Tamilnad Mercantile Bank Limited

Company Overview

Tamilnad Mercantile Bank Limited provides commercial banking products and services in India. The company provides deposit services and credit cards; house rent, personal, education, car, and home loans; traders, tractor, truck, and mortgage loans; IPO finance and SME credit; tax saving deposits; recurring, current, savings, and current deposit accounts; and cash certificates. It also provides bill payment, anywhere banking, mobile SMS banking, demat account, mutual fund marketing, RTGS, ECS, money transfer, and clearing services, as well as compensation and security representative policies. Tamilnad Mercantile Bank Limited was formerly known as The Nadar Bank Ltd. and changed its name to Tamilnad Mercantile Bank Limited in November 1962. The company was founded in 1921 and is headquartered in Tuticorin, India. Tamilnad Mercantile Bank Limited has branches in Andhra Pradesh, Delhi, Gujarat, Karnataka, Kerala, Maharashtra, Orissa, Pondicherry, Punjab, Rajasthan, Tamilnadu, Uttar Pradesh, and West Bengal.

Key developments for Tamilnad Mercantile Bank Limited

Tamilnad Mercantile Bank Limited Opens 221St Branch at Silvassa11/26/2010

Tamilnad Mercantile Bank Limited opened its 221st Branch at Silvassa, Dadra & Nagar Haveli (UT).

Tamilnad Mercantile Bank Limited Reports Earnings Results for the Six Months Ended September 30, 201010/31/2010

Tamilnad Mercantile Bank Limited reported earnings results for the six months ended September 30, 2010. For the period, the bank's net profit was INR 1,113.9 million, a growth of 62.68% on year-on-year basis against net profit of INR 684.7 million during the period last fiscal. Return on Assets (annualized) was up from 1.20% to 1.61%.

Tamilnad Mercantile Bank Limited to Open Branches in Colombo, Singapore; Provides Dividend Guidance for the Full Year of Fiscal 201010/8/2010

Tamilnad Mercantile Bank Limited is planning its foray abroad by opening branches in Sri Lanka, Malaysia and Singapore. The bank is looking to open a branch in Colombo first and then enter Singapore and Malaysia. In India, the bank is planning to add 20 branches before March 2011 and would also apply for licences for 100 more branches and to recruit 100 clerks. At present, the bank has 217 branches across the country. The company is planning for a record dividend of INR 1,000 per share for fiscal 2010. This follows a record dividend of INR 500 per share for fiscal 2008 and INR 600 per share in fiscal 2009.

Tamilnad Mercantile Bank Ltd Jobs

Tamilnad Mercantile Bank Ltd jobs are available to all Indian citizens. The bank invites job applicants to apply through their website. Recruitment in Tamilnad Mercantile Bank Ltd is through a written examination followed by an interview.

Tamilnad Mercantile Bank Ltd jobs are specially suitable for persons with an analytical bent of mind. Jobs in Tamilnad Mercantile Bank Ltd are ideal for persons with a commerce background. The Tamilnad Mercantile Bank Ltd recruitment process also welcomes job applicants from diverse streams like pure sciences and engineering.

Careers in Tamilnad Mercantile Bank Ltd start from the probationary officer level to the director and above. Economists are specially welcome in the bank.

A Study the Strategies Issue in Indian Banking Sector

1.0 INDIAN BANKING SYSTEM

A banking company in India has been defined in the banking companiesact,1949.as one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This activity is generally known as "remittance business" in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.

Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise."

KINDS OF BANKS

Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community.  Banks in the organized sector can be classified in to the following

1.      COMMERCIAL BANKS:-

Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial   banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.

2.      CO-OPERATIVE BANKS:-

Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:

                                                                                            

3.      SPECIALIZED BANKS:-

There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank     are important.

4. CENTRAL BANK:-

A central bank is the apex financial institution in the banking and financial system

of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution.  India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMY

Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:

1.     PROMOTING CAPITAL FORMATION:-

A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.

2.     ENCOURAGING INNOVATION:-

Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

3.     MONETSATION:-

Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.

4.     INFLUENCE ECONOMIC ACTIVITY

Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.

5.      FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.

 PRINCIPLES OF BANK LENDING POLICIES

The main business of banking company is to grant loans and advances to traders

as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:

1.      SAFETY

Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.

2.      LIQUIDITY

It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.

3.     PROFITABILITY

Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.

4.      PURPOSE OF LOAN

Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.

5.     PRINCIPLE OF DIVERSIFICATION OF RISKS

While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.

 OBJECTIVES OF THE STUDY

The following are the main objective of the studies.

1. To study the problem in financial crisis and money related query.

2. To evaluate banking is one of the most regulated businesses in the India.

3. To Analysis the role developing economy for the nation.

4. To study dynamic role in delivery and purchase of consumer durables.

 Scope of the Study

All persons need money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM

machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development.

So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures.

 METHODOLGY

Theoretical study conducted on the basis of secondary data, collected from books, journal and annual reports.

2. BANK PROFILE:

Indian Bank

Name of the Branch               : Karaikal. [0090]

Date of Opening                     : 1971

District/Port Open                : Karaikal/Port Town.

Category/Size                         : Large.

Population                              : Urban.

Computerisation          : CBS.

Name of the Branch Head      : R.Muralitharan (Senior Branch   Manager)

Staff Strength                         Officers                : 06

                                                Award Staff: 06

                                                Sub Staff               : 03

Productivity                           : Rs. 281.39 Lacs.

Branch Classification            : Profit Centre.

Location of the Branch      : No. 96-98 Bharathiyar Road, Karaikal-609607

Competition in the area        : Almost All Banks are functioning.

Potential Available                : Situated in a Commercial Area with a number of shops around Scope for trade finance. Branch has to tap more trade finance.

Computerised                         : ATM/CBS.

Commercial Activity             : Being a union territory, large commercial Industrial activities are on.

STRATEGIC ISSUES IN BANKING SERVICES

Strategic Planning is the process of analyzing the organizational external and internal environments; developing the appropriate mission, vision, and overall goals; identifying the general strategies to be pursued; and allocated resources.

• Mission is an organization's current purpose or reason for existing.

• Vision is an organization's fundamental aspirations and purpose that usually appeals to its member's hearts and minds.

• Goals are what an organization is committed to achieving.

• Strategies are the major courses of action that an organization takes to achieves goals.

• Resource Allocation is the earmarking of money, through budgets, for various purposes.

• Downsizing Strategy signals an organization's intent to rely on fewer resources primarily human-to accomplish its goals.

Tactical Planning is the process of making detailed decisions about what to do, which will do it, and how to do it-with a normal time and horizon of one year or less. The process generally includes:

• Choosing specific goals and the means of implementing the organization's strategic plan,

• Deciding on courses of action for improving current operations, and

• Developing budgets for each department, division and project.

TOTAL QUALITY MANAGEMENT

While Total Quality Management has proven to be an effective process for improving organizational functioning, its value can only be assured through a comprehensive and well thought out implementation process. TQM is, in fact, a large scale systems change, and guiding principles and considerations regarding this scale of change will be presented. Without attention to contextual factors, well intended changes may not be adequately designed. As another aspect of context, the expectations and perceptions of employees will be assessed, so that the implementation plan can address them. Specifically, sources of resistance to change and ways of dealing with them will be discussed. This is important to allow a change agent to anticipate resistances and design for them, so that the process does not bog down or stall. Next, a model of implementation will be presented, including a discussion of key principles. Visionary leadership will be offered as an overriding perspective for someone instituting TQM. In recent years the literature on change management and leadership has grown steadily, and applications based on research findings will be more likely to succeed. Use of tested principles will also enable the change agent to avoid reinventing the proverbial wheel. Implementation principles will be followed by a review of steps in managing the transition to the new system and ways of helping institutionalize the process as part of the organization's culture. Finally, some miscellaneous do's and don’ts will be offered.

Planned change processes often work, if conceptualized and implemented properly; but, unfortunately, every organization is different, and the processes are often adopted "off the shelf" "the 'appliance model of organizational change': buy a complete program, like a 'quality circle package,' from a dealer, plug it in, and hope that it runs by itself" (Kanter, 1983, 249). Alternatively, especially in the underfunded public and not for profit sectors, partial applications are tried, and in spite of management and employee commitment do not bear fruit. This chapter will focus on ways of preventing some of these disappointments. In summary, the purpose here is to review principles of effective planned

change implementation and suggest specific TQM applications. Several assumptions are proposed:

1. TQM is a viable and effective planned change method, when properly installed

2. Not all organizations are appropriate or ready for TQM

3. Preconditions (appropriateness, readiness) for successful TQM can sometimes be created

4. Leadership commitment to a large scale, long term, and cultural change is necessary.

While problems in adapting TQM in government and social service organizations have been identified, TQM can be useful in such organizations if properly modified.

For survival, banks have to make efforts to improve their quality and competitiveness by planning and taking innovative in fall areas:

·     Increase emphasis on customer focused activities

·     Intro a “total quality” program

·     Developing differential value added services

·     Educating employees through involvement programs

·     Increase quality through management and system

·     Increase effectiveness of product development

·     Developing product with lower uses costs

TQM principles

·     Customer satisfaction

·     Plan-do-check-act (PDCA) cycle

·     Management by 'fact' - 5Ws (what, why, who, when, and where) + 1H(how) approach

·     Respect for people

TQM elements

·   Total employee involvement (TEI)

·   Total waste elimination (TWE)

·   Total quality control (TQC)

TQM focus areas

·   Customer satisfaction

·   Product quality

·   Plant reliability

·   Waste elimination

Benefits achieved through TQM

·     Increased focus on the customer

·     Mindset of 'continuous improvement'

·     Better product quality

·     Better systems and procedures

·     Better cross-functional teamwork

·     Increased plant reliability

·     Waste elimination in offices and factories.

