Depending on the secondary data
In any kind of research work there are two types of data that are available these are either primary data or the secondary data. In the primary data the researchers try to gather the information concerning the particular project by conducting direct interviews or surveys in order to get precise findings. These types of direct interviews assist the researchers to make all the possible clarifications and as a result remove any misconception or the wrong findings. But this method is not only costly but also time consuming. The primary data is not suitable for the research objectives.
On the other hand secondary data concerning the usage of the already published material or some other sources like the internet or the annual reports of the company or certain articles or books etc. in case of the archival and the historical analysis the data provided from the secondary source is appropriate.
The survey based secondary data is helping in the gathering of the information through questionnaires. In this the information is pertaining to either households or people or various companies etc. these are being presented in the form of either pie diagrams or tables or in some matrix form where computer usage can be done easily. (Adrian, Philip and Mark, 2000) Thus various sources of secondary data have been used in my research work.
Validity and Reliability of Research
It is necessary to find out as to the information or the data available for making the analysis is appropriate and relevant. As the data is generally utilized for drawing interpretations thus it is necessary that its data is being analyzed on the criteria of validity and reliability.
Chapter 4 Results and Analysis
Operations of Foreign Banks In India
In India presently there are twenty nine foreign based banks which are having two hundred seventy three and eight hundred seventy one ATMs of network. There are always debates concerning the liberalization policy which is being presently being pursued in India and its impact on the foreign banks operations and also on the regulations specifically on the participation of the foreign banks and the extent to which they are able to diversify themselves in this liberal environment.
But there are definitely no doubts concerning the manner in which the regulations specified by the RBI concerning the foreign banks have been to quite a large extent. This can be even certified from the international standards that the environment in India for the foreign banks is quite a large extent be considered liberal. There are certain facts that are basically strengthen these contentions, which are as follows:
- There are no limitations being imposed on the foreign banks concerning setting up of the financial subsidiaries that are non banking in nature in India.
- Just like the Indian banks the same single license is being given to the foreign banks and there are no separate categorizations in the banking license which shows any discrimination which is done in certain countries.
- Even the insurance coverage is being extended to the foreign banks without any discrimination or charging of any premium discriminatory rate.
- Even the prudential regulations as are there for the Indian banks the similar kinds to a large extent which are being applied over the foreign banks concerning the assets classification or the income recognition or the capital adequacy etc. but certain prudential regulations are completely the same as in case of the Indian banks like the investment valuation or the exposure limits etc.
- Even the restrictions are not being imposed on the foreign banks branches conducting any type of business. It is due to this that the branches of these foreign based banks are able to diversify their various businesses in the different part of the country.
- Moreover the Indian banks are contesting the fact that the lending requirements is thirty two percent for the lower priority division on the net bank credit which is adjusted for the foreign banks whereas for them it is forty percent.
- As per the WTO requirements India has not granted licensed to the new banks from abroad on the criteria that the total assets being held in India by the foreign bank comprising of items that are included or not shown in the balance sheet is more than fifteen percent of the banking sectors total assets comprising of both inside and outside items of the balance sheet. But even after these regulations there have been no instances when any foreign bank was denied the license on these grounds. In 2007 the review of the trade policy in India showed that by the 31st January 2007 forty nine percent shares was being enjoyed by the foreign banks in India.
- In fact the situation is showing instances of in fact favoring more of the banks from the abroad in comparison to the Indian banks. This can be even seen from the fact that the foreign banks branches are not being discriminated on the grounds of operating any kind of business they wish to initiate in any part of India.
- Moreover the surveys show that the foreign banks have much more comfortable and dominating share of the banking sector in India which is touching the heights of 72.66%. Even in case of the two big private banks in India they are having 74% share from the NRIs that shows that they are almost like the foreign banks. Thus all such banks along with the banks from abroad are having 76.33% share in the total advances ort the deposits being extended in the Indian Territory. Even by the 31st march 2007 only 20% was the sealing imposed in case of the foreign share holding in case of the 10 big government sector banks that were listed. Thus the total share holdings in case of the banks which were from the public sector were almost 30% in favor of the private sector.
- Even in the case of the FX market the foreign banks have raised their share from 41% to 52% in 2007 till 2008 from the 2005 to 2006.
