I.

EVOLUTION OF BANKING IN INDIA Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan 2, 1809), the first joint-stock bank sponsored by Government of Bengal and governed by the royal charter of the British India Government. It was followed by establishment of Bank of Bombay (Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the presidency banks, marked the beginning of the limited liability and joint stock banking in India and were also vested with the right of note issue. In 1921, the three presidency banks were merged to form the Imperial Bank of India, which had multiple roles and responsibilities and that functioned as a commercial bank, a banker to the government and a bankers bank. Following the establishment of the Reserve Bank of India (RBI) in 1935, the central banking responsibilities that the Imperial Bank of India was carrying out came to an end, leading it to become more of a commercial bank. At the time of independence of India, the capital and reserves of the Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn and advances at Rs 723 mn and a network of 172 branches and 200 sub offices spread all over the country. In 1951, in the backdrop of central planning and the need to extend bank credit to the rural areas, the Government constituted All India Rural Credit Survey Committee, which recommended the creation of a state sponsored institution that will extend banking services to the rural areas. Following this, by an act of parliament passed in May 1955, State Bank of India was established in Jul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as its subsidiaries. To further accelerate the credit to fl ow to the rural areas and the vital sections of the economy such as agriculture, small scale industry etc., that are of national importance, Social Control over banks was announced in 1967 and a National Credit Council was set up in 1968 to assess the demand for credit by these sectors and determine resource allocations. The decade of 1960s also witnessed significant consolidation in the Indian banking industry with more than 500 banks functioning in the 1950s reduced to 89 by 1969. For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of 14 major banks was announced that each had a minimum of Rs 500 mn and above of aggregate deposits. In 1980, eight more banks were nationalised. In 1976, the Regional Rural Banks Act came into being, that allowed the opening of specialized regional rural banks to exclusively cater to the credit requirements in the rural areas. These banks were set up jointly by the central government, commercial banks and the respective local governments of the states in which these are located. The period following nationalisation was characterized by rapid rise in banks business and helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in the two decades of 1950-70 to about 25 % post nationalisation period. Aggregate deposits which registered annual growth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s. Growth of bank credit increased from an average annual growth of 13% in the 1960s to about 19% in the 1970s and 1980s. Branch network expanded significantly leading to increase in the banking coverage. Indian banking, which experienced rapid growth following the nationalization, began to face pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearing up towards new prudential norms and operational standards pertaining to capital adequacy, accounting and risk management, transparency and disclosure etc. In the early 1990s, India embarked on an ambitious economic reform programme in which the banking sector reforms formed a major part. The Committee on Financial System (1991) more popularly known as the Narasimham Committee prepared the blue print of the reforms. A few of the major aspects of reform included (a) moving towards international norms in income recognition and provisioning and other related aspects of accounting (b) liberalization of entry and exit norms leading to the establishment of several New Private Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lending rates (except the saving deposit rate), (d) allowing Public Sector Banks access to public equity markets for raising capital and diluting the government stake,(e) greater transparency and disclosure standards in financial reporting (f) suitable adoption of Basel Accord on capital adequacy (g) introduction of technology in banking operations etc. The reforms led to major changes in the approach of the banks towards aspects such as competition, profitability and productivity and the need and scope for harmonization of global operational standards and adoption of best practices. Greater focus was given to deriving efficiencies by improvement in performance and rationalization of resources and greater reliance on technology including promoting in a big way computerization of banking operations and introduction of electronic banking. The reforms led to significant changes in the strength and sustainability of Indian banking. In addition to significant growth in business, Indian banks experienced sharp growth in profitability, greater

emphasis on prudential norms with higher provisioning levels, reduction in the non performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in performance and profitability. Indian banking industry is preparing for smooth transition towards more intense competition arising from further liberalization of banking sector that was envisaged in the year 2009 as a part of the adherence to liberalization of the financial services industry. II. STRUCTURE OF THE BANKING INDUSTRY According to the RBI definition, commercial banks which conduct the business of banking in India and which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors, are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act, 1934, and when included are known as Scheduled Commercial Banks. Scheduled Commercial Banks in India are categorized in five different groups according to their ownership and/or nature of operation. These bank groups are (i) State Bank of India and its associates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks. Banking Industry at a Glance In the reference period of this publication (FY06), the number of scheduled commercial banks functioning in India was 222, of which 133 were regional rural banks. There are 71,177 bank XIV offices spread across the country, of which 43 % are located in rural areas, 22% in semi-urban areas, 18% in urban areas and the rest (17 %) in the metropolitan areas. The major bank groups (as defined by RBI) functioning during the reference period of the report are State Bank of India and its seven associate banks, 19 nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 New Private Sector Banks and 29 Foreign Banks. Table 1: Indian Banking at a Glance