KNOWLEDGE MANAGEMENT

                According to Peter Drucker and Daniel Bell, the management Gurus knowledge is the only meaningful economic resource. Knowledge management can be defined as a systematic and integrative process of coordinating organization-wide activities of acquiring, creating, storing, sharing, diffusing, developing and deploying knowledge by individual and groups in the pursuit of major organizational goals. It also involves the creation of an interacting learning environment where organization members transfer and share what they know; and apply knowledge to solve problems, innovate and create new knowledge.

                Knowledge management is as much about people and culture as it is about technology. Knowledge management thrives only when the human communication network operates freely across the shortest path between the knowledge providers and knowledge seekers. There must be a culture that promotes and rewards the pooling together of knowledge resources. Thus organizations must build a culture that motivates people to create, share and use knowledge.

                After the preoccupation with system and procedures to collect data ad translate it into information, its time for firms to focus on the next plane- knowledge. Knowledge management is not a buzzword. Every knowledge management solution, if currently implemented, has definite measurable business benefits.

          Future business success increasingly depends on the retention and the creative use of the knowledge ideas and experiences of an organization and its employees. And in knowledge economy corporations need for workers will be more than the workers need for employer.

INNOVATION IN BANK

          Innovation drives organizations to grow, prosper and transform in sync with the changes in the environment, both internal and external. Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance and regulation. A liberalized and globalize financial infrastructure has provided an additional impetus to this gigantic effort.

           The pervasive influence of information technology has revolutionaries banking. Transaction costs have crumbled and handling of astronomical number of transactions in no time has become a reality. Internationally, the number brick and mortar structure has been rapidly yielding ground to click and order electronic banking with a plethora of new products. Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as a time tested way of targeting and serving clients, have readily embraced Customer Relationship Management (CRM), with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM has, therefore, become the new mantra in customer service management, which is both relationship based and information intensive.

          Risk management is no longer a mere regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the core of banking. We now see the evolution of many novel deferral products like credit derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant product innovation, is a very useful credit risk management tool that enhances liquidity and market efficiency. Securitization is yet another example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.

TECHNOLOGY IN BANKING

          Nobel Laureate Robert Solow had once remarked that computers are seen everywhere excepting in productivity statistics. More recent developments have shown how far this state of affairs has changed. Innovation in technology and worldwide revolution in information and communication technology (ICT) have emerged as dynamic sources of productivity growth. The relationship between IT and banking is fundamentally symbiotic.

In the banking sector, IT can reduce costs, increase volumes, and facilitate customized products; similarly, IT requires banking and financial services

to facilitate its growth. As far as the banking system is concerned, the payment system is perhaps the most important mechanism through which such interactive dynamics gets manifested. Recognizing the importance of payments and settlement systems in the economy, we have embarked on technology based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products such as the computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent of the value of cheques processed in the country, the computerization of Government Accounts and Currency Chest transactions, operationalisation of Delivery versus Payment (DvP) for Government securities transactions. Two-way inter-city cheque collection and imaging have been operationalised at the four metros. The coverage of Electronic Clearing Service (Debit and Credit) has been significantly expanded to encourage non-paper based funds movement and develop the provision of a centralized facility for effecting payments. The scheme for Electronic Funds Transfer operated by the Reserve Bank has been significantly augmented and is now available across thirteen major cities. The scheme, which was originally intended for small value transactions, is processing high value (upto Rs.2 crore) from October 1, 2001. The Centralized Funds Management System (CFMS), which would enable banks to obtain consolidated account-wise and centre-wise positions of their balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has begun to be implemented in a phased manner from November 2001.

          A holistic approach has been adopted towards designing and development of a modern, robust, efficient, secure and integrated payment and settlement system taking into account certain aspects relating to potential risks, legal framework and the impact on the operational framework of monetary policy. The approach to the modernization of the

payment and settlement system in India has been three-pronged:                  (a) consolidation, (b) development, and (c) integration. The consolidation of the existing payment systems revolves around strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing Services and Electronic Funds Transfer by providing for systems with the latest levels of technology. The critical elements in the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the INFINET; optimizing the deployment of resources by banks through Real Time Gross Settlement System, Centralized Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structured Financial Messaging Solution (SFMS). While integration of the various payment products with the systems of individual

banks is the thrust area, it requires a high degree of standardization within a bank and seamless interfaces across banks.

          The setting up of the apex-level National Payments Council in May 1999 and the operationalisation of the INFINET by the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad have been some important developments in the direction of providing a communication network for the exclusive use of banks and financial institutions. Membership in the INFINET has been opened up to all banks in addition to those in the public sector. At the base of all inter-bank message transfers using the INFINET is the Structured Financial Messaging System (SFMS). It would serve as a secure communication carrier with templates for intra- and inter-bank messages in fixed message formats that will facilitate ‘straight through processing’. All inter-bank transactions would be stored and switched at the central hub at Hyderabad while intra bank messages will be switched and stored by the bank gateway. Security features of the SFMS would match international standards.

          In order to maximize the benefits of such efforts, banks have to take pro-active measures to:

·     further strengthen their infrastructure in respect of standardization, high levels

·     of security and communication and networking;

·     achieve inter-branch connectivity early;

·     popularize the usage of the scheme of electronic funds transfer (EFT); and

·     Institute arrangements for an RTGS environment online with a view to integrating into a secure and consolidated payment system.

Information technology has immense untapped potential in banking. Strengthening of information technology in banks could improve the effectiveness of asset-liability management in banks. Building up of a related data-base on a real time basis would enhance the forecasting of liquidity greatly even at the branch level. This could contribute to enhancing the risk management capabilities of banks.

REGULATIONS AND COMPLIANCE

          Progressive strengthening, deepening and refinement of the regulatory and supervisory system for the financial sector have been important elements of financial sector reforms. In the long run, it is the supervision and regulation function that is critical in safeguarding financial stability. There is also some evidence that proactive and effective supervision contributes to the efficiency of financial intermediation.  Financial sector supervision is expected to become increasingly risk-based and concerned with validating systems rather than setting them. This will entail procedures for sound internal evaluation of risk for banks. As mentioned earlier, bank managements will have to develop internal capital assessment processes in accordance with their risk profile and control environment. These internal processes would then be subjected to review and supervisory intervention if necessary. The emphasis will be on evaluating the quality of risk management and the adequacy of risk containment. In such an environment, credibility assigned by markets to risk disclosures will hold only if they are validated by supervisors. Thus effective and appropriate supervision is critical for the effectiveness of capital requirements and market discipline.

          In certain areas, as for instance, in the urban cooperative banking segment, the regulatory requirements leave considerable scope for regulatory arbitrage and even circumvention. The problem is rendered more complex by the existence of regulatory overlap between the Central Government, the State Governments and the Reserve Bank. Regulatory overlap has impeded the speed of regulatory response to emerging problems. The need for removing multiple regulatory jurisdictions over the cooperative banking sector has been reiterated on several occasions. In this regard, the Reserve Bank has proposed the setting up of an apex supervisory body for urban cooperative banks under the control of a high-level supervisory board consisting of representatives of the Central governments, the State governments, the Reserve Bank and experts. The apex body is expected to ensure compliance with prudential requirements and also supervise on-site inspections and off-site surveillance.

          Recent developments in certain segments of the financial sector have also brought to the fore issues relating to corporate governance in banks. As part of on-going reforms, boards have been given greater autonomy to prescribe internal control guidelines, risk management and procedures for market discipline and accountability. It is extremely important that greater vigilance over adherence to these norms goes hand-in-hand with greater autonomy. Recent evidence of transgression of prudential guidelines by a few banks has raised the issue of the audit and supervisory functions of boards. As we move towards a more deregulated financial regime, these functions have to be transferred from either the Government or the Reserve Bank to bank boards. This imposes a greater responsibility and accountability on the bank management. It is in this context that a consultative group of directors of select banks and other experts has been set up to recommend measures to strengthen the internal supervisory role of boards. The objective is to obtain a feedback on how boards function vis-à-vis compliance with prudential norms, transparency and disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for ensuring management discipline.

          Several other initiatives in improving the supervisory function have been undertaken, including a prudential supervisory reporting system for financial institutions, improvements in procedures for financial inspection, sensitizing the general public for better regulation of the activities of NBFCs and enactment of appropriate legislation to protect depositor interests in some States. Major legal reforms have been initiated in areas

such as security laws, the Negotiable Instruments Act, bank frauds and the regulatory framework of banking. The Reserve Bank has also accepted the principle of transfer of ownership to the Government in respect of some financial institutions in view of the conflict of interest that may arise in the conduct of its supervisory function. It is expected that these initiatives will pave the way for an efficient, and risk-based supervisory environment in India.

          The largest set of consolidated regulations that mandate integrity of data in India are the IT Act and SEBI's clause 49 for listed companies. These regulations do not currently enforce the kind of security standards that are common in Europe and the US. In a global economy, however, no company is an island and India Inc is adopting US and European compliance procedures and certifications such as Sarbanes Oxley, Safe Harbour, BS, and ISO.

          Compliance, regulatory or otherwise, does not directly concern the IT department. In manufacturing for instance, compliance controls don't really involve system security, and a

large part of the quality control required by authorities cannot be imposed or enforced using IT. Companies that deal with sensitive information, financial services and BPOs, banks, MNC subsidiaries or those with plans to expand beyond Indian shores are all affected. These will continue to make strides towards compliance. For the mediumscale segment (Rs 100-300 crore turnover), security and audits are not a priority. This segment is comfortable with public mail servers, and exchanging information over not very secure connections.

CORPORATE GOVERNANCE - CODE OF CONDUCT

1. Need and objective of the Code

          Clause 49 of the Listing agreement entered into with the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on the Board of an entity and its Senior Management. The term "Senior Management" shall mean personnel of the company who are members of its core management team excluding the Board of Directors. This would also include all members of management, one level below the Executive Directors including all functional heads.