- The fact that the foreign banks are able to increase their amounts of returns which they have made it from the Indian territories.
- Even by comparing the public sector banks with the performance of the foreign banks on various criteria’s it can be seen that the latter is performing better than the former. For instance the ROE and ROA was 14.02% and 1.65% in the year 2006 to 2007 in case of the foreign banks and for the public sector banks it was only 13.62% and 0.82%. Moreover the net profit per branch in 2005 to 2006 was only 0.33 crores in case of the PSBs whereas it was 11.99 crores. Therefore it can be easily said that foreign banks have gained substantially in India and moreover it is earning or getting better returns as compared to its public sector rivals. This has been mainly to a certain extent on account of the favorable market conditions and less of competition being posed to these foreign banks from the PSBs that is helping the growth and development of the foreign banks in India. Moreover the role of the government is more of a regulating the flow of capital and its share in regard to the off balance business is also very less.
- Moreover there are certain dimensions concerning the banks from abroad are concerning the giving of the authority to its different branches. According to present commitments to the WTO India has assured of giving every year around twelve banking license to various new banks from abroad not only to the present ones but also to the fresh ones. In this commitment there was also allowing of the more of the ATMs to the foreign banks that has been allowed by the RBI. It is the continuous authorization by the RBI that is above the allowed and including the permissions for the ATMs to be set up has helped the growth of the foreign banks in a much better way. It can be seen from the fact that from 2003 till 2007 there were around 75 banking licenses that were granted by the RBI to various banks from abroad.
- Therefore it can be said that the allowing of the foreign banks by the RBI that has helping the growth in the number of the foreign banks entering the Indian market. Thus it is the favorable conditions that are being provided to the foreign banks, due to which the number of these banks have risen substantially even though the WTO commitments have not been adhered strictly. It is also the kind of relations which the nations are sharing among themselves that is affecting the growth of the foreign banks in particular nations. It is the level of proportionality in regard to the granting of the permission to the banks from abroad among each other’s nations that is also to be considered. This can be easily explained with the help of a very practical instance which shows the difference in the nations attitudes. It was from 2003 till October 2007 India allowed the setting up of 19 banks from US that are still operating in India. But during this span of 5 years, United States did not grant even a single banking license to any of the bank which was from India. Even though there were several requests concerning the establishing of 3 branches, 2 subsidiaries and around 9 of the representatives offices from the banks from India. Even after the expiry of 5 years or more there has been no improvement and not a single Indian bank has been given the banking license to operate in USA.
- But there is another proposition concerning the extent by which the foreigners are taking keen interest in the financial industry of India. This can be seen also by the extent of foreign participation in the NBFCs that are working in the Indian economy. In this quite a bit of them are from the abroad only. Even in the case of NBFCs there is almost 26% which is being held by the foreign companies. Moreover the extent of foreign contribution towards the total assets based of the NBFCs the total majority was nearing to 9.2% which is a substantial share that cannot be ignored. In case of the NDSI NBFCs also in India there is significant participation made by the foreign banks as this sector is not being thoroughly supervised or controlled by RBI. Thus it can be easily concluded that the foreign involvement has been increasing in India mainly on account of the favorable policies and regulations followed by the Indian government.
Emerging Challenges In The Banking Sector In India
There has been many reforms introduced in the banking sector in India but even though have helped in up lifting the market conditions for the growth of the foreign banks in India. However then also there are certain drawbacks which are as follows:
When analyzing the efficiency of any financial system it is important to even take into account the vastness of the system. Crockett (1997)
The modern economies are interrelated and the disturbance or the imbalance in the market conditions of one economy would be having an impact on the other economies as per the Walras law. This is to be seen in context to the banking sector of the emerging economies 25. The PSBs have a major strategic role to be played in concern to the overall policies of the government concerning the banking sector, but there are some issues which need to be focused on. These are:
Financial System Structure
After independence, the banking structure in India was having too many regulations until in 1990’s when the liberalization helped in removing most of these limiting factors. The Indian market conditions have been really fragile 26 with the presence of only 27 PSBs. But after the beginning of the liberalization era the competition in the market has changed the banking structure with the coming up of more foreign or the private banks in a big way in the market. Thus to match up the competition the PSBs has to be restructured their facilities and other necessary reforms to face the growing competition from these banks.