Source: Reserve Bank of India Table 2: Number of Banks, Group Wise

Source: Indian Banks Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd. Table 3: Group Wise: Comparative Average

Source: Reserve Bank of India. Table 4: Bank Groups: Key Indicators

Source: Reserve Bank of India. Mergers & Acquisitions During FY06, two domestic banks were amalgamated - Ganesh Bank of Kurundwad with Federal Bank Ltd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank of Punjab Ltd, while one Foreign bank UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi Ltd. ING Bank NV closed its business in India. In Sept, 2006, The United Western Bank Ltd was placed under moratorium leading to its amalgamation with Industrial Development Bank of India Ltd. in Oct, 2006. On Apr 1, 2007, Bharat Overseas Bank an old private sector bank was taken over by Indian Overseas Bank and on Apr 19, 2007, Sangli Bank, another old private sector bank was merged with ICICI Bank, a new private sector bank. Shareholding Pattern As of Mar 2006, only four Nationalised Bank had 100% ownership of the Government. These are Central Bank of India, Indian Bank, Punjab and Sind Bank and United Bank of India. As of Mar 2006, the government shareholding in the State Bank of India stood at 59.7% and in between 51-77% in other nationalised banks. In Feb 2007, Indian Bank came out with a public issue thus leaving only three nationalised banks having 100% government ownership. Foreign institutional holding up to 20% of the paid up is allowed in respect of Public Sector Banks including State Bank of India and many of the banks have reached the threshold level for FII investment. In respect of Private Sector Banks where higher FII holding is allowed, threshold limit has been reached in the leading banks. III. INDIAN BANKING AND INTERNATIONAL TRENDS When compared to other emerging markets, the growth of Indian banking has been impressive and compares favorably on several counts. A recent study by Bank for International Settlements on the progress and the prospects of banking systems in emerging countries highlights the following features of the performance of Indian banks:

Average growth rate of real aggregate credit in India rose from 6.1% during the period 199599 to 14.6 % in 2000-04. The average growth rate of real aggregate credit in India during 2000-04 in India is higher as compared to major countries and regions in the emerging markets, such as China (13.3%), Other Asia (4.7%), Latin America (4.5%), and Central Europe (9.6%).

Commercial banks in India account for a major share of the bank credit (97%) as compared to Latin America (68%), Other Asia (74%) and Central Europe (83%). Real bank credit to the private sector has shown sustained growth in India, and has moved from 3.9% a year in 1990-94 to 6.9% a year in 1995-99 to 13.5 % a year in 2000-04. In 2005, real bank credit to the private sector in India showed a growth of 30% year-on-year as against 9.4% in China and 15.8% in emerging markets. In India, during the period 1999 and 2004, non-performing loans as a percentage of total commercial bank assets came down from 6.1% to 3.3%, capital asset ratios moved up from 11.3% to 12.9% and operating costs as a percentage of total assets reduced from 2.4% to 2.3%. NPAs in China in 2004 stood at 6%. In India, return on assets of banks during the period 1999-2004 moved up from 0.4% to 1.1%, and return on equity from 8.5% to 20.9% where as in China the former rose from 0.1% to 0.3%.

