PRIVATE BANKSIndia is one of the largest country, with a huge financial systems characterized by variety of institutions and instruments. Initially all the banks in India were private banks, which were founded in the pre-independence era to cater to the banking needs of the people. In 1921, three major banks i.e. Banks of Bengal, Bank of Bombay, and Bank of Madras, merged to form Imperial Bank of India in 1935. In 1955, after the declaration of first-five year plan, Imperial Bank of India was rechristened as State Bank of India (SBI).

The Reserve Bank of India (RBI) was also established as a private body and took over the central banking responsibilities from the Imperial Bank of India. It got nationalized in the year 1949.

Following this, occurred the nationalization of major 14 banks in India on 19 July 1969 and nationalization of 6 more commercial banks In 1980, thereby enabling major control over banking business of India.

Entry of New Banks in the Private Sector

The new millennium has brought with it challenges as well as opportunities in various fields of economic activities including banking. The financial reforms launched during the early 1990s have dramatically changed the banking scenario in the country and new private sector banks were allowed entry into the market. Reserves Bank of India encouraged setting up of private banks as part of its policy of liberalization of the Indian banking industry. HDFC was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in private sector.

Categorization of Private banks The private banks those got established after 1993 i.e. after banking sector reform bracketed as New Generation Private Sector Banks and they are well distinguished from old generation private sector banks.

Old Private Sector Banks

1. Bank of Rajasthan Ltd. 2. Catholic Syrian Bank Ltd

3. City Union Bank Ltd 4. Dhanalakshmi Bank Ltd. 5. Federal Bank Ltd 6. ING Vysya Bank Ltd 7. Jammu and Kashmir Bank Ltd 8. Karnataka Bank Ltd. 9. Karur Vysya Bank Ltd 10.Lakshmi Vilas Bank Ltd 11.Nainital Bank Ltd 12.Ratnakar Bank Ltd 13.SBI Commercial and International Bank Ltd. 14. South Indian Bank Ltd. 15.Tamilnad Mercantile Bank Ltd. 16.United Western Bank Ltd.

New generation Private sector banks

1. Axis Bank (Formerly UTI Bank Ltd)2. HDFC Bank 3. ICICI Bank 4. IndusInd Bank 5. Kotak Mahindra Bank 6. Yes Bank

Features of new generation Private sector banks

a. Technology- The private banks have used technology to provide quality service through lower cost delivery mechanisms.

b. Convergence- The new private banks are able to provide a range of financial services under one roof, thus increasing their fee based revenues.

c. High-end Customers- The new generation private sector banks mainly concentrate on high-end and high middle income segments.

d. Priority sector targets - The new generation private sector banks which rely on indirect financing to accomplish the priority sector targets.

e. Lucrative Business Areas -They made a strong presence in the most lucrative business areas in the country because of technology up gradation.

f. Operating Expenses - their operating expenses is low as compared to the PSU banks and their efficiency ratios (employee’s productivity and profitability ratios) is also high.

g. Value added services to customers and they undertake all most all the modern method of banking such as the internet banking, mobile banking, etc.

Advantage over public sector banks

They took advantage of the following problems concerning the nationalized / state sector banks

1. Large number of unprofitable branches2. Excess staffing 3. Mounting Non Performing Assets on account of intervention of Govt.4. Laggard in technology5. Development of innovative consumer oriented products 6. Lesser focus on marketing

They have made banking more efficient and customer friendly. In the process they have jolted public sector banks out of complacency and forced them to become more competitive.

Disadvantages of Private Banks

Private Banks runs like a business. Even though, there are lots of advantages to this, the major disappointment comes on the service charges, which is very much higher.

Deficient in public disclosure. Unorganized HR System The minimum balance for deposit accounts is much higher than the public

sector banks . Low focus on priority sector lending and financial inclusion.

MERGER OF PRIVATE SECTOR BANKS

Times bank with the HDFC Bank and that of ICICI Bank with Bank of Madura points at the possibility of further consolidation in the industry for adding values.

While in both these cases market immediately reacted sharply by increasing their capitalization and shareholders of both these banks saw appreciable increase in their wealth. This just goes on to prove that among other factors, bankers now will have to constantly seek to invest in technology and also be open to strategicalliances, M&A, restructuring and other exercises

IMPACT OF NEW PRIVATE SECTOR BANKS ON THE PERFORMANCE OF THE OLD PRIVATE SECTOR BANKS

With advent of latest technologies, professionalism, innovative product and services etc. the new generation private sector banks have set in dramatic changes and made visible impact on the business of the old private banks in the area of Growth, Credit Quality, Operational Efficiency, Profitability etc. Therefore the old private banks are forced to equip it to face the rising competition from the new private sector banks.

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At present, Private Banks in India include leading banks like ICICI Banks, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank, Kotak Mahindra Bank, SBI Commercial and International Bank, etc. Undoubtedly, being tech-savvy and full of expertise, private banks have played a major role in the development of Indian banking industry.

As per the guidelines for licensing of new banks in the private sector issued in January 1993, RBI had granted licenses to 10 banks. The main provisions/requirements are listed below:

Initial minimum paid-up capital shall be Rs. 200 crore; this will be raised to Rs. 300 crore within three years of commencement of business.

Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time; their contribution of 40 per cent shall be locked in for 5 years from the date of licensing of the bank and excess stake above 40 per cent shall be diluted after one year of bank’s operations.

Initial capital other than promoters’ contribution could be raised through public issue or private placement.

While augmenting capital to Rs. 300 crore within three years, promoters need to bring in at least 40 percent of the fresh capital, which will also be locked in for 5 years. The remaining portion of fresh capital could be raised through public issue or private placement.

NRI participation in the primary equity of the new bank shall be to the maximum extent of 40 per cent. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter, equity participation shall be limited to 20 per cent within the 40 per cent ceiling. Shortfall in NRI contribution to foreign equity can be met through contribution by designated multilateral institutions.

No large industrial house can promote a new bank. Individual companies connected with large industrial houses can, however, contribute up to 10 per cent of the equity of a new bank, which will maintain an arms length relationship with companies in the promoter group and the individual company/ies investing in equity. No credit facilities shall be extended to them.

NBFCs with good track record can become banks, subject to specified criteria

A minimum capital adequacy ratio of 10 per cent shall be maintained on a continuous basis from commencement of operations.

Priority sector lending target is 40 per cent of net bank credit, as in the case of other domestic banks; it is also necessary to open 25 per cent of the branches in rural/semi-urban areas.