The commercial banks are able to diversify their various services like provision of loans if the least capital adequacy needs are set with caution as per the economic environment. Eichngreen (1999) Pg.29 but the significant improvisation has to come by increasing their capital rather than the mere capital ratios or giving less of the loans involving higher risks. Nachane et al. (2000) it has been found that the NPA level approximating 15% should be sufficient for wiping out within 15 years the banking sectors net worth. Sheng (1996) PSBs have been able to improvise their capital position in a small way through its retained earnings, government capital injections and the public equity sales.
Recapitalization of The Bank
There have been many instances over the past few years in various countries in which recapitalization of the bank have led them into problematic situations. Turner and Hawkins (1999) In case of India due to the losses on account of the impaired assets there is a requirement of a US$ 11 to 13 billion for helping the SCBs in India to handle these losses. Standard and Poor & Crisil (1999) by recapitalizing the PSBs does not seem to be an appropriate strategy as it would be further worsening the impact of the inflationary situations in the country. A gradual privatization in case of PSBs would be more appropriate.
Pro Cyclicity Of Prudential Norms
Moreover the executing of the capital adequacy requirements faces problems as there is pro cyclical in the bank behavior that is when the situations of recession or other cyclical changes are there that are requiring the tightening of the system, that the present systems problems are revealed. BIS (2000) in this regard the regulations extent and timing has a crucial role in regard to the economies cyclical factor. Moreover it needs the proper strategy concerning the prudential rules that have to be initiated from time to time as per the situations to improvise the structure. Reddy (20001 c)
Treating of The Weaker Banks
The main reason behind any bank to get into a weak situation is due to the proper managerial strategies or the poor management of the assets quality due to the strict rules of IRAC due to which either substantial or major part of the bank’s net worth is wiped out. Sheng (1996) Moreover the changing of the institutional setups for handling the problems concerning bad loans are mainly on account of the programs introduced in the bank aiming at restructuring, in nations like Philippines, Sweden, Spain and lately in Korea, Malaysia and Japan. Sheng (1996), Turner and Hawkins (1999) However in the Indian conditions this was not recommended due to many reasons by the ARF. RBI (1992-93)
Since 1993 due to strict laws the non-performing assets (NPAs) have reduced remarkably in case of the PSBs. But over the past few years it has slowed down and as per the global standards the NPAs level is higher. In 1997 USA’s banks NPA was 1.1% of the advances and 0.66% of the assets. Goldstein (1996) In case of the Indian NPAs the main reason for its rise are due to the insufficient strict regulations concerning the bankruptcy or the foreclosure or in the court decrees execution, problems of the debt recovery etc. 43
By restructuring of the organization, improvisation of the efficiency of the management, change in the legal execution, etc. can help in sorting these problems.
The NPAs have a close relation to the legal setup in any country. Especially in the case of the emerging or the developing economies there is a requirement of workable regulations concerning contract, bankruptcy and collateral proceedings, and also to restructure the court processes also with the suitable remedial measures. Even in India there is a need to change the loss pertaining to the debts recovery and the civil courts procedures like the speedy settlement of the court cases. Thus it is needed that the legal setup has to be made quick, responsive and competent enough to handle the various banking sectors problems.
Disclosures and Transparencies
Various disclosure and transparency standards followed in India have to be improvised to match up the global standards. Mostly the raw source data is availability is a problem and the data concerning the banking sector is mainly with the RBI and very limited data is disclosed by RBI which is serving as the secondary data due to which proper comprehending and the evaluation of the banking sector is a problem. Thus it is required that RBI should be disclosing most of the financial data except the confidential one. This would help in removing the discrepancies of the financial sector.
Possible Disputes as Owner/Supervisor
The RBI is trying to structure the banking sector for the purpose of improvising the efficiency and development of healthy competitive situations in the market. There has been substantial move towards the privatization of the government banks. The step of transferring the SBIs ownership under government would be moving against the direction of the government lowering its role in the banking industry. Instead of owning SBI government can take two steps in which the first step is of setting of the board of directors who are independently appointed by RBI and secondly of the RBI requiring or forming trust in which the SBI can make its deposits.
Supervision and Regulation
After seeing the Asian crisis it is again being reinforced that there is a requirement of an effective supervising and regulating framework. 53 the main motive is to boost up the stability in the financial market and lowering of the risks in the system. Thus using the proper policies concerning the risk management and the regulators in the financial system have to be formulated in the direction of improvising the efficiency and effectiveness.