IV. BUSINESS OF COMMERCIAL BANKS 1. Balance Sheet Growth In FY06, the aggregate balance sheet of the scheduled commercial banks increased by 18.4%, over a 19.3 % growth registered in FY05. The ratio of bank assets to GDP rose to 86.9% as compared to 82.8% in FY05. Banking industry gained from the by rapid rise in the real economy, leading to surge in several areas of business. 2. Capital and Reserves The capital of the scheduled commercial banks as on Mar 31, 2006 stood at Rs 252040 mn. During FY06, reserves and surplus of all scheduled commercial banks rose by 27.6%. Revenue and other reserves nearly doubled for the banks as a whole, with SBI reporting four fold increase in this regard. 3. Deposits and Advances Deposits of SCBs grew by 17.8 % in FY06 as against 16.6% in FY05, but the advances growth outstripped this pace with a rise of 31.8% in FY06, over a 33.2% growth in FY05. As per a recent RBI report, FY06 was the second consecutive year, when increase in credit in absolute terms was more than the absolute increase in aggregate deposits. Table 5: Deposits/Advances/Investments of Bank Groups in India (In Rs mn)

Source: Reserve Bank of India 4. Group-wise Performance The growth in deposits across the different bank groups showed substantial variation. Public Sector Banks with a deposit growth of 12.9% and Old Private Sector Banks with 11.4% showed a relatively subdued growth in deposits where as the New Private Sector Banks with 50.7% and Foreign Banks with 31.7% showed a sharp rise. Borrowings of the Public Sector Banks grew at 24%, but that of the Foreign Banks was much higher (30%). Due to redemption of the India Millennium Deposits in Dec 2005, banks non-resident foreign currency deposits showed a sizeable decline. Loans and advances growth too was on similar trends. For Public Sector Banks, loan growth was 29.5% as compared to 34.9% in FY05, for Old Private Sector Banks, it was 21.5% as against 22.7% in the previous year, for New Private Sector Banks it was 50.2 %

as against 33% in FY05, and for Foreign Banks it was 29.5% as against 24 % in FY05. In the non-food credit, apart from retail credit which grew at 40.9%; infrastructure (24%), basic metals (14.1%) and textiles (11.2%) were the other major sectors that received higher levels of incremental credit. 5. Growth in Retail Lending While total credit of the SCBs grew at 31% in FY06, credit to the new segments in the retail banking showed still higher growth rates. In FY06, loans to housing rose by 33.4%, credit card receivables by 47.9%, auto loans by 75%, and other personal loans by 39.1% taking the growth of retail loans during the FY06 to 40.9%. Retail loans in FY06 constituted 25.5% of the total loans and advances of scheduled commercial banks. Lending to sensitive sectors also rose significantly. Loans to capital market rose by 39.2%, to real estate markets by 81.78% and to commodities by 85.56% with the growth in these three segments reaching to 77.65% in FY06. Table 6: Advances to Sensitive Sectors as a percentage to Total Loans

Source: Reserve Bank of India 6. Priority Sector Advances Credit to priority sector increased at a robust rate of 33.7% in FY06 on the top of 40.3% in the previous year. A major portion of the credit growth in the priority sector is accounted by agriculture and housing. Credit to SSI also grew sizeably. Table 7: Priority Sector Lending

Source: Reserve Bank of India. Figures in brackets are annual growth rate in % 7. Market Share The share of Public Sector Banks showed deceleration in respect of major areas of business, where as that of the new private sector and Foreign Banks earned higher share of business. The market share of the Old Private Sector Banks too came under pressure. Public Sector Banks hold 75% market share in major areas of business.

Table 8: Major Components of Business, Bank GroupWise (in %)

Source: Reserve Bank of India * Industrial Development Bank of India Ltd ** Includes Industrial Development Bank of India Ltd 8. Access to Equity Markets Banks have been increasingly accessing primary equity capital markets for raising resources. In FY06, resource mobilization of banks through public equity markets rose by 24%. Resources raised by banks from public equity markets showed continuous increase, from Rs 24560 mn in FY04 to Rs 89220 mn in FY05 to Rs 110670 mn in FY06. Encouraged by the response to banks stocks, eleven banks, six in the public sector and five in the private sector, raised Rs 110670 mn from the equity markets. The Public Sector Banks which raised equity from the capital markets included Allahabad Bank, Oriental Bank of Commerce, Syndicate Bank, Andhra Bank, Bank of Baroda and Union Bank of India. The five Private Sector Banks were Lakshmi Vilas Bank Ltd, Yes Bank Ltd, ICICI Bank Ltd., The South Indian Bank Ltd and The United Western Bank Ltd. The size of the share issue of these banks was Rs 6270 mn where as the premium was at Rs 104400 mn. Banks also tapped private placement market for resource mobilization in a big way by raising Rs 301510 mn of which Public Sector Banks accounted for 74%. Bank stocks also emerged as an important portfolio for investment giving significant returns. Returns from bank stocks as measured through BSE Bankex rose from 28.6% in FY05 to 36.8 % in FY06 as compared to the benchmark index. Bank stocks still have scope for further growth with lower valuation prevailing at present in many banks.

