fin

1. Commercial Bank Management
PGSEM and PGP
December 09-February 2010

2. This course is focused on…
• Functional aspects of commercial banking
– Liabilities management
– Credit management
– Capital adequacy management
– Investment management
• Risk management
– Liquidity risk management
– Interest rate risk management
– Credit risk management
– Operational risk management
– Risk capital allocation
Indian Banking policy and the environment is the backdrop of the
course

3. Scheme of Evaluation
• Three quizzes (30%)- quiz dates-16th September, 30th
September, 14th October
• Assignment-2 (25%)
• Final test (45%)

4. Banking Sector in India :An Overview

5. Evolution of Indian Banking
• Post-Independence(1947-69): Monopoly, concentration
of economic power
• Nationalization(1969): Social control, directed credit
• Financial sector reforms(1992): Competition,
deregulation
• Consolidation(2001): Universal banking models, mergers
etc…
• Financial inclusion, Leveling the playing field (2008):

6. Indian Banking (1947-1970)
• Government take over of RBI(January 1949)
• Enactment of Banking Regulation Act 1949
• Committee on Rural Credit Survey(1951)The Committee
recommended one strong integrated state partnered
commercial banking institution to stimulate banking
development in general and rural credit in particular.
• The Imperial Bank of India was taken over by the
Government of India and called as State Bank of India in
1955
• Nationalization of private banks in 1969 and 1980

7. Impact of Nationalization
(1970 to 1992)
• Substantial increase in banking business in terms of
per capita branches, deposits, and deployment of credit.
• Penetration of banking activity to rural and semi-urban
areas
• Excessive focus on quantitative achievement and social
obligations, often at the expense of achieving profitability
and efficiency
• Capital base was eroded
• Rise in quantum of bad Loans
• Poor customer service

8. Indian Commercial banks: At a glance
Jun-69 Mar-80 Mar-92 Mar-07
Number of Commercial Banks 73 75 77 82
Number of Bank Offices in India 8262 32149 60570 73836
Rural 1833 15105 35269 30560
Semi-urban 3342 8122 11356 16484
Urban 1584 5178 8279 13840
Metropoliton 1503 4014 5666 12952
Deposits (Rs in millions) 46460 426528 2654629 26969803
Advances (Rs in million) 35990 270081 1598078 19812163
Deposits of Public Sector Banks NA 391841.9 2358874 19941995.8
Advances of Public sector banks 248876.2 14401229 14401228.9
Percentage of Deposits of Public sector
banks 92% 89% 74%
Percentage of Advances of Public
sector banks 92% 90% 73%

9. Financial Sector reforms: A beginning
• Chakravarthy Committee Report (1985) and Vaghual
Committee(1990) brought some changes in the
financial markets. The innovative instruments like
Treasury bills, CPs, CDs have become new avenues
for banks.
• Entry of Banks into para banking services (late
eighties); Merchant banking, Mutual Funds, Leasing,
Factoring etc...

10. McKinnon-Shaw-Maxwell Fry
Hypothesis
• Excessive intervention in the financial system leads to
financial repression and comes in the way of financial
intermediation and its contribution to resource
mobilization needs to be qualified

11. Bank Management: Three fundamental
approaches
• The accommodation principle: Banks should
accommodate the legitimate credit demands of
commerce, industry and agriculture
• The profit maximizing principle:
• The stock adjustment principle

12. Profit Maximizing Principle
• Neo classical marginal principle
• Banks select asset portfolio by understanding cost-
benefit analysis so as to maximize the return, net of
cost, from the entire portfolio.
• It is also risk-return approach
• This approach attempts to incorporate the element of
uncertainty inherently associated with decision making
process
• The asset choice modeling assumes greater
importance

13. Stock Adjustment Principle
• Banks have a desired level of each balance sheet item
and they adjust the stocks of each of the variables so as
to close the gap between actual and desired levels

14. Reforms in Banking Sector-post 1992
• Competition Enhancing Measures
• Measures Enhancing Role of Market Forces
• Prudential Measures
• Institutional and Legal Measures
• Supervisory Measures
• Technology Related Measures

15. Implications of reforms on bank
management
• How do banks manage liabilities and funds?
• How to price deposits and minimise cost of funds?
• How to rate the loans?
• What are the risk-return characteristics of loans?
• How to price the loans?
• How to fix the exposure norms?
• How to estimate expected and unexpected losses on
loans?
• How to manage market risks?