There is a growing trend towards universal banking and in this regard most of the banks in India are also providing such services. Universal banking should not be regarded as a panacea. Rojas Suarez (1997) has suggested that the possible impact of the failure of the bank would be much more in case of the universal banking as compared to the earlier banking style.
Due to the incorporating of the foreign banks in India there are always chances that there would be disequilibrium between the assets and liabilities that are adversely affecting the interest rate risks etc. therefore it is necessary that all kinds of risk situations are being proactively handled is of main importance. From the operational side firstly the bank’s board of directors are required to participating in the formulation of the framework concerning the managing, measuring and identifying the risks.
Capital Account Liberalisation
The main things seen in the Indian scenario is concerning the interest rate differences and the forward premia linkages that are going through the situations concerning the lags and the leads.
It is corporate governance that can help in the getting the maximum gains from the reforms. The corporate governance in case of the banking industry is working in the creating of the level playing that is helping the legal set up in this regard. The main challenge being posed in the banking sector of India is concerning not only the manner in which the banks are migrating to become a part of public sector but they are also concerned on how in the best manner will be the banks managed. Tarapore (2000)
Banks runs were also associated with the insurance’s deposit. (Dybvig and Diamond (1983). It was being done to ensure that in case there are too many withdrawals then it is not leading to any kind of financial panic. There are certain provisions like the Bank Nationalization Act and the other state enactment concerning the cooperatives that are leading to problems in concern to the deposit insurance corporation that is acts like the liquidator and receiver if the insured entity fails. 60
Issues Concerning Cooperative Banking
UCBs are gaining lot of importance in the Indian financial structure. It was also seen that the rules concerning the UCBs should be simple and have more transparency in the granting of the licenses. In this regard the Madhava Rao Committee in 1999 suggested that the promoter’s credibility and the bank’s capital base be taken as the basis on which the license is granted. It is the RBI which the apex bank that has to determine the manner in which there are stable conditions in the financial market. Reddy (2001c).
Comparative Swot Analysis of Public Sector and Private Sector Banks
Public Sector Bank
- Major share in the market – among the various PSBs, SBI happens to be the leader as it has been in the Asian top twenty five banks list and in the world’s hundred top banks. It has a diversified network of a around 9,517 branches in various parts of the country along with the 5,500 Automated Teller Machines (ATMs) This can be even seen from the fact that the SBI has 14.9% share in the market and 15.6% in case of the advances.
- Strong financial performance- The bank has been able to consolidate its opposition as from 2005 to 2007 the bank has been able to improvise its revenue by 33% to touch the figure of Rs 683,768.3 million. Even the net interest margin has risen to 3.3% in 2007 from the 2.9% in 2006. It is the robust financial working of SBI that has helped it to diversify or consolidate and controlling of its activities.
- Falling NPAs- SBI has been able to significantly reduce its nonperforming assets in 2007. The net NPAs and the gross NPAs of SBI has reduced substantially from 1.9% and 3.6% in 2006 to 1.5% and 2.9% in 2007.
- In regard to its treasury revenues SBI has shown a fall over the past certain years. As the treasury revenue is having 21% share in the SBI’s total revenue therefore any fall in this regard would have a substantial impact on the overall revenue of the bank. From 2005to 2007 the CAGR from the treasury operations have lowered by 25%. From 2005-07 its treasury revenue was Rs. 201,117.8 million. But in 2007 it was amounting to only Rs.114642 million.
- Government control- due to the excessive interference and control by the government SBI has not been able to perform as good as the other private banks like the ICICI. As it is not able to take quick decisions and the excessive political interference at times delays the effective decisions to be taken. From 2005 to 2006 ICICI bank diversified by opening 204 more branches whereas only 139 branches could be opened by SBI. Even the ICICI growth in terms of its deposits has increased 5 times that of the SBI. Thus it is due to the undue controls put by the government due to which it is not able to compete with its rival banks effectively.