Source : Bombay Stock Exchange. 9. Asset Quality There is a perceptible increase in the quality of bank assets. Standard assets as percent of all assets for scheduled commercial banks moved from 94.9% in FY05 to 96.7% in FY 06, with decline in reported sub standard, doubtful and loss assets. The proportion of standard assets

rose across all the bank groups in FY06, showing improved management of assets by banks. According to a report of the Reserve Bank of India, the gross non performing assets of the scheduled commercial banks declined by Rs 73090 mn over and above the decline of Rs 65610 mn in FY05. As on 31 Mar 2006, gross NPAs of scheduled commercial banks stood at Rs 518150 mn of which 26.4% are with State Bank group, 53% with the nationalised banks, 7.1% with the Old Private Sector Banks, 7.3% with the New Private Sector Banks and 3.7% with the Foreign Banks. Scheduled commercial banks stepped up recovery efforts through numerous methods. In addition to their own internal recovery processes, banks recovered to the tune of Rs 6080 mn through one-time settlement and compromise schemes, Rs 2230 mn though Lok Adalats, Rs 47100 mn through Debt Recovery Tribunals and Rs 34230 mn through SARFAESI Act. Asset Reconstruction Company of India Ltd (ARCIL) acquired 559 cases amounting to Rs 211260 mn from banks. Table 9: Asset Classification in Banks (as % of Total Assets)

Source: Reserve Bank of India 10. Distribution of Network The expansion in the distribution network of the banks is increasingly evident from the growth of the automated teller machines. There is a surge in the growth of off-site ATMs with their share in the total ATMs rising to 32% in respect of Public Sector Banks, 67% in State Bank group, 32% in Old Private Sector Banks, 63% in New Private Sector Banks and 73% in Foreign Banks. Computerisation of public sector bank branches is also moving at rapid pace. In 2007 the pace of computerization progressed much further. Public Sector Banks have 93 branches operating abroad in 26 countries. All scheduled commercial banks together have 106 branches abroad.

Table 10: Branches/ATMs/Staff in Banks (Number)

Source: Reserve Bank of India 11. Major Trends in Business Indian banking, in addition to improvements in performance and efficiency, has also experienced significant changes in the structure of asset and liabilities. The major changes on the liabilities side include relatively higher growth of demand deposits over time deposits, and also, within time deposits, greater preference for short term over the longer term deposits. The share of demand deposits in total deposits increased from 14.7% in FY01 to 17% in FY06. The share of short term deposits in total time deposits increased from 43.8% in FY00 to 58.2% in FY06. The narrowing of interest rate spread between short and long term deposits has reduced the preference for long term deposits. Banks are moving away from investments to loans due to more lending opportunities offered by the higher economic growth. The rate of bank credit growth which was at 14.4% in FY03 rose sharply to reach 30% each in the FY05 and FY06. Bank credit has picked up momentum on the back of rising growth of real economy. A period of low interest rates induced banks to shift their preference from investments to advances, which led to the share of gross advances in total assets of all commercial banks reaching 54.7% in FY06 from 45% in two years prior to that. The sectors towards which the bank credit was directed has also shown significant changes. Retail loans witnessed growth of over 40% in the last two years, and began driving the credit growth to a significant extent. Retail loans as a percentage of Gross Advances rose from about 22% in FY04 to 25.5% in FY06. Within the retail loans, housing segment showed the highest growth of 50% in FY05 and 34% in FY06. As per the RBI data, banks direct exposure to commercial real estate more than doubled in FY06. Despite sharp rise in the credit growth, improved risk management processes and procedures of banks contained the surge in bad debts which is evident from the lower levels of incremental nonperforming assets reported by the banks as also the rise in the proportion of standard assets. Further improvement in risk management systems could provide banks with more opportunities in expanding credit and pursuing higher levels of growth in retail lending. ///////////////////////////////////////////////////////