2. Bank's Belief System

          This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and conduct its daily business with its multitudinous stakeholders, government and regulatory agencies, media and anyone else with whom it is connected. It recognizes that the Bank is a trustee and custodian of public money and in order to fulfill fiduciary obligations and responsibilities, it has to maintain and continue to enjoy the trust and confidence of public at large.

          The Bank acknowledges the need to uphold the integrity of every transaction it enters into and believes that honesty and integrity in its internal conduct would be judged by its external behavior. The bank shall be committed in all its actions to the interest of the countries in which it operates. The Bank is conscious of the reputation it carries amongst its customers and public at large and shall endeavor to do all it can to sustain and improve

upon the same in its discharge of obligations. The Bank shall continue to initiate policies, which are customer centric and which promote financial prudence.

A. General Standards of conduct

          The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees and other stakeholders and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. The Directors and members of the Core Management while discharging duties of their office must act honestly and with due diligence. They are expected to act with that amount of utmost care and prudence, which an ordinary person is expected to take in his/ her own business. These standards need to be applied while working in the premises of the Bank, at offsite locations where business is being conducted whether in India or abroad, at Bank-sponsored business and social events, or at any other place where they act as representatives of the Bank.

B. Conflict of Interest

          A "conflict of interest" occurs when personal interest of any member of the Board of Directors and of the Core management interferes or appears to interfere in any way with the interests of the Bank. Every member of the Board of Directors and Core Management has a responsibility to the Bank, its stakeholders and to each other. Although this duty does not prevent them from engaging in personal transactions and investments, it does demand that they avoid situations where a conflict of interest might occur or appear to occur. They are expected to perform their duties in a way that they do not conflict with the Bank's interest such as :

· Employment /Outside Employment - The members of the Core Management are expected to devote their total attention to the business interests of the Bank. They are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.

· Business Interests - If any member of the Board of Directors and Core Management considers investment in securities issued by the Bank's customer, supplier or competitor,

they should ensure that these investments do not compromise their responsibilities to the Bank. Many factors including the size and nature of the investment; their ability to influence the Bank's decisions, their access to confidential information of the Bank, or of the other entity, and the nature of the relationship between the Bank and the customer, supplier or competitor should be considered in determining whether a conflict exists. Additionally, they should disclose to the Bank any interest that they have which may conflict with the business of the Bank.

C. Applicable Laws

      The Directors of the Bank and Core Management must comply with applicable laws,regulations, rules and regulatory orders. They should report any inadvertent non -compliance, if detected subsequently, to the concerned authorities.

D. Disclosure Standards

      The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports required to be filed with Government and Regulatory agencies. The members of Core Management of the bank shall initiate all actions deemed necessary for proper dissemination of relevant information to the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws, rules and regulations.

E. Use of Bank's Assets and Resources

      Each member of the Board of Directors and the Core Management has a duty to the Bank to advance its legitimate interests while dealing with the Bank's assets and resources. Members of the Board of Directors and Core Management are prohibited from:

·   Using Corporate property, information or position for personal gain,

·   Soliciting, demanding, accepting or agreeing to accept anything of value from any person while dealing with the Bank's assets and resources,

·  Acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a significant direct or indirect interest.

F. Confidentiality and Fair Dealings

(i) Bank's confidential Information

·   The Bank's confidential information is a valuable asset. It includes all

trade related information, trade secrets, confidential and privileged information, customer information, employee related information, strategies, administration, research in connection with the Bank and commercial, legal, scientific, technical data that are either provided to or made available each member of the Board of Directors and the core Management by the Bank either in paper form or electronic media to facilitate their work or that they are able to know or obtain access by virtue of their position with the Bank. All confidential information must be used for Bank's business purposes only.

·    This information includes the safeguarding, securing and proper disposal of confidential information in accordance with the Bank's policy on maintaining and managing records. The obligation extends to confidential of third parties, which the Bank has rightfully received under non-disclosure agreements.

·   To further the Bank's business, confidential information may have to be disclosed to potential business partners. Such disclosures should be made after considering its potential benefits and risks. Care should be taken to divulge the most sensitive information, only after the said potential business partner has signed a confidentiality agreement with the Bank.

·     Any publication or publicly made statement that might be perceived or construed as attributable to the Bank, made outside the scope of any appropriate authority in the Bank, should include a disclaimer that the publication or statement represents the views of the specific author and not the Bank.

(ii) Other Confidential Information

      The bank has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Bank to enter into a business relationship. At other times, the Bank may request that a third party provide confidential information to permit the Bank to evaluate a potential business relationship with the party. Therefore, special care must be taken by the Board of Directors and members of the Core Management to handle the confidential information of others responsibly. Such confidential information should be handled in accordance with the agreements with such third parties.

·   The Bank requires that every Director and the member of Core Management, General Managers should be fully compliant with the laws, statutes, rules and regulations that have the objective of preventing unlawful gains of any nature whatsoever.

·   Directors and members of Core Management shall not accept any offer, payment, promise to pay or authorization to pay any money, gift or anything of value from customers, suppliers, shareholders/ stakeholders etc that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commission of fraud or opportunity for the commission of any fraud.

4. Good Corporate Governance Practices

      Each member of the Board of Directors and Core Management of the Bank should adhere to the following so as to ensure compliance with good Corporate Governance practices.

(a) Dos

§ Attend Board meetings regularly and participate in the deliberations and discussions effectively.

§  Study the Board papers thoroughly and enquire about follow-up reports on definite time schedule.

§ Involve actively in the matter of formulation of general policies.

·     Be familiar with the broad objectives of the Bank and policies laid down by the Government and the various laws and legislations.

·     Ensure confidentiality of the Bank's agenda papers, notes and minutes.

(b) Don'ts

·     Do not interfere in the day to day functioning of the Bank.

·     Do not reveal any information relating to any constituent of the Bank to anyone.

·     Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads.

·     Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers and other professionals etc.

·     Do not do anything, which will interfere with and/ or be subversive of maintenance of discipline, good conduct and integrity of the staff.

5. Waivers

·  Any waiver of any provision of this Code of Conduct for a

member of the Bank's Board of Directors or a member of the Core Management must be approved in writing by the Board of Directors of the Bank.

The matters covered in this Code of Conduct are of the utmost importance to the bank, its stakeholders and its business partners, and are essential to the Bank's ability to conduct its business in accordance with its value system.

ENTREPRENEURSHIP

      Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship may involve creating many job opportunities.

      Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. Schumpeter (1950), an entrepreneur is a

person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces "creative destruction" across markets and industries, simultaneously creating new products and business models and eliminating others. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Despite Schumpeter's early 20th-century contributions, the traditional microeconomic theory of economics has had little room for entrepreneurs in their theories.

Characteristics of entrepreneurship:-

§   The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force of an entrepreneurship

§   The vision is usually supported by a set of ideas that have not been aware by the majority of the market/industry

§   The overall blueprint to realize the vision is clear, however details may be incomplete, flexible, and evolving

§    The entrepreneur promotes the vision with an influential passion

§   With a persistent and deterministic mindset, the entrepreneur devises a set of entrepreneurial strategies to thrive for the vision

PERFORMANCE AND BENCHMARKING

• PERFORMANCE MANAGEMENT:-

      Performance management is a systematic approach to improving worker productivity through a year-round, ongoing process of communicating and managing performance expectations. With Performance-based Management, performance improvement becomes the joint responsibility of employees and their managers. Generally there are two things which determine how successful a performance appraisal system is in place in an organization.

      1) The contents/design of the performance appraisal form and

      2) The manner in which Performance Appraisal is conducted.

      While organizations lay great emphasis on the contents/design part, spending much of time, money and energy on designing most suitable, objective, comprehensive formats, it serves no purpose if the appraising process is not conducted properly.

      Performance-based Management measures, evaluates and improves performance on the job. You can expect employee productivity to increase because performance assessments and performance feedback will always be job-related, even if the duties of a particular job expand or change. Furthermore, because this type of performance management focuses on productivity and not personality and since it involves ongoing, open, two-way communication between manager and employee, it greatly reduces many of the stereotypes, problems and anxieties associated with traditional labor-intensive

      A benchmark is a point of reference for a measurement. The term presumably originates from the practice of making dimensional height measurements of an object on a workbench using a graduated scale or similar tool, and using the surface of the workbench as the origin for the measurements.

      Benchmarks are designed to mimic a particular type of workload on a component or system. "Synthetic" benchmarks do this by specially-created programs that impose the workload on the component. "Application" benchmarks, instead, run actual real-world programs on the system. Whilst application benchmarks usually give a much better measure of real-world performance on a given system, synthetic benchmarks still have their use for testing out individual components, like a hard disk or networking device.

Computer manufacturers have a long history of trying to set up their systems to give unrealistically high performance on benchmark tests that is not replicated in real usage. For instance, during the 1980s some compilers could detect a specific mathematical operation used in a well-known floating-point benchmark and replace the operation with a mathematically-equivalent operation that was much faster. However, such a transformation was rarely useful outside the benchmark. Manufacturers commonly report only those benchmarks (or aspects of benchmarks) that show their products in the best light. They also have been known to mis-represent the significance of benchmarks, again to show their products in the best possible light. Taken together, these practices are called bench-marketing.

       Users are recommended to take benchmarks, particularly those provided by manufacturers themselves, with ample quantities of salt. If performance is really critical, the only benchmark that matters is the actual workload that the system is to be used for. If that is not possible, benchmarks that resemble real workloads as closely as possible should be used, and even then used with skepticism. It is quite possible for system A to outperform system B when running program "furble" on workload X (the workload in the benchmark), and the order to be reversed with the same program on your own workload.