- Diversifying Indian banking sector - It is due to the favorable market conditions in the Indian economy that the GDP has been growing at a steady pace. Moreover the inflationary situations are more or less under control due to which it is the tertiary sector and the secondary sector which are showing an encouraging trend in the market. From 2000 till 2005 the banking sector’s total assets base in India has risen significantly to reach the figure of $520 billion from the 4265 billion. Even the profits have risen substantially to reach $five billion from $1.7billion. According a forecast the Indian banking sector’s total assets base is expected is to reach $one trillion and around $ ten billion of profits by the 2010 ending.
- Increased Consumerism - It is mainly account of the liberalization and the better economic growth which is mainly responsible for the investment and the creating of wealth. Mainly due to the MNCs and the outsourcing which is being done by the BPO firms is leading to the rise in the disposable income of the consumers. It is the rise in the number of loans being taken due to the lucrative programs being launched by the bank to attract the customers by SBI. Therefore SBI has to exploit the favorable conditions in the market.
- Expansion of the market abroad - Since 2006 the bank is trying to operate even in the foreign markets by opening sixty overseas offices from 2007 to 2008. Thus by 2007 ending it would be opening 13 new more offices abroad. Moreover the bank is planning to raise its revenue from the foreign markets from the 2005 3.6% to reach 8.4% by 2007 ending.
- There is a continuous threat from the banks which are privately owned. Thus the privates sector has been able to attract more customers because of its strong marketing techniques or the additional services being provided to its customers. In case of the corporate fee and the retail deposits the private sector has been able to outperform the PSBs like SBI.
- OPERATIONAL ISSUES- The outdated strategies in concern to attracting of customers or the long strikes which are there due to which there are problems of labor and the workers which the bank is not able to solve properly. As a result the private banks are able to outperform the PSBs like SBI. The private banks along with the foreign banks are able to provide efficient and prompt services to its customers due to which they are able to attract customers.
Private Sector Bank
- Leader among the private banks - ICICI has been one of the most reputed private banks which is operating in India. This bank is the leader among the private banks who is having the second largest total assets. In regard to its branches also it is far better than any other bank as it is having around 630 branches with more than 2200 ATMs in different parts of the country. It is the free flow market capitalization through which the bank has been able to accumulate Rs. 480 billion which is the 3rd among the various financial firms that are listed on the stock exchanges of India.
- Strong improvement in the assets quality - ICICI has been able to get the remarkable rise in the assets quality of the banks in India by substantially lowering the NPA in the 2007. Every year the share of NPA is reducing significantly as it was 2.1 % in 2005 but it is only 0.7% in 2006.
- Relatively higher efficiency - ICICI has outperformed all its private and public rivals in the banking industry merely on account of the efficient operations as compared to them.
- Credit risk concentration - ICICI is one of the twenty biggest borrowers in regard to the gross exposure which is around Rs. 3, 66,510.7 million by 31st March, 2006. The bank has been on its own one of the biggest borrowers in comparison to any other financial firm. Due to this it is always running into more risks as compared to the others.
- Profitability slowing down - The profitability of the bank is also seeing the lowering down since last year. Its net profit margin has gone down to 9% in 2006 from 2005 10.7%
- The rise in the company’s net profit was only 28% in 2006 as compared to the 52.1% rise in the earlier year. The industry’s average net profit margin from 2002 to 2006 was 26.6% whereas the ICICI bank’s was only 9.9% which was far below the industry level. This portrayed the inefficiency of the bank to manage its costs properly as compared to its rival banks.
- Total relying on the domestic market - ICICI bank has been mainly concentrating its efforts in its domestic markets as the main revenue share of the bank is from the Indian market. It has not focused its attention on foreign markets in a much serious manner. On the other hand its rival banks like the HSBC holdings and the Standard Chartered bank etc. have been able to diversify their operation due to which their income sources are better than the ICICI banks.
- Growth in the banking sector in India - The Indian GDP growth rate had been at 7.6% over the past year and the main growth has been witnessed in the tertiary and the secondary sector. In the service industry particularly the banking sector is performing remarkably well in comparison to the other industries under the service sector. Moreover the banking sector’s total assets base in India has managed to reach $520 billion from $265billion. Even the profits margins have managed to reach $5 billion from the previous $1.7 billion figure. Thus the remarkable good figures are showing good prospects of growth in the times to come.