In the last Industry Shastra, we discussed the structure and business model of the Indian banking industry. Today, in the 2nd part of the same article, we will talk about its future prospects, along with growth drivers and key concerns. Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a highperforming sector

According to an IBA-FICCI-BCG report titled Being five star in productivity road map for excellence in Indian banking, Indias gross domestic product (GDP) growth will make the Indian banking industry the third largest in the world by 2025. According to the report, the domestic banking industry is set for an exponential growth in coming years with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010). So, before going in its future, lets have a glance at its historical performance.

If we look at 5 years historical performance of different types of players in the banking industry, public sector bank has grown its deposits, advances and business per employee by the highest rate 21.7%, 23% and 21.1% respectively. As far as net interest income is concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per employee and profit per employee has been the highest for public sector banks, in absolute terms, foreign banks have the highest business per employee as well as profit per employee.

In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of public sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very high for private and foreign bank as compared to public banks. In conclusion, we could say that the current position of ROA, Net NPA and CAR of different kinds of players in the industry indicates that going ahead, public banks will have to face relatively more problems as compared to private and foreign banks. After looking at industry performance, lets see how the different players in the Banking Industry have performed in the last five years

The table above indicates that overall the top private banks have grown faster than that of public banks. Axis Bank, one of the new private sector bank, has shown the highest growth in all parameters i.e. net interest income, deposits, advances, total assets and book value. Among public sector banks, Bank of Baroda has been the outperformer in the last five years.

Kotak Mahindra Bank has reported the highest 5-year average net interest margin and currently, it also has the highest CAR whereas HDFC Bank has the highest CASA, the lowest net NPA to net advances ratio and the highest five-year-average ROA. On the other hand, Indias largest bank, SBI reported the lowest five-year-average ROA. Currently, it has the highest net NPA to net advances ratio and the lowest CAR.

Looking at all of the above, it is expected that Private Banks are better placed to garner growth in the Indian Banking Industry. High growth of Indian Economy: The growth of the banking industry is closely linked with the growth of the overall economy. India is one of the fastest growing economies in the world and is set to remain on that path for many years to come. This will be backed by the stellar growth in infrastructure, industry, services and agriculture. This is expected to boost the corporate credit growth in the economy and provide opportunities to banks to lend to fulfil these requirements in the future. Rising per capita income: The rising per capita income will drive the growth of retail credit. Indians have a conservative outlook towards credit except for housing and other necessities. However, with an increase in disposable income and increased exposure to a range of products, consumers have shown a higher willingness to take credit, particularly, young customers. A study of the customer profiles of different types of banks, reveals that foreign and private banks share of younger customers is over 60% whereas public banks have only 32% customers under the age of 40. Private Banks also have a much higher share of the more profitable mass affluent segment. New channel Mobile banking is expected to become the second largest channel for banking after ATMs: New channels used to offer banking services will drive the growth of banking industry exponentially in the future by increasing productivity and acquiring new customers. During the last decade, banking through ATMs and internet has shown a tremendous growth, which is still in the growth phase. After ATMs, mobile banking is expected to give another push to this industry growth in a big way, with the help of new 3G and smart phone technology (mobile usage has grown tremendously over the years). This can be looked at as branchless banking and so will also reduce costs as there is no need for physical infrastructure and human resources. This will help in acquiring new customers, mainly who live in rural areas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG report predicts that mobile banking would become the second largest channel of banking after ATMs. Financial Inclusion Program: Currently, in India, 41% of the adult population dont have bank accounts, which indicates a large untapped market for banking players. Under the Financial Inclusion Program, RBI is trying to tap this untapped market and the growth potential in rural markets by volume growth for banks. Financial inclusion is the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. The RBI has also taken many initiatives such as Financial Literacy Program, promoting effective use of development communication and using Information and Communication Technology (ICT) to spread general banking concepts to people in the under-banked areas. All these initiatives of promoting rural banking are taken with the help of mobile banking, self help groups, microfinance institutions, etc. Financial Inclusion, on the one side, helps corporate in fulfilling their social responsibilities and on the other side it is fueling growth in other industries and so as a whole economy.