• BENCHMARKING:-

        Benchmarking (Comparing) is a selective method of finding out how and why some companies can perform tasks much better than other companies. There can be as much as a tenfold difference in the quality, speed and cost-performance of an average company versus a world-class company.

It involves the following seven steps

1) Determine functions to benchmark.

2) Identify the key performance variables to measure.

3) Identify the best-in-class companies.

4) Measure performance of best-in-class companies

5) Measures the company's performance.

6) Specify programs and actions to close the gap

7) Implement and monitor results

      A company can identify "best practices" companies by asking employees, customers, suppliers and distributors what they rate as doing the best. Major Consulting Firms can also be contacted for this purpose. To keep costs under control, a company should focus primarily on benchmarking those critical tasks that deeply affect customer satisfaction and Cost Management and where substantially better performance is known to exist.

Recent Banking Development In India

Reserve Bank of India the central bank and monetary authority of India, is the central regulatory and supervisory authority for the Indian financial system

. A variety of financial intermediaries in the public and private sectors participate in India's financial sector, including the following:

Commercial banks comprising a. public sector banks; b. private sector banks; and c. foreign banks

Cooperative banks; Long-term lending institutions; Non-bank finance companies, including housing finance companies; Other  specialized   financial   institutions,   and   state-level financial institutions; Insurance companies; and Mutual funds.

Statutory Pre-Emotions

In the pre-reforms phase, the Indian banking system operated with a high level of statutory preemptions, in the form of both the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR), reflecting the high level of the country's fiscal deficit and its high degree of monetization. Efforts in the recent period have been focused on lowering both the CRR and SLR. The statutory I minimum of 25 per cent for the SLR was reached as early as 1997, and while the Reserve Bank continues to pursue its medium-term objective of reducing the CRR to the statutory minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks (SCBs) is currently placed at 5.0 per cent of NDTL (net demand and time liabilities). The legislative changes proposed by the Government in the Union Budget, 2005-06 to remove the limits on the SLR and CRR are expected to provide freedom to the Reserve Bank in the conduct of monetary policy and also lend further flexibility to the banking system in the deployment of resources.

Interest Rate Structure

Deregulation of interest rates has been one of the key features of financial sector reforms. In recent years, it has improved the competitiveness of the financial environment and strengthened the transmission mechanism of monetary policy. Sequencing of interest rate deregulation has also enabled better price discovery and imparted greater efficiency to the resource allocation process.

The process has been gradual and predicated upon the institution of prudential regulation of the banking system, market behavior, financial opening and, above all, the underlying macroeconomic conditions.

Interest rates have now been largely deregulated except in the case of:

Savings deposit accounts;

Non-resident Indian (NRI) deposits;

Small loans up to Rs.2 lakh; and export credit.

After the interest rate deregulation, banks became free determine their own lending interest rates. As advised by the Indian Banks' Association (a self-regulatory organization for banks), commercial banks determine their respective BPLR (benchmark prime lending rates) taking into consideration:

Actual cost of funds; Operating expenses; and A minimum margin to cover regulatory requirements of provisioning and capital charge

and profit margin.

These factors differ from bank to bank and feed into the determination of BPLR and spreads of banks. The BPLRs of public sector banks declined to 10.25-11.25 per cent in March 2005 from 10.25-11.50 per cent in March 2004. With a view to granting operational autonomy to public sector banks, public ownership in these banks was reduced by allowing them to raise capital from the equity market of up to 49 per cent of paid-up capital. Competition is being fostered by permitting new private sector banks, and more liberal entry of branches of foreign banks, joint-venture banks and insurance companies. Recently, a roadmap for the presence of foreign banks in India was released which sets out the process of the gradual opening-upof the banking sector in a transparent manner. Foreign investments in the financial sector in the form of Foreign Direct

Investment (FDI) as well as portfolio investment have been permitted. Furthermore, banks have been allowed to diversify product portfolio and business activities. The share of public sector banks in the banking business is going down, particularly in metropolitan areas. Some diversification of ownership in select public sector banks has helped further the move towards autonomy and thus provided some response to competitive pressures; Transparency and disclosure standards have been enhanced to meet international standards in an ongoing manner.

Prudential Regulation

Prudential norms related to risk-weighted capital adequacy requirements, accounting, income recognition, provisioning and exposure were introduced in 1992 and gradually these norms have been brought up to international standards. Other initiatives in the area of strengthening prudential norms include measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending and risk concentration, application of the mark-to-market principle for investment portfolios and limits on deployment of funds in sensitive activities.

Keeping in view the Reserve Bank's goal to achieve consistency and harmony with international standards and our approach to adopt these standards at a pace appropriate to our context, it has

been decided to migrate to Basel II. Banks are required to maintain a minimum CRAR (capital to risk weighted assets ratio) of 9 per cent on an ongoing basis. The capital requirements are uniformly applied to all banks, including foreign banks operating in India, by way of prudential guidelines on capital adequacy. Commercial banks in India will start implementing Basel II with effect from March 31, 2007. They will initially adopt the Standardized Approach for credit risk and the Basic Indicator Approach for operational-risk. After adequate' skills have been developed, at both bank and supervisory level, some banks may be allowed to migrate to the Internal Ratings-Based (IRB) Approach. Banks have also been advised to formulate and operationalize the Capital Adequacy Assessment Process (CAAP) as required under Pillar II of the New Framework, Some of the other regulatory initiatives relevant to Basel II that have been implemented by the Reserve Bank are:

Ensuring that banks have a suitable risk management framework oriented towards their requirements and dictated by the size and complexity of their business, risk philosophy, market perceptions and expected level of capital.

Introducing Risk-Based Supervision (RBS) in select banks on a pilot basis.

Encouraging banks to formalize their CAAP in alignment with their business plan and performance budgeting system. This, together with the adoption of RBS should aid in fulfilling the Pillar II requirements under Basel II.

Expanding the area of disclosures Pillar III) so as to achieve greater transparency regarding the financial position and risk profile of banks.

Building capacity to ensure the regulator's ability to identify    eligible    banks    and    permit    them    to adopt IRB/Advanced Measurement approaches.

With a view to ensuring migration to Basel II in a non-disruptive manner, a consultative and participative approach has been adopted for both designing and implementing the New Framework. A Steering Committee comprising senior officials from 14 banks (public, private and foreign) with representation from the Indian Banks' Association and the Reserve Bank has been constituted. On the basis of recommendations of the Steering Committee, draft guidelines on implementation of the New Capital Adequacy Framework have been issued to banks. In order to assess the impact of Basel II adoption in various jurisdictions and recalibrate the proposals, the BCBS is currently undertaking the Fifth Quantitative Impact Study (QIS 5). India will be participating in the study, and has selected 11 banks which form a representative sample for this purpose. These banks account for 51.20 per cent of market share in terms of assets. They have been advised to familiarize themselves with the QIS 5 requirements to enable them to participate in the exercise effectively. The Reserve Bank is currently focusing on the issue of recognition of the external rating agencies for use in the Standardized Approach for credit risk.

As a well-established risk management system is a prerequisite for implementation of advanced approaches under the New Capital Adequacy Framework, banks were required to examine the various options available under the Framework and draw up a roadmap for migration to Basel II. The feedback received from banks suggests that a few may be keen on implementing the advanced approaches. However, not all are fully equipped to do so straightaway and are,

therefore, looking to migrate to the advanced approaches at a later date. Basel II provides that banks should be allowed to adopt/migrate to advanced approaches only with the specific approval of the supervisor, after ensuring that they satisfy the minimum requirements specified in the Framework, not only at the time of adoption/migration, but on a continuing basis. Hence, banks desirous of adopting the advanced approaches must perform a stringent assessment of their compliance with the minimum requirements before they shift gears to migrate to these approaches. In this context, current non-availability of acceptable and qualitative historical data relevant to internal credit risk ratings and operational risk losses, along with the related costs involved in building up and maintaining the requisite database, is expected to influence the pace of migration to the advanced approaches available under Basel II.

Exposure Norms

The Reserve Bank has prescribed regulatory limits on banks' exposure to individual and group borrowers to avoid concentration of credit, and has advised banks "to fix limits on their exposure to specific industries or sectors (real estate) to ensure better risk j management. In addition, banks are also required to observe certain statutory and regulatory limits in respect of their exposures to capital markets.

Asset - Liability Management

In view of the growing need for banks to be able to identify, measure, monitor and control risks, appropriate risk management guidelines have been issued from time to time by the Reserve Bank, including guidelines on Asset-Liability Management (ALM). These guidelines are intended to serve as a benchmark for banks to establish an integrated risk management system.

However, banks can also develop their own systems compatible with type and size of operations as well as risk perception and put in place a proper system for covering the existing deficiencies and the requisite upgrading.

Detailed guidelines on the management of credit risk, market risk, operational risk, etc. have also been issued to banks by the Reserve Bank. The progress made by the banks is monitored on a quarterly basis. With regard to risk management techniques, banks are at different stages of drawing up a comprehensive credit rating system, undertaking a credit risk assessment on a half yearly basis, pricing loans on the basis of risk rating, adopting the Risk-Adjusted Return on Capital (RAROC) framework of pricing, etc. Some banks stipulate a quantitative ceiling on aggregate exposures in specified risk categories; analyze rating-wise distribution of borrowers in various industries, etc.

In respect of market risk, almost all banks have an Asset- Liability Management Committee. They have articulated market risk management policies and procedures, and have undertaken studies of behavioral maturity patterns of various components of on-/off-balance sheet items.