- Untapped rural market - In case of the credit being given in the rural sector there is a huge potential which is still lying untapped and there is great scope of increasing the share and contribution in this sector. The unregulated money lenders are having significant share in the rural advances therefore there is a great potential which has to be tapped properly. Thus ICICI bank can open up its branches or other means of giving loans in the rural India.
- Domestic remittance market - The global remittance industry is approximately $250 million out of which $150 billion is being directed towards the developing nations. There is a great potential in India in case of the remittance market which ICICI can tap properly if it wishes to.
- Rising house loans interest rates - In India the interest rates concerning home loans have almost touched double figures by 2006. This rise in the interest rates are likely to impact the extent of the loans being taken in regard to the home buying this would be adversely affecting the banks income from this side. ICICI is quite likely to see certain fall in its revenue from the house loans as there has been a rise in the overall rates on the house loans.
- Indian financial market’s volatility - Since 2006 the financial markets globally are volatile even though there have been robust earning since last few years. Generally the rectifying phase is going in the financial market due to which there has not been any substantial stable income from the market.
- Base II Accord - It is being formulated for improvising the aligning of the bank’s regulatory capital in regard to its risk. This is requiring an evaluation to be done by the banks concerning their risk and setting aside of the sufficient regulatory capital in accordance. Thus the following of these accords standards needs substantial accuracy and proper information systems concerning credit management. Thus these kinds of adherences are likely to affect the profit margins of the bank.
Reasons For Globalization To Be A Boon For The Banking Industry
After the globalization phase just like all the other industries even the banking sector has totally revolutionized not only in its working but also in its approach. The globalization has helped the banking sector to improvise its efficiency and match up to the global standards. This thrust in the financial market has helped the entire banking sector environment to be highly competitive with the entry of the foreign banks. But the extent to which the foreign banks entry is likely to influence has been discussed and also certain opposition to the entry of the foreign banks has been reviewed.
Possible benefits that the emerging economies would be getting due to the entry of the foreign banks.
- Scope and economies of scale – generally the trends in the banking sector has witnessed many acquisitions and mergers by the foreign banks as the way to diversify its operations into international markets in a much bigger way. There is more likelihood of the new financial companies or the banks joining the industry or providing the financial industry functions like the portfolio management, insurance, brokerage activities etc. all such services are helping the banking firms to benefit from the economies of scale.
- Service and product innovations- the main source of service and product innovations in the emerging markets is from the foreign banks. Moreover the competition is getting tougher with the entry of new entrants which is making the interest rates to be highly competitive in which the most likely benefits are to flow in the direction of the borrowers and savers. Moreover by the entry of the new firms in the banking sector it would help in the following of the better and modern banking practices like quick dispersing of loans or loans being provided on a telephone call only or the clearing operations efficiency etc.
- Developing financial markets – financial markets have been developed more efficiently due to the foreign banks entering into the industries. For instance as the branches are not available in sufficient numbers to foreign banks therefore they are possibly trying to diversify their operations through interbank market. Therefore the entry of the foreign bank would be possibly helping the markets to develop and the promotion of the interest rates to be determined by the market. Another instance is regarding the inducing of the banking business by the foreign banks which could have possibly reached out to the international markets.
- Attracting Foreign Direct Investment (FDI) – entry of the foreign banks has assisted in the smooth flow of the FDIs. As the banks from abroad are having good relations with the investors from abroad therefore it is quite likeably that the foreign investors are being attracted to the emerging markets. Moreover with the foreign banks already operating in the domestic market would help in lowering the expenses borne by the companies that are from abroad. Therefore it can be concluded that the FDI would be improvising in its volume due to the entry of the foreign banks.
Sources of Disapproval of The Entry To Foreign Banks
As there is approval so are the accusations against the foreign banks entry. Due to following reasons:
- One of the main accusations is that the domestic banking firms are easily acquired by the financially strong foreign giants.
- Foreign banks would be benefitting with MNCs as these banks and MNCs are having close relationships in various nations as there is likelihood that the local or the domestic banks are not being preferred by the international brands.
- All the most economically strong and financially well off consumers would be easily induced by the foreign banks. Although there is much debate concerning the various operations being performed by the foreign banks as these are being mainly accused of the best customers being stolen by them. Therefore in this competitive environment the local or the domestic banks require the entire restructuring of its services and activities in order to face the growing competition from the foreign banks.