More stringent capital requirements to achieve as per Basel III: Recently, the RBI released draft guidelines for implementing Basel III. As per the proposal, banks will have to augment the minimum core capital after a stringent deduction. The two new requirements capital conservative buffer(an extra buffer of 2.5% to reduce risk) and a counter cyclical buffer (an extra capital buffer if possible during good times) have also been introduced for banks. As the name indicates that the capital conservative buffer can be dipped during stressed period to meet the minimum regulatory requirement on core capital. In this scenario, the bank would not be supposed to use its earnings to make discretionary payouts such as dividends, shares buyback, etc. The counter cyclical buffer, achieved through a pro-cyclical build up of the buffer in good times, is expected to protect the banking industry from system-wide risks arising out of excessive aggregate credit growth.

The above table reveals that even under current Basel Norm II, Indian banks follow more stringent capital adequacy requirements than their international counterparts. For Indian Banks, the minimum common equity requirement is 3.6%, minimum tier I capital requirement is 6% and minimum total capital adequacy requirement is 9% as against 2%, 4% and 8% respectively recommended in the Basel II Norm. Due to this the capital adequacy position of Indian banks is at comfortable level. So, going ahead, they should not face much problem in meeting the new norms requirements. But as we saw earlier, private sector banks and foreign banks have considerable high capital adequacy ratio, hence are not expected to face any problem. But, public sector banks are lagging behind. So, the Government will have to infuse capital in public banks to meet Basel III requirements. With the higher minimum core Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is expected to come down. Increasing non-performing and restructured assets: Due to a slowdown in economic activity in past couple of years and aggressive lending by banks many loans have turned nonperforming. Restructuring of assets means loans whose duration has been increased or the interest rate has been decreased. This happens due to inability of the loan taking company/individual to pay off the debt. Both of these have impacted the profitability of banks as they are required to have a higher provisioning amount which directly eats into the profitability. The key challenge going forward for banks is to increase loans and effectively manage NPAs while maintaining profitability. Intensifying competition: Due to homogenous kind of services offered by banks, large number of players in the banking industry and other players such as NBFCs, competition is already high. Recently, the RBI released the new Banking License Guidelines for NBFCs. So, the number of players in the Indian banking industry is going to increase in the coming years. This will intensify the competition in the industry, which will decrease the market share of existing banks. Managing Human Resources and Development: Banks have to incur a substantial employee training cost as the attrition rate is very high. Hence, banks find it difficult manage the human resources and development initiatives. Currently, there are many challenges before Indian Banks such as improving capital adequacy requirement, managing non-performing assets, enhancing branch sales & services, improving organisation design; using innovative technology through new channels and working on lean operations. Apart from this, frequent changes in policy rates to maintain economic stability, various regulatory requirements, etc. are additional key concerns. Despite these concerns, we expect that the Indian banking industry will grow through leaps and bounds looking at the huge

growth potential of Indian economy. High population base of India, mobile banking offering banking operations through mobile phones, financial inclusion, rising disposable income, etc. will drive the growth Indian banking industry in the long-term. The Indian economy will require additional banks and expansion of existing banks to meet its credit needs. Given below is the MoneyWorks4me assessment for few banks: At MoneyWorks4me we have assigned colour codes to the 10 YEAR X-RAY and Future Prospects of the companies, as Green (Very Good), Orange (Somewhat Good) and Red (Not Good). *The 10 YEAR X-RAY facilitates analysis of the financial performance of the bank considering the seven most important parameters. A 10 Year period will normally encompass an entire business cycle. Analyzing the performance over this time frame is essential to understand how a company has fared during the good as well as bad times. The seven most important parameters that one needs to look at are Net Interest Income Growth Rate, Total Income Growth Rate, EPS Growth Rate, Book Value per Share (BVPS) Growth Rate, Return on Assets (ROA), Net NPA to Net Advances Ratio and Capital Adequacy Ratio.