NPL Management

Banks have been provided with a menu of options for disposal recovery of NPLs (non-performing loans). Banks resolve / recover their NPLs through compromise/one time settlement, filing of suits, Debt Recovery Tribunals, the Lok Adalat (people's court) forum, Corporate Debt Restructuring (CDR), sale to securitization / reconstruction companies and other banks or to non-banking finance companies (NBFCs). The promulgation of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 and its subsequent amendment have strengthened the position of creditors. Another significant measure has been the setting-up of the Credit Information Bureau for information sharing on defaulters and other borrowers. The role of Credit Information Bureau of India Ltd. (CIBIL) in improving the quality of credit analysis by financial institutions and banks need hardly be overemphasized. With the enactment of the Credit Information Companies (Regulation) Act, 2005, the legal framework has been put in place to facilitate the full-fledged operationalization of CIBIL and the introduction of other credit bureaus.

Board for Financial Supervision (BFS)

An independent Board for Financial Supervision (BFS) under the aegis of the Reserve Bank has been established as the apex supervisory authority for commercial banks, financial institutions, urban banks and NBFCs. Consistent with international practice, the Board's focus is on offsite and on-site inspections and on banks' internal control systems. Offsite surveillance has been strengthened through control returns. The role of statutory auditors has been emphasized with increased internal control through strengthening of the internal audit function. Significant progress has been made in implementation of the Core Principles for Effective Banking Supervision. The supervisory rating system under CAMELS has been established, coupled with a move towards risk-based supervision.

Consolidated supervision of financial conglomerates has since been introduced with bi-annual discussions with the financial conglomerates. There have also been initiatives aimed at strengthening corporate governance through enhanced due diligence on important shareholders, and fit and proper tests for directors.

A scheme of Prompt Corrective Action (PCA) is in place for attending to banks showing steady deterioration in financial health. Three financial indicators, viz. capital to risk-weighted assets ratio (CRAR, net non-performing assets (net NPA) and Return on Assets (ROA) have been identified with specific threshold limits. When the indicators .fall below the threshold level (CRAR, ROA) or go above it (net NPAs), the PCA scheme envisages certain structured / discretionary actions to be taken by the regulator.

The structured actions in the case of CRAR falling below the trigger point may include, among other things, submission and implementation of a capital restoration plan, restriction on expansion of risk weighted assets, restriction on entering into new lines of business, reducing/skipping dividend payments, and requirement for recapitalization.

The structured actions in the case of ROA falling below the trigger level may include, among other things, restriction on accessing/renewing costly deposits and CDs, a requirement to take

steps to increase fee-based income and to contain administrative expenses, not to enter new lines of business, imposition of restrictions on borrowings from the inter bank market, etc.

In the case of increasing net NPAs, structured actions will include, among other things, undertaking a special drive to reduce thestock of NPAs and containing the generation of fresh NPAs, reviewing the loan policy of the bank, taking steps to upgrade credit appraisal skills and systems and to strengthen follow-up of advances, including a loan review mechanism for large loans, following up suit filed/ decreed debts effectively, putting in place proper credit risk management policies / processes / procedures / prudential limits,- reducing loan concentration, etc.

Discretionary action may include restrictions on capital expenditure, expansion in staff, and increase of stake in subsidiaries. The Reserve Bank/Government may take steps to change promoters/ ownership and may even take steps to merge/amalgamate/liquidate the bank or impose a moratorium on it if its position does not improve within an agreed period.

Technological Infrastructure

In recent years, the Reserve Bank has endeavored to improve the efficiency of the financial system by ensuring the presence of a safe, secure and effective payment and settlement system. In the process, apart from performing regulatory and oversight functions the Reserve Rank has also played an important role in promoting the system's functionality and modernization on an ongoing basis. The consolidation of the existing payment systems revolves around strengthening computerized cheque clearing, and expanding the reach of Electronic Clearing Services (ECS) and Electronic Funds Transfer (EFT). The critical elements of the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the Indian Financial Network (INFINET) and the development of a Real-Time Gross Settlement (RTGS) System, a Centralized Funds Management System (CFMS), a Negotiated Dealing System (NDS) and the Structured Financial Messaging System (SFMS). Similarly, integration of the various payment products with the systems of individual banks has been another thrust area.

An Assessment

These reform measures have had a major impact on the overall efficiency and stability of the banking system in India. The dependence of the Indian banking system on volatile liabilities to finance its assets is quite limited, with the funding volatility ratio at -0.17 per cent as compared with a global range of-0.17 to 0.11 per cent. The overall capital adequacy ratio of banks at end-March 2005 was 12.8 per cent as against the regulatory requirement of 9 per cent which itself is higher than the Basel norm of 8 per cent. The capital adequacy ratio was broadly comparable with the global range. There has been a marked improvement in asset quality with the percentage of gross NPAs to gross advances for the banking system declining from14.4 per cent in 1998 to 5.2 per cent in 2005. Globally, the NPL ratiovaries widely from a low of 0.3 per cent to 3.0 per cent in developed economies, to over 10.0 per cent in several Latin American economies. The reform measures have also resulted in an improvement in the profitability of banks. ROA rose from 0.4 per cent in the year 1991-92 to 0.9 per cent in 2004-05. Considering that, globally, ROA was in the range -1.2 to 6.2 per cent for 2004, Indian banks are well placed. The banking

sector reforms have also emphasized the need to review manpower resources and rationalize requirements by drawing up a realistic plan so as to reduce operating cost and improve profitability. The cost to income ratio of 0.5 per cent for Indian banks compares favorably with the global range of 0.46 per cent 10- 0.68 per cent and vis-a-vis 0.48 per cent to 1.16 per cent for the world's largest banks.

Comparative study of non interest income of the Indian Banking Sector

Introduction

There are two broad sources of bank revenues:

1. Interest income 2. Non-interest income.

Interest income is generated from what is known as “the spread.” The spread is the difference between the interest a bank earns on loans extended to customers, corporate etc and the interest paid to depositors for the use of their money. It is also earned from any securities that the banks own, such as treasury bills or bonds.

Non-interest income is earned by providing a variety of services, such as trading of securities, assisting companies to issue new equity financing, securities commissions and wealth management, sale of land, building, profit and loss on revaluation of assets etc.

As compared to the developed world, the Indian banking sector, apart from the relying on traditional sources of revenue like loan making are also focusing on  the activities that generate fee income, service charges, trading revenue, and other types of noninterest income. While noninterest income plays an important role in banking revenues in the developed world, its contribution to the total income of the Indian banking was 25% as on 31st March 2008.

Components of non interest income

The major components of non interest income in our banking sector are as follows:

1. Commission/ exchange and brokerage2. Profit or loss on Sale of investments3. Profit or loss Sale of land& buildings4. Profit/loss on revaluation of investments5. Profit or loss on Exchange transaction etc.

6. Miscellaneous income source which includes advisory, trading etc.

Share of various sources of non interest income

The share of various sources of non interest income to the total income of banking sector as on 31st march 2008 is shown in the pie chart below:

In the above figure we find that the highest contribution to the non interest income has been of the commission followed by sale of investments, miscellaneous income and exchange transactions.

Movements of interest and non interest income of the Indian banking sector (1994-2004)

Methodology

Under this I have done a comparative study of non interest income of the Indian banking sector by classifying banks into four categories:

1. SBI and associates which includes State bank of India, State bank of Bikaner and Jaipur, State bank of Hyderabad, State bank of Mysore, State bank of Patiala, State bank of Saurashtra and State bank of Travancore.

1. Nationalized banks: (Public sector banks) which includes Allahabad bank, Andhra bank, Bank of Baroda, Bank of India, Bank of Maharashtra,  Canara bank, Central Bank of India, Corporation bank, Dena bank, Indian bank, Indian Overseas bank, New bank of India, Oriental bank of Commerce, Punjab &Sind bank, Punjab National Bank, Syndicate bank, UCO bank, Union bank of India, United bank of India, Vijaya bank.( Total 19)

1. Other scheduled banks: (Private sector banks) which includes Development credit bank, Times bank, Axis bank, Indus land Bank, ICICI bank, Bank of Rajasthan, Catholic Syrian bank, Lakshmi Vilas bank, HDFC bank, Centurion bank, Bank of Punjab, Tamilnad Mercantile Bank, Federal bank, Punjab Cooperative bank, Lord Krishna bank, ING Vyasya bank, IDBI bank, Dhanlakshmi bank.(total 18 banks)

1. Foreign banks:  which includes Barclays bank, ING bank, ABN Amro bank, Bank of

America, BNP  Paribas, Standard Chartered bank, DBS bank ,Citibank, HSBC, Deutsche

bank, Mashreq bank, Bank of Nova Scotia, Bank of Bahrain & Kuwait, American Express bank (total 14 banks)

The banks used under private sector and foreign sector category are reflective of major portion of their respective market/category. Moreover data was not available for other banks within that category.

The period of study taken was 11 years i.e. 1994-2004. The period of study was taken as 11 years because, for the above mentioned period the data was available for all the bank and to ensure uniformity.

Objectives of the study:

1. To analyze the growth of non interest income as a source of revenue for the Indian banking sector over a period of 11 years (1994-2004).

2. To analyze the contribution of major components of the non interest income over a period of 11 years (1994-2004).

3. To find out statistically that how much of the profits of the banking sector over a period of 11 years is determined by non interest income and interest income.

4. To find out statistically the contribution of various components of Non interest income towards the profits of the bank over a period of 11 years.

5. To find out the contribution of interest and non interest income towards the total income in each of the 11 years (1994-04).

6. To find out the correlation between the non interest income and the total income of the banking sector over a period of 11 years.

7. To find out the reasons for the increase in the non interest income and what are the challenges involved to generate non interest income.

Tool used:

Data regarding the interest income, non interest income, profits, various components of non interest income, total income of the banking sector has been collected from the RBI website.

To find out the influence of interest and non interest income on the profits of the banking sector, I have made use of multiple regression tool in E-views software.