- There is quite likelihood that due to the presence of the banking forms from the abroad that the merchant and investment banking operations are being launched like the other advisory facilities provided by them in regard to the accusations and mergers or the various capital market devices or the raising of the capital or providing of favorable conditions for the security markets. It is due to this that the relying of entirely on the bank financing would not be there. Even though it might be lowering the share in the market and increasing the domestic banking firms’ dominance but on the overall basis this would be benefiting the emerging economy.
- Another accusation against the foreign banks is that it is raising the control over the domestic economy by the foreign banks with their entry. The debate is concerning that the foreign banks may be the main driver forces in certain type of colonialism of financial kind which would not be accepted. Thus it basically implies that the foreign banks are not allowed to prosper in the domestic market or to be contributing toward the economic development of the nation with one fear only that it would be gaining control over the domestic economy. The role of the foreign banks should be viewed in the similar manner such as the role being played by FDI in the production procedures is crucial. Therefore in the same manner domestic banking industry would be benefiting by improvising the efficiency. In case of the domestic nations financial intermediation would be improvised with the entry of the foreign banks.
- One of the debates concerning the entry of foreign banks is concerning the protection to be provided to the local banking firms from the financially and technically stronger foreign based financial giants. It is the same debated issue concerning the protection being given to the infant industry against the bigger giants. In fact the banks from abroad are trying to locally generate these services rather than importing from abroad. By imposing the restrictions on the various activities of the foreign banks on the grounds of being too large then it would be helping in the safeguarding of the domestic inefficient banks from the big giants. Thus the social costs involved are much higher.
- Foreign banks would be operating in such a manner that their style of contributing to the economic development would not be the same as it would have been due to the local or the domestic banks performing the similar functions or activities. It is one of the most outdated debates of mercantilism. As per this opinion it basically suggests that the foreign banks help in providing finances to those export oriented industries whose exports would be helping in the business of their own native nations industries.
Chapter 5 Conclusion, Limitations and Suggestions for Further Research
Even though globalization has spread at a very fast pace to the different corners of the world but in case of the banking industry there has been a gradual progress being witnessed in case of certain countries. Even though there had been substantial resistant against the entry of foreign banks but after so much of resistance all these restrictions have finally given way in certain economies like that of the Latin America or the other transition economies. But in case of the Asian economies these are not globalized.
Even though this concept is making its way but there are differing reviews in this regard. As regard to the estimating of the banking systems which are global concerning their working and that of the international banks is in it’s initially stages. But in regard to our analysis concerning the benefits or drawbacks of the globalization on the banking industry is providing not much cause for leading any kind of disapproval concerning this trend.
In fact a good banking system can be created and maintained if the financial system is integrated with the other financial systems or the foreign bank or the international banking. In fact all such domestic banking firms that are being protected by various provisions or regulations passed by the government from time to time in order to boost their performance is in fact making them more inefficient and uncompetitive, by removing of these protective regulations these inefficient firms are being exposed to the good competition then it would be making them more efficient and competitive. Thus it can be said a banking industry which is globalized helps in boosting the domestic market especially if it is in the phase of economic crisis. This would also help in improvising the infrastructure and the adherence of the global standards in the local market which would be changing the manner in which the banking requirements of the local customers will be provided with various kinds of amenities. All such facilities being provided would be matching up to the global standards
Recommendations for Future Studies
The banking sector is major sector which has a substantial impact on the other industries operations therefore conducting a research on this sector on regard to its various policies like the lending policies etc in regard to the monetary and financial situations in the economy. Geoffrey (1990) in the research the individual as well as the industry research significant as the individual banks case studies has substantial results which can be generalized to the industry’s level.
As there is not much information regarding the individual banks therefore we have selected the top down methodology to stress on the banking sector in a better way. In this regard the future study is going to be more beneficial and proper in depth study from bottom to up methodology should be used in combination into the top down methodology. The present research would not be concerning much about the various facilities or the functions being performed by the bank like the risk management, deposit taking or the credit policy. The research would be much better if the future study is emphasizing on the influence the Indian banking industry would be having after the entry of the foreign banks.
As per my view the study initiates from the impact the banking sector would be having from the macro level which would be giving certain advantages in order to help the researchers in getting a better outlook concerning the banking sector in India. This would also help in showing the real hurdles and also the interests involved in it.
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