While investing, one must always invest in the stocks of a company that operates in an industry with bright long-term prospects. Further, the companys 10 YEAR X-RAY and future prospects should also be Green. The table given above gives you a list of few companies from the Banking Industry that you could consider investing in. But, you need to invest in these stocks at the right price (i.e. when the market offers an attractive discount). To find out the right price to invest in these companies, become a member of MoneyWorks4me.com
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The Indian banking industry started taking shape after Indias independence in 1947. Though the Indian banking industry can be traced as far back as 1806 with the establishment of Bank of Bengal, the industry was in a state of turmoil. Under the British influence, Calcutta witnessed a surge in trading activities, giving rise to a number of banking establishments during the period. Several banks, set up in order to finance trading, went out of business. For instance, Union bank, formed by Indian merchants, failed due to

economic recession during 1848-49 resulting in depositors losing money. Such events resulted in shifting the reigns of the industry into the hands of Europeans till the early twentieth century. From 1906 to1911, several banks were set up based on the principles of the Swadesi movement. The movement inspired Indian businessmen and politicians to set up banks for the Indian community and many new banks were launched to promote trade and finance in communal groups. Some of the prominent ones among these are Bank of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of India. Bank of Bengal, along with its sister banks, Bank of Bombay and
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Bank of Madras, set up by British East India Company, merged in >> Check out more such India-centric 1921 to give birth to Imperial bank of India, now known as State e-books and reports bank of India.

During 1914-1945, India went through several ups and downs politically and economically and the effects were felt in the banking sector too. The World Wars disrupted banking activities of the nation and almost 94 banks failed during this period. After 1947, however, banking activities flourished. After the partition of India, the government toook drastic steps to regulate the banking industry. For example, in 1948, additional powers and authority were vested in the Reserve bank of India to monitor the functioning of the entire banking system. The passing the Banking regulation act in 1949, empowered RBI to further regulate, inspect, and control Indian banks. The nationalization and liberalization of banks 1969 and 1991 respectively also boosted the development of the Indian banking sector. Nationalization resulted in 91% of government holding in the banking industry and liberalization paved the path for private players to participate in the industry. As a result, banks like Oriental bank of Commerce, HDFC bank, ICICI bank, and AXIS bank came into being. Foreign banks too were permitted to set up their offices in India. The rationalization of FDI norms in 2002 also allowed foreign players to acquire stakes in Indian banks. These banks implemented innovative forms of banking like ATMs, mobile banking, phone banking, internet banking, and debit/credit cards. The private players constantly improved services in order to retain customers and win the severe competition which had become a feature of the Indian banking industry. Currently, private banks are going through a series of mergers and acquisitions and public sector banks are shrinking in the form of manpower, equity, and non-performing assets. The public sector banks have been grappling with attrition which surfaced after the Voluntary Retirement Scheme was announced. The dilution of equity from 51% to 33% has opened up opportunities for takeovers. The Indian banking system, however, proved resilient to shocks arising out of the global financial recession. In terms of quality of assets, the Indian banking players have come out clean with strong and transparent balance sheets compared to their counterparts in other nations.

Following the financial crisis, new deposits made their way towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5% of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8%. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8%, 5.6%, and 3%, respectively. Ever since US declared recovery from the global financial crisis, the confidence of non-resident Indians (NRIs) in the Indian economy has revived again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin. The report also found that scheduled commercial banks served 34,709 banked centers. Of these centers, 28,095 were single office centers and 64 centers had 100 or more bank offices. The expansion plans are self evident from the example of SBI, which is adding 23 new branches abroad, bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers. Currently, the Indian banking framework is comprised of 88 scheduled commercial banks (SCBs) 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake, they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS. Currently the banking industry looks optimistic in terms of strong inflow of funds. This could be supported by the declaration made by RBI in 2009. According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to:

Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly through policy adjustments, Actively manage liquidity to ensure credit demands of productive sectors are met adequately, Maintain an interest rate environment consistent with financial stability and price stability.

The money supply growth on a year-on-year basis at 18.9% as on October 9, 2009, remained above the indicative projection of 18% set out in the First Quarter Review of July 2009. The main source of the expansion was bank credit to the government, reflecting large market borrowings of the government