16. Emerging Trends
• Deposit banking to financial services
• Balance sheet exposures to off-balance sheet exposures
• Capital adequacy to capital efficiency
• Physical distribution to virtual distribution
• Fragmentation to consolidation
• Data to information to knowledge

17. INDIAN COMMERCIALBANKING:INSTITUTIONAL SET UP
SBIandAssociates
(8)
Nationalised Banks
(19+1)
RRBs
(193)
PublicSector
Old Banks
(19)
New Banks
(8)
LABs
(4)
Domesticbanks Foreignbanks
(31)
Private Sector
Commercial Banks Coperative banks
(2805)
ReserveBank of India

18. Scheduled Commercial Banks
• A bank which is included under second schedule of the
RBI Act. Under Section 42(6) of the Act, the RBI may
include any bank after satisfying minimum criteria.
• The minimum criteria is Banks whose deposits are more
than Rs. 150 Cr, they are all Scheduled Banks

19. 8
20
25
29
96
STATE BANK OF INDIA &
ITS ASSOCIATES
NATIONALISED BANKS PRIVATE BANKS FOREIGN BANKS REGIONAL RURAL BANKS
Institutional Structure of Commercial Banks in India

20. SBI group
13%
Nationalised Banks
52%
Private Banks
26%
Foreign Banks
9%
Advances of Various Banking Groups as on 31 March 2007

21. SBI group
24%
Nationalised Banks
50%
Private Banks
20%
Foreign Banks
6%
Deposits of various banking Groups as on 31st March 2007

22. Banking Sector: Emerging Trends

23. Forces of change
• Competition
• Deregulation and reregulation
• Technology
• Globalisation
• Global Regulation: Basel-II

24. Foreign banks entry time-table
ROADMAP PRIOR TO MARCH 2005 2005-2009 AFTER 2009
Structure of foreign bank
presence in India
Branches only
Branches or
wholly-owned
subsidiaries
Full national treatment, including IPO,
subject to 26% of paid-in capital being
held by resident Indians
Aggregate FDI limit in private
banks
49%
74% for banks
identified as
distressed by RBI
74%
Foreign voting rights limit
10%
Branching limit per year
12
Unchanged
Proposed amendment to allow voting rights to reflect
ownership level
>12 subject to RBI approval
5% foreign investment limit in private banks by individual foreign banks
10% foreign investment limit in private banks by FIIs or individual corporate entities

25. Competition from Non-Banks
• In US, GE and Ford emerged as the largest financial
services companies
• In UK, Sainsbury, Marks & Spencer and Tesco are
taking deposits and making loans
• Fixed costs of entering into various markets has come
down due to technology
• Australian retail giant Woolworths is launching its credit
card in calendar year 2008. After that, the company
would consider offering other financial services including
home loans or insurance to its customers.

26. Year Retailer Product Provider Brand Promoted in Store
Jun-96 Tesco Instant Access Savings Account Natwest Tesco
Oct-96 Sainsbury Instant Access Savings Account Bank of Scotland Sainsbury
Credit Cards
Dec-96 Safeway Deposit Account Abbey National Abbey National
Feb-97 Tesco Instant Access Savings Account RBS Tesco
Mar-97 Morrisons Savings Account Midland Midland
Jul-97 Tesco
Credit Card Travel Insurance,
Foreign Currency RBS, Direct lane Tesco
Jul-97 Sainsbury Mortgages Bank of Scotland Sainsbury
Sep-97 Asda Insurance Lloyds-Tsb Lloyds-Tsb
Jan-98 Safeway Instant Access Account Abbey National Abbey National
Jan-98 Sainsbury Home Insurance Royal and Sun Alliance Royal and Sun Alliance
Mar-98 Tesco Home Insurance Direct Line Tesco
Jun-98 Sainsbury Pet Care Insurance Royal and Sun Alliance Royal and Sun Alliance
Source: Andrew Alexander and Jane Pollard, Banks, Grocers and the changing retailing of financial services in Britain, JRCS, 2000

27. Competition from Non-Banks
• Controlling communication networks and gate ways are
emerging as “brokers” directing the customers
• The loyalty of customer is increasingly broker oriented
rather than ultimate producer of the product
• The possession of brand name is inspiring confidence