The interest and non interest income were independent variable and the profits of the bank was the dependent variable

Two Multiple Regression equation was used for the study:

Equation 1

Profits=a+b1*interest income+b2*noninterest income

Where b1 and b2 were coefficient and a is the intercept term which shows the profits of the bank had been c if interest and non interest income had been 0

Equation 2

Profits: a+b1*commission+b2*profit/loss on sale of land+ profit/loss on sale of investment+ profit/loss on revaluation of investment +profit/loss on exchange transactions+ Miscellaneous income

Where profits was the dependent variable and various components of non interest income were independent variable and a is the constant term

The equation 2 was used to find out the influence of various components of non interest income on the profits of the bank.

SBI and Associates

(Rs‘000)

In the above table we see the following:

Column1: Average

Column 2: Year

Column 3: Other income or the non interest income of the bank

Column 4: Commission, exchange and brokerage

Column 5: Net profit/loss on sale of investment

Column6:  Net profit/loss on revaluation of investment

Column7: Net profit/loss on sale of land, building and other assets

Column 8: Net profit/ loss on exchange transactions

Column 9: Miscellaneous income

Column 10: Total income of the bank

Column 11: Profit/loss of the bank

Column 12: Interest income of the bank

Column 13: Noninterest income as a percentage of total income

Column 14: Interest income as a percentage of total income

Influence of interest and non interest income on profits of SBI& Associates

The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the SBI and its associates are determined by interest and non interest income.

1. We find non -interest income to be a significant variable in explaining the profits of SBI as the prob value is less the .05 (.0095)and the value of t stat is more than 2(3.386)[ Rule:

an independent variable is said to be significant is its prob value is less than .05 or the t-stat is more than 2).

2. We find that in our regression model the percentage of variation in the profits of SBI and its associate that is explained by interest and non interest income is 92.81% ( Rule: for a regression model to be efficient the r-square shall be at least .6)

3. From the above output we find that Noninterest income had a significant influence on the profits of SBI and its associates over a period of 11 years.

The objective is to find out that which one of the non interest component had a major influence on the profit of SBI & associates over a period of 11 years.

We find the following:

1. The percentage of variation in the profits of the SBI& associates explained by the 6 independent variables is  98.1% which is significant(as R square shall be more than .6)

2. We find that commission/exchange/brokerage and profit/loss on sale of investment had a major influence on the profits of the SBI and its associates over a period of 11 years. As they are having a prob values less than .05(level of significance) and is having a t-stat more than 2.

This means that SBI and its associates shall focus more on commission exchange and brokerage for its non interest income.

Contribution of various components of non-interest income   of SBI& Associate(94-04)

The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange and brokerage had around 59% (highest) contribution to the non interest income followed by sale of investment (20%). Exchange transaction was having a contribution of 12% and miscellaneous income was having an influence of 9%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.

Movements of interest and non interest income   of SBI & Associates(94-04)

If we look at the movement of interest and non interest income of SBI and associates over a period of 11 years we will find that the non interest income has grown at a CAGR of 18.46% and the interest income has grown at a CAGR of 13.15%.The noninterest income over a period of 11 years has grown by 444.563% whereas interest income has increased by 244.14% which shows how aggressively the bank is working on its non interest income.

Contribution of interest and non interest income of SBI & Associate

From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has

increased over a period of time from 14% to 21% and share of interest income has decreased from 85% to 78%.

On an average over a period of 11 years the contribution of non interest income as been 15% and interest income has been 85% to the total income of the SBI and its associates.

Correlation between non interest income and total income

0.935642

There is a very positive correlation between non interest income and the total income of SBI and its associates which shows that higher the non interest income higher the total income of the SBI& associate.

Nationalized banks: Public sector banks

(Rs‘000)

In the above table we see the following:

Column1: Average

Column 2: Year

Column 3: Other income or the non interest income of the bank

Column 4: Commission, exchange and brokerage

Column 5: Net profit/loss on sale of investment

Column6:  Net profit/loss on revaluation of investment

Column7: Net profit/loss on sale of land, building and other assets

Column 8: Net profit/ loss on exchange transactions

Column 9: Miscellaneous income

Column 10: Total income of the bank

Column 11: Profit/loss of the bank

Column 12: Interest income of the bank

Column 13: Noninterest income as a percentage of total income

Column 14: Interest income as a percentage of total income

Influence of interest and non interest income on profits of Public sector banks (94-04)

The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the public sector banks are determined by interest and non interest income.

Non interest and Interest income are independent variables and profit is the dependent variable

From the above output we find:

1. We find non -interest income to be a significant variable in explaining the profits of public sector banks as the prob value is less the .05 (.0268) and the value of t stat is more than 2(2.7056) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2].

2. We find that in our regression model the percentage of variation in the profits of public sector banks that is explained by interest and non interest income is 88.86%( Rule for a regression model to be efficient the r-square shall be at least .6)

3. From the above output we find that noninterest income had a significant influence on the profits of public sector banks over a period of 11 years.

The objective  is to find out which one of the non interest component had a major influence on the profit of public sector banks over a period of 11 years.

We find the following:

1. The percentage of variation in the profits of the public sector banks explained by the 6 independent variables is  94.8% which is significant(as r square shall be more than .6)

1. We find that none of the non interest component was individually sufficient in explaining the profits of the public sector banks as we find that none of the non interest component is having a significance value of less than .5 or having a t-stat of more than 2.

Contribution of various components of non interest income of Public Sector banks (94-04)

The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange and brokerage had around 36% (highest) contribution to the non interest income followed by sale of investment (35%).  Miscellaneous income was having a contribution of 16% followed by exchange transaction i.e. 12%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.

Movements of interest and non interest income   of Public sector banks(94-04)

If we look at the movement of interest and non interest income of public sector banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 19.85% and the interest income has grown at a CAGR of 12.68%.The noninterest income over a period of 11 years has grown by 511.87%  whereas interest income has increased by 230.03% which shows how aggressively the bank is working on its non interest income.

Contribution of interest and non interest income of the Public Sector banks(94-04)

From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 11% to 20% and share of interest income has decreased from 88% to 79%.

On an average over a period of 11 years the contribution of non interest income as been 13% and interest income has been 87% to the total income of the public sector banks.

Correlation between non interest income and total income of Public sector banks

0.940162

There is a very positive correlation between non interest income and the total income of public sector banks which shows that higher the non interest income higher the total income of the public sector banks.

Private sector banks

(Rs  ‘000)

In the above table we see the following:

Column1: Average

Column 2: Year

Column 3: Other income or the non interest income of the bank

Column 4: Commission, exchange and brokerage

Column 5: Net profit/loss on sale of investment

Column6:  Net profit/loss on revaluation of investment

Column7: Net profit/loss on sale of land, building and other assets

Column 8: Net profit/ loss on exchange transactions

Column 9: Miscellaneous income

Column 10: Total income of the bank

Column 11: Profit/loss of the bank

Column 12: Interest income of the bank

Column 13: Noninterest income as a percentage of total income

Column 14: Interest income as a percentage of total income

Influence of interest and non interest income on profits of Private sector banks(94-04)

The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the private sector banks are determined by interest and non interest income.

Non interest and Interest income are independent variables and profit is the dependent variable

From the above output we find:

1. We find non -interest income to be a significant variable in explaining the profits of private sector banks as the prob value is less the .05 (.0128) and the value of t stat is more than 2(3.188) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2].

2. We find that in our regression model the percentage of variation in the profits of private sector banks that is explained by interest and non interest income is 95.95 %( Rule for a regression model to be efficient the R-square shall be at least .6)

3. From the above output we find that noninterest income had a significant influence on the profits of private sector banks over a period of 11 years.

The objective to find out which one of the non interest component had a major influence on the profit of private sector banks over a period of 11 years.

We find the following:

1. The percentage of variation in the profits of the private sector banks explained by the 6 independent variables is  91.2% which is significant(as r square shall be more than .6)

1. We find that sale of investment , land & building and miscellaneous income and exchange transactions have a major influence on the profits of private sector banks over a

period of 11 years as these variable are having a significance level of less than .05 and a t-stat of more than 2.

1. According to the above output miscellaneous income had a major influence o the profits of the as it’s is having the maximum t-stat i.e. 10.680 so bank shall focus on it for its non interest income.

Contribution of various components of non interest income of Private Sector banks (94-04)

The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that sale of investment has around 41%(highest) contribution  to the non interest income followed by commission/exchange /brokerage 34% followed by miscellaneous income(17%) and exchange transactions 8%. The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income.

Movements of interest and non interest income   of Private Sector banks(94-04)

If we look at the movement of interest and non interest income of private sector banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 43.50% and the interest income has grown at a CAGR of 33.95%. The non interest income over a period of 11 years has grown by 3604.74%% whereas interest income has increased by 1760.84% which shows how aggressively the  private sector banks are working on its non interest income.

Contribution of interest and non interest income of Private sector banks (94-04)

From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 13% to 23% and share of interest income has decreased from 86% to 76%.

On an average over a period of 11 years the contribution of non interest income as been 17% and interest income has been 83% to the total income of the private sector banks.

Correlation between non interest income and total income of Private sector banks

0.987067

There is a very positive correlation between non interest income and the total income of private sector banks which shows that higher the non interest income higher the total income of the private sector banks.

Foreign banks

(Rs  ‘000)

In the above table we see the following:

Column1: Average

Column 2: Year

Column 3: Other income or the non interest income of the bank

Column 4: Commission, exchange and brokerage

Column 5: Net profit/loss on sale of investment

Column6:  Net profit/loss on revaluation of investment

Column7: Net profit/loss on sale of land, building and other assets

Column 8: Net profit/ loss on exchange transactions

Column 9: Miscellaneous income

Column 10: Total income of the bank

Column 11: Profit/loss of the bank

Column 12: Interest income of the bank

Column 13: Noninterest income as a percentage of total income

Column 14: Interest income as a percentage of total income

Influence of interest and non interest income on profits of Foreign banks (94-04)

The above output is of the multiple regression equation where we have tried to find out that how much of the profits of the foreign   banks are determined by interest and non interest income.

Non interest and Interest income are independent variables and profit is the dependent variable

From the above output we find:

1. We find non -interest income to be a significant variable in explaining the profits of foreign banks as the prob value is less the .05 (.0006) and the value of t stat is more than 2(5.459) [Rule: an independent variable is said to be significant if its prob value is less than .05(level of significance) or the t-stat is more than 2].

2. We find that in our regression model the percentage of variation in the profits of foreign banks that is explained by interest and non interest income is 94.64%( Rule for a regression model to be efficient the r-square shall be at least .6)

From the above output we find that noninterest income had a major and significant influence on the profits of foreign  banks over a period of 11 years

The objective is  to find out which one of the non interest component had a major influence on the profit of foreign banks over a period of 11 years.

We find the following:

1. The percentage of variation in the profits of the foreign banks explained by the 6 independent variables is  99.0% which is significant(as r square shall be more than .6)

1. We find  that only miscellaneous income have a major influence on the profits of foreign  banks over a period of 11 years as it is  having a significance level of less than .05(.049) and a t-stat of more than 2(2.790).

Contribution of various components of non interest income of Foreign banks (94-04)

The above pie graph has been prepared by taking into account the average values of non interest income components over a period of 11 years (94-04). From the above graph we find that commission/exchange /brokerage was having around 48% (highest) contribution  to the non interest income followed by  exchange transactions 29%. The contribution of sale of investment was 17% followed by miscellaneous income 6% .The sale of land/buildings, revaluation of investment was having a very negligible influence on the non interest income

Movements of interest and non interest income of foreign banks (94-04)

If we look at the movement of interest and non interest income of foreign banks over a period of 11 years we will find that the non interest income has grown at a CAGR of 19.57% and the interest income has grown at a CAGR of 13.49%. The non interest income over a period of 11 years has grown by 497.394%% whereas interest income has increased by 254.54% which shows how aggressively the bank is working on its non interest income

Contribution of interest and non interest income of foreign banks (94-04)

From the above table we find the contribution of interest and non interest income as a percentage of total income in each of the 11 years period. We find the share of non interest income has increased over a period of time from 21% to 31% and share of interest income has decreased from 78% to 68%.

On an average over a period of 11 years the contribution of non interest income as been 23% and interest income has been 77% to the total income of the foreign banks.

Correlation between non interest income and total income of foreign banks

0.972437

There is a very positive correlation between non interest income and the total income of private sector banks which shows that higher the non interest income higher the total income of the private sector banks.

Findings

We have seen that the contribution of non interest income of our banking sector has increased significantly over a period of 11 years. We have also seen that in each type of banks i.e. SBI, public sector banks, private sector banks and foreign banks the contribution of non interest income towards the total income has increased over a period of time and that of the interest income has decreased over a period of time. If we look at the total banking sector we will find that in our banking system the non interest income is having a significant influence on the profits of the banks. On an average the share of the non interest income towards the total income of the banking sector has increased from 12% in 1994 to  20% in 2004.If we look at the components of non interest income of our banking sector we will find that  commission/exchange and brokerage earned by the banks had a major contribution i.e. 44% to the total noninterest income of the bank , after the commission the next big contribution to the non interest income had been of the sale of investments which was 28%, followed by exchange transactions having a share of 15%. Miscellaneous income was having the 13% contribution to the total noninterest income of the banking sector. The contribution of sale of land, revaluation of investments was having a negative or even a negligible influence on the noninterest income of the banking sector. On an average the non interest income of the banking sector has grown at a CAGR of 25% as compared to interest income which has grown at a CAGR of 18%. The percentage increase in the non interest income of the banking sector has increased by 1264.64% and interest income has increased by 622%. The private sector banks had seen a significant contribution in the increase of  its non interest income over a period of 11 years as compared to other types of banks. Among the various non interest components that had an influence on the profits of the banking sector we find that commission, sale of investment, miscellaneous income had a significant influence on it. We also find that there was a positive correlation between the non interest income and the total income of the banking sector. We also find that in case of public sector banks none of the  non interest component  was found to be statistically significant enough to influence the profits over a period of 11 years.

Reasons for increase in the non interest income

Now if we look at the reason for the increase in the non interest income of the banking sector we will find that it has majorly increased due to following reasons:

1. With economy growing at an unprecedented rate of 9.4 per cent during 2006-07 and acceleration in the growth rate being attributable to the buoyancy in the industrial and service sector, the demand for fee-based services of banks has gone up and as a result of which the non interest income has also risen up.

2. Noninterest income is an effective way  used by  banks to respond to its  squeezing margins

3. At the bank level, greater reliance on noninterest income, particularly trading revenue, is associated with lower risk-adjusted pro?ts attached to it.

Challenges involved

1. Not aggressive direct customer interaction  of public sector banks.2. High cost and less expertise involved  in launching of innovative products/services as per

the customers’ expectations.3. Technology requirements.

Conclusion

After studying the non interest growth pattern of the Indian banking sector over a period of 11 years we can say that it is slowly and gradually becoming one of the important avenues for our Indian banks to generate revenue from. In this respect we see that not only private banks and foreign banks are ahead but also our public sector banks are gradually catching it. We can say that it to  be an important source available with our banking sector to respond to the squeezing margins and meeting the shareholders expectations.

Literature review

1. Business Efficiency of Public Sector Commercial Banks: A Data Envelopment Approach :

Ram Pratap Sinha (2008)

The article says that following the nationalization of 20 major commercial banks in 1969 and 1980, the government followed policies of financial repression up to the 1980s. During this period the public sector commercial banks had rapid expansion of branches, especially in the rural and semi urban areas and had reasonable success in the matter of deposit mobilization and disbursement of loans. However, the operating efficiency of public sector commercial banks, declined during the period due to various reasons. In the 1990s, the banking environment was radically transformed by certain bold initiatives taken by RBI including the dismantling of entry barriers, rate deregulation, introduction of prudential accounting norm and the implementation of Basel I capital adequacy norms. The changed competition and accounting environment compelled the commercial banks to provide unprecedented attention to cost cutting and supplementing fund-based income by fee-based income.

1. Product mix and earnings volatility at commercial bank: evidence from a degree of leverage model:  Robert De young & Karin P Roland(1999)

The article says that the commercial banks lending and deposit taking business has declined in recent years. Deregulation and new technology have eroded bank’s comparative advantages and made it easier for non bank competitors to enter these markets. In response, banks have shifted their sales mix towards noninterest income-by selling non bank fee based financial services such as mutual funds, by charging fees for services that used to be bundled together with deposit or loan products .It says that the conventional wisdom in the banking industry is that earnings from

fee based products are more stable than loan based earnings and that fee based activities reduce bank risk via diversification.

Disclosure Level of Indian Banks: International Comparison and Impact on Shareholder Wealth

Public disclosures are used as a mechanism to establish transparency in the system. Indian banks lag behind their foreign counterparts in terms of the extent of disclosure of financial information though the trend is towards more disclosure. The big question, however, is whether these disclosures are really appreciated by the shareholders. Purely in terms of impact on shareholder wealth, past disclosure norms announcements by RBI seem to have had little effect. But still, considering that the Indian banking industry is to be further liberalized to provide an open field to foreign banks, it makes sense for the Indian banks, both private and public, to increase disclosure in order to attract big MNC accounts and tap into foreign capital.

Regulators require banks to publicly disclose financial and other information which help shareholders, depositors, and other stakeholders to assess the level of risk and make investment decisions. Banks are thus subject to market discipline and the regulator can also use market pricing information as an indicator of the banks' financial health. Market discipline refers to a market-based incentive scheme in which investors in bank liabilities, such as subordinated debt or uninsured deposits, "punish" banks for greater risk-taking by demanding higher yields on those liabilities. This article tracks the disclosures made by the banks across the globe to find out where India stands in terms of disclosures in the banking industry and also seeks to find out how the disclosures, as and when mandated in India, have impacted the share prices of various banks.

Initiatives Towards Market Discipline

Financial engineering and technological improvements have caused financial intermediaries to be involved in overly complex and advanced financial operations. These activities have become increasingly expensive to monitor and supervise from the perspective of regulatory agencies. A number of recent policy initiatives recognize the importance of market discipline in safeguarding financial stability1. These include:

Initiatives to create internationally accepted accounting standards (IAS) and proposals to make it mandatory for banks to issue subordinated debt.

Pillar 3 of the proposed revised capital framework of Basel II accord2 encourages greater bank disclosure to strengthen market discipline. In particular, the hope is that greater disclosure of a bank's risk profile will provide them with incentives to hold capital commensurate with the risks they take.

We will now analyze the results of a comparative study of disclosures made by banks worldwide.

Comparative Study of Disclosures Made by Banks across the Globe

Annual reports of nine banks from various parts of the world were studied and the information contained therein was used as proxy for the information disclosure regulatory requirements the banks have to follow their respective countries. The banks chosen as samples for the study purpose were ANZ Bank (Australia), ASB Bank (New Zealand), Emirates NBD Public Joint Stock Company (Dubai), Bank of China (China), Banco do Brasil (Brazil), Citibank (USA), The Mauritius Commercial Bank Limited (Mauritius), VTB Bank (Russia), and Corporation Bank (India). Exhibit 13 shows a comparative chart with the disclosure details required in six countries on the basis of information contained in the annual reports.