28. The 6 Cs Traditional Model Internet Enabled
Cross Sell Product driven Value driven
Connectivity Stand alone Connected
Channels Few Multiple
Consolidation Low
High-across products and
banks
Competition
Within
Industry Outside Industry
Convenience
Short time
window 24 x 7x 365
(Source: Sanjiv Singhal (2003) Internet Banking: The Second Wave, p 43)
Impact of Technology

29. “The PC will be the information highway. The mobile phone
will be the transaction highway”
-Kees Van Rossum, Executive Vice President, Retail Banking, Post bank

30. Country Bank Mobile Operator
Finland Leonia/Various Sonera
Germany Deutsche Mannesmann
Direkt T-mobil
Hypo Vereinsbank Viag Interkom
LBBW MobilCom
Italy Banca Intesa Omnitel
Banco di
Roma/Fineco Telcom Italia
Japan Sakura Bank NTT DoCoMo
Norway Den Norske Bank Telenor
Spain BBVA Telefonica Moviles
Sweden Swed Bank Telenor
England Lloyd's BT-Celinet
Natwest Orange

31. Leverage on Technology
• Operational efficiency
• Customer Management
• Product Management
• Distribution

32. Consolidation

33. Mergers and Acquisitions: Driving factors
• Economies of Scale
– Overcapacity
– High cost distribution and transaction infrastructures
such as branch networks and IT platforms that lend
themselves to rationalization
• Economies of Scope
– Universal Banks
– Barriers in product innovation leads to innovation on
distribution side
• Capital adequacy requirements

34. Potential Industry Structure
Small Medium Large
Size
Few
Many

35. Financial Inclusion
• Financial inclusion is delivery of banking services at an
affordable cost to the vast sections of disadvantaged and
low income groups.
• As banking services are in the nature of public good, it is
essential that availability of banking and payment
services to the entire population without discrimination is
the prime objective of the public policy.

36. Financial Inclusion
• The Financial Inclusion Task Force in UK has identified
three priority areas for the purpose of financial inclusion
– access to banking
– access to affordable credit
– access to free face-to-face money advice
• UK has established a Financial Inclusion Fund to
promote financial inclusion and assigned responsibility to
banks and credit unions in removing financial exclusion.
• Basic no frills accounts have been introduced.

37. Financial Inclusion: Initiatives of UK
• Credit unions have been established, accompanied by
tighter regulations to ensure greater protection for
investors.
• Post Office Card Account (POCA) has been created
for those who are unable or unwilling to access a basic
bank account.
• The concept of a Savings Gateway has been piloted.
This offers those on low-income employment, £1 from
the State for every £1 they invest, up to a maximum of
£25 per month.
• Community Finance Learning Initiatives (CFLIs) were
also introduced with a view to promoting basic financial
literacy among housing association tenants.

38. Indicator of banking growth

39. Opportunity

40. Benchmarking of Indian Banking Sector
Country
Return on
Assets
Gross NPL to
Gross Advances CRAR
Provisions to
NPL
Capital to
Assets
1 2 3 4 5 6
India 1.0* 2.3* 13.0* 52.6* 6.4**
Emerging and Developing Economies
Brazil 1.1 4.3 18.5 157.3 9.2
Mexico 1.2 3.8 15.2 143.7 9.1
Russia 0.5* 7.6 18.5 90.8 13.6*
China 1* 1.8 12.0* 134.3 5.4
United Arab Emirates 2.2* 2.5* 16.2 101.5* 10.6*
South Africa 1 5.1 13.5 _ 7.9*
Advanced Economies
USA 0.2 3.8 13.5 66.5 10.1
UK -0.5 1.6 12.9* 54.6^ 4.4*
Japan 0.2 1.7 13.4 25.5 3.6*
France 0.4** 2.8** 10.2** 51.3** 4.2*
Germany 0.3** 2.7** 12.9** 56.7* 4.5*
Italy 0.3* 5.5 10.8* 46.1* 6.6*
Canada 1.3 0.9 10.3 29.8 5.8
Korea 0.5* 1.5 12.9 125.3 9.5
* Data pertains to 2008.
** data pertains to 2007
^ Data pertains to 2006
Note: Data pertains to 2009.

41. All India Average (based on 2001 Census) 59%
Kerala 89%
Bihar 33%
Nagaland 21%
Haryana, Chandigarh and Delhi 84%
UK (British Bankers Association Survey1992) 94%
Ratio of Deposit Accounts to Adult Population