Capital

Details IND AUS RUS BRL CHN

USA

Full details of Tier 1 and Tier 2 capital N N N N N Y

Details of loan capital issued in various countries N Y Y N Y N

Risk

Details IND AUS

RUS BRL CHN

USA

Maximum exposure to credit risk N N Y N Y N

Concentration of credit risk by Geography and Industry N Y Y N Y Y

Ratings of the customers (%) to whom credit is imparted N N N N N Y

Single borrower/ Group Limits Exceeded Y N Y N Y N

Exposure to Country Risk Y N N N N Y

Traded Market Risks using VAR (Average, High & Low) N Y Y N Y N

Foreign Exchange Risk N N Y N Y N

Equity Price Risk N N Y N N N

Liquidity Risk N N Y N Y N

Investments

Details IND AUS RUS

BRL CHN USA

Details of investments in trading securities available for sale assets and derivative instruments (country wise)

N Y Y N Y Y

Effect of 1% shock on next year's net interest income N Y Y N Y Y

Assets and Liabilities

Details IND AUS RUS BRL

CHN USA

Average Balance Sheet and Average rate of interest on time & demand deposits N Y N N Y N

Fair value of financial assets and liabilities N Y Y N Y Y

Interest sensitivity of assets & liabilities N N N N N N

Maturity Analysis of groups assets and liabilities N N Y N Y Y

Income and Expenditure

Details IND AUS RUS

BRL CHN USA

Income on investment shown separately for 'Assets held for sale' & 'Trading Securities'

N Y Y N Y N

Commission , Brokerage and Exchange shown separately N Y Y N Y Y

Total capital and current expenditures committed N Y Y N Y Y

Provisions and NPAs

Details IND AUS RUS

BRL CHN

USA

Details of Interest foregone on Impaired Loans N Y N N N Y

NPAs industry wise, customer type wise N N N N Y N

Total write offs and recoveries by industry N Y N N N N

Details of bad loans in each sector like agri, industry etc. N N Y N Y N

Collaterals repossessed N N N N Y Y

Loans restructured, sold to ARCs Y N N N N N

Business Highlights

Details IND AUS RUS BRL CHN

USA

Credit Cost N N N N Y N

Excess Reserve Ratio N N N N Y N

Employee classification by sex, age, education, and gender N N N Y Y N

Coverage Ratio (Service fees/Personal Expenses) N N N Y N N

Shareholder Information

Details IND

AUS RUS BRL CHN USA

Top twenty shareholders (both for equity and preference)

N Y N N Y N

Distribution of shareholding N Y N Y N N

General InformationDetails IND AUS RUS BRL CHN USA

Superannuation and other post employment benefit schemes N N Y N N Y

Market Share N N N Y N N

No. of customers and no. of credit and debit cards N N N Y N N

Exhibit 1. Public disclosures by banks in various countries

Indian banks are lagging behind their counterparts in other developing countries such as China, Russia, and Brazil on various disclosure fronts such as assets and liabilities, investments, and NPAs.

As can be seen from the chart, in terms of disclosures, Indian banks are lagging behind their counterparts in other developing countries on various fronts such as assets and liabilities related disclosures, investments and NPA (non-performing asset) related disclosures, etc. Banks in China, Russia, and Brazil are subject to much more stringent disclosure norms. This difference can lead to significant challenges for the Indian banks in near future, as described next.

Probable Impact of Less Disclosure by Indian Banks

The banking sector in India is slated to open its door to foreign players in the year 2009 to the full extent as the restrictions on the number of branches that a foreign bank can open (currently 24 per year) will no longer exist. With increased presence of foreign players in this sector the competition is going to be intense. These banks will bring with them the best practices from across the globe to gain a competitive edge over Indian banks. Citibank, Standard Chartered Bank and HSBC Bank have already captured a significant chunk of business in a short span of time despite the limitation on the number of branches which they can open. If Indian banks have to compete with these banks they need to be in a much stronger position than they are presently for the following reasons.

Business across borders is increasing at a fast pace and the multinational companies coming to operate in India will like to engage with the banks which have a high degree of corporate governance and are financially sound. Disclosure norms can play a crucial role in building an image in the mind of these companies.

Though the current Indian shareholders don't care much about the disclosures made by the banks as is proved in the second part of the article, the situation is not going to remain the same with shareholders becoming increasingly informed about their rights.

Also, if the Indian banks need to access the foreign markets to raise capital at a much cheaper rate they have to give a serious thought to disclosure norms. The investors in the developed markets are much more informed and demanding than their Indian counterparts and view corporate governance practices as a starting point before putting their monies anywhere.

Though it is quite clear that Indian banks' disclosure is very low when compared to banks in most other countries, a question remaining to be answered is whether the shareholders of these banks actually worry about the lack of disclosure and how they react to new norms which the Reserve Bank of India (RBI) has come up with periodically.

Impact of Disclosure Norms Announcement on Stock Prices

Comparison of disclosures by various banks shown above (Exhibit 1) clearly shows that Indian banks are lagging behind significantly when it comes to disclosures in the areas of capital, risk and investment. Further, the study attempted to find out the impact of RBI policy announcements (RBI directives4 to ensure transparency and efficiency in the banking system) regarding risk disclosure norms on shareholder wealth in the Indian banking industry using the Event Study method. This study covered the risk disclosure policy announcements by RBI over the past eight years. Bankex5 which is an exclusively designed index by BSE, takes 12 major stocks from the banking industry as proxy for performance of the Indian banking industry as a whole. Bankex has been used to find out the behavior of abnormal return due to disclosure policy announcements. Attempt has also been made to find out the difference between the pattern of abnormal returns of private and public sector banks; out of the four banks in the study two banks are public sector banks (SBI, Bank of Baroda) and other two are from the private sector (HDFC, Axis Bank).

The Event Study method that was performed has been briefly outlined below along with the results and possible interpretations.

Event Study Method

Event study is an important research tool used to measure the effect of an economic event on the value of a firm. Impact of any event can easily be found out by performing T-test for significance where T-stat is calculated using the value of abnormal return and standard error.

Hypothesis Formulation

In order to perform T-test for significance, null and alternate hypothesis were formulated as follows:

H0: Announcements of risk disclosure norms by RBI does not have a significant impact on shareholder's wealth in Indian banking industry.

H1: Announcement of risk disclosure norms by RBI does have a significant impact on shareholder's wealth in Indian banking industry.

Basic Assumptions and Limitations of the Study

For the purpose of the study, event was defined as risk disclosure announcements made by the Reserve Bank of India.

The time period of the events examined was from Jan 2000 - April 2007. CNX-50 or Nifty was assumed as the proxy for market return. Daily returns were computed based on the differences between the prices/index values

between consecutive trading days. Other events were assumed to have no impact on stock prices.

Methodology

To begin with, significant events were identified from the Trend and Progress Report of RBI. Daily share price and Index data were collected from Prowess (Jan 2000- April 2007). Announcement date was reckoned as "event day zero" (t=0) and a window period of nine days (four days before t=0 and four days after t=0) was selected for calculating abnormal return. Normal return was calculated for individual scrip based on its historical linear regression relationship with market returns (Ri=Α + Β*Rm) where Α and Β are respectively the intercept and slope of linear regression line. Here the regression was performed on past 150 days of stock/index data. Abnormal return was calculated as the difference between actual and expected daily return. Standard error was calculated by taking the variance of past 150 days index value. T-stat (a mathematical parameter to perform a test of significance) was calculated by dividing the daily abnormal return by square root of standard error6.

Results Analysis

Analysis has been done separately for each event date. Significance of the impact of disclosure norm has been judged by the value of T-stat. T-stat value greater than 1.65 denoting a 90% confidence level has been highlighted in the table to get an idea of intensity of impact of event on market. The example below analyzes the impact of the event that occurred on 10th Oct, 2000.

Example - Announcement Date: 10-Oct-2000

Disclosure Norm Announced by RBI: In order to bring more transparency to the balance sheets of public sector banks and as a further step towards consolidated supervision and to provide additional disclosure, it was decided that public sector banks should annex the balance sheet, profit and loss account, report of the Board of Directors and the Report of the Auditors in respect of each of their subsidiaries to their consolidated balance sheet beginning from the year ending March31, 2001. This was a major policy development in the Report of Trend and Progress of India 200-2001. Exhibit 2 shows the change the changes in Bankex and individual banks' return and the corresponding T-Stat values over the period.

 

Exhibit 2. Abnormal Return and T-Stat for different banks during window period of nine days

Interpretation of Result

There is no overall significant impact on shareholder wealth except in the case of Axis Bank which shows the abnormal return of around 8% with T-stat =2.5 which is significant with almost 99% level on day 4 after policy announcement. Hence we fail to reject the null hypothesis with

respect to the specific event. So above mentioned risk disclosure norm didn't have a significant impact on shareholder wealth in Indian banking industry.

The same kind of analysis was done for all other event dates and it became quite evident that risk disclosure norms don't affect the value of shareholders fund. Although in a few cases it was observed that banking industry as a whole or some individual players showed abnormal returns at different points of time (either before or after the event date within the window period), the overall the impact was not significant at all. Also there is no significant difference in the reaction of private and public sector banks to disclosure norms.

The nature of ownership in Indian banking industry is one of the reasons which hinder the impact of disclosure norms on shareholder wealth.

The nature of ownership in Indian banking industry is one of the reasons which hinder the impact of disclosure norms on shareholder wealth. The government has a majority ownership in the banking sector. Comparison of share price volatility of banking companies with corporate houses in India shows that banking industry is less volatile in nature. Also investments made by retail shareholders in banks are generally long-term. This is verified by the fact that banking scrips are of low traded volume when compared to that of other companies, clearly pointing out that retail investors don't buy shares of banking companies for trading purposes.

Conclusion

Indian banks are far behind their foreign counterparts in disclosing information to the public. There is lot of talk about corporate governance in the banking industry which requires banks to be more transparent in their operations and make disclosures which can help investors in making informed decisions. However the study shows that new disclosures mandated by RBI do not really have any significant impact on the share prices of these banks. Still, in the wake of increased competition from foreign banks, disclosure norms can serve to be important differentiating factor to attract and retain big corporate clients.