INDIAN BANKING  

Trend and Progress of Banking in India, 2006-07

Resource Mobilization: Challenge before banks in India 

THE major challenge for banks in India in current times is to mobilize enough resources for meeting the demands of a growing economy, said Indian central banking authorities Reserve Bank of India (RBI). In its Report on Trend and Progress of Banking in India, 2006-07 country’s central bank said that most of business of banks in India is still concentrated in a few urban centres. To mitigate this problem, since 2006, opening of new branches for any bank is approved by the Reserve Bank only on condition that at least half of such new branches are opened in under-banked areas as notified by the Reserve Bank.  

Many banks now find that the branches in semi-urban and rural areas are also commercially viable. The Report records that there are some States where the credit-deposit ratio is observed to be low. Already some area-specific action plans for accelerated financial deepening have been drawn up with full participation of the State Governments, banks and other local development agencies. The Reserve Bank would continue to play the role of a catalyst as well as a coordinator in these initiatives of growing cooperation between the States and the banking system.  

The Report further notes that there remains huge potential for growth in small centres and States with low credit-deposit ratios. The challenge going forward is to increase banking penetration further. Banks, therefore, need to expand their outreach to hitherto under-banked areas/States by re-focusing their strategies and using appropriate technology and delivery channels. Information technology is critical to minimizing transaction costs. At policy level, the Reserve Bank, in recent years, has also focused on democratization of the financial sector with the aim of ensuring 100 per cent financial inclusion.  

The Reserve Bank has also made a beginning to enhance financial literacy and impart financial education to enable vast numbers of new entrants into employment and higher incomes to better manage their finances in a rapidly marketising financial sector. As noted in the Report, there is also a need for the banking sector to increase the flow of credit to agriculture and small-scale industries. To address this issue, the Reserve Bank has at policy level already modified the definition of the priority sector in April 2007. Priority sector is now restricted to advances to highly employment intensive sectors such as agriculture, small industry, educational loans for students and low cost housing.  The Report observes that to raise capital from the market continuously to sustain their operations in a fast growing economy is a challenge for banks. They also need to be vigilant about maintaining their profitability in future. Banks’ net interest margins have come under pressure in recent years. This is the outcome of increased competition and reflects an improvement in the efficiency of the banking sector. However, the impact of reduced margins on the profitability of banks has been disguised by strong volume growth in the last few years. In order to maintain their profitability in future, therefore, banks would have to contain operating costs, apart from searching for non-interest sources of income.

RBI Third Quarter review* of Annual Statement on Monetary Policy for the Year 2007-08 HIGHLIGHTS Bank Rate, Reverse Repo Rate, Repo Rate and Cash Reserve Ratio (CRR) kept unchanged. The flexibility to conduct overnight or longer term repo including the right to accept or reject tenders under the liquidity adjustment facility (LAF), wholly or partially, is retained. Overall real GDP growth projection for 2007-08 at around 8.5 per cent is retained. The policy endeavour would be to contain inflation close to 5.0 per cent in 2007-08 while conditioning expectations in the range of 4.0-4.5 per cent. While non-food credit has decelerated, growth in money supply and aggregate deposits of scheduled commercial banks continue to expand well above indicative projections. High growth in reserve money is driven by large accretion to RBI’s net foreign exchange assets. Liquidity management will assume priority in the conduct of monetary policy through appropriate and timely action. Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be: o To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets. o To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion. o To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate.     Presented by Dr. Y Venugopal Reddy, Governor, Reserve Bank of India on January.29, 2008

As noted in the Report, there is also a need for the banking sector to increase the flow of credit to agriculture and small-scale industries. To address this issue, the Reserve Bank has at policy level already modified the definition of the priority sector in April 2007. Priority sector is now restricted to advances to highly employment intensive sectors such as agriculture, small industry, educational loans for students and low cost housing. 

The Report observes that to raise capital from the market continuously to sustain their operations in a fast growing economy is a challenge for banks. They also need to be vigilant about maintaining their profitability in future. Banks’ net interest margins have come under pressure in recent years. This is the outcome of increased competition and reflects an improvement in the efficiency of the banking sector. However, the impact of reduced margins on the profitability of banks has been disguised by strong volume growth in the last few years. In order to maintain their profitability in future, therefore, banks would have to contain operating costs, apart from searching for non-interest sources of income.

In an increasingly global and competitive financial world, a major challenge for banks is to institute appropriate risk management systems to manage such risks and for the Reserve Bank to understand the changing forms of risk and adapt its regulatory and supervisory responsibilities appropriately while maintaining financial stability. 

Commercial Banks

According to the Reserve bank analysis, bank credit growth remained robust for the third year in succession, although there was some moderation. Deposit growth of commercial banks accelerated due mainly to term deposits. Higher net accretion in deposits than expansion in credit, resulted in moderate growth of investment portfolio as well. 

Net profits of scheduled commercial banks increased on the back of rise in interest income and containment of operating expenses. 

Non-performing assets ratio, both on a gross and net basis, declined further.

The capital to risk-weighted ratio of SCBs was sustained at the previous year’s level despite strong growth increase in risk-weighted assets emanating largely from credit expansion.  

Consequent upon the amalgamation of 147 RRBs into 46 new RRBs, sponsored by 19 banks in 17 States, the total number of RRBs declined from 196 to 95 as at August 31, 2007.  

Co-operative Banking

The analysis of balance sheets, financial performance and soundness indicators of co-operatives reveals that: 

• Assets of urban co-operative banks (both scheduled and non-scheduled) increased moderately during 2006-07.

• Net profits of scheduled UCBs declined during 2006-07 in contrast to an increase in the previous year mainly on account of increase in provisions, contingencies and taxes.

• Asset quality of UCBs improved significantly during 2006-07.

• In the short-term structure of rural co-operative banks, while the operating profits of StCBs declined during 2005-06, their net profits increased significantly mainly on account of substantial decline in provisioning. The balance sheets of DCCBs expanded moderately. Their profits witnessed a sharp decline. During 2005-06, total profits earned by profit-making PACS increased, while the losses made by loss making PACS declined.

• In the case of long-term structure, the operating profits of state co-operative agriculture and rural development banks (SCARDBs) registered a sharp rise.  

• Asset quality of StCBs, DCCBs and SCARDBs declined, while that of PCARDBs improved significantly.  

• The SHG-Bank linkage programme continued to make significant progress as 0.6 million new SHGs were credit linked by the banking system during 2006-07 taking the cumulative number of SHGs credit linked to 2.86 million.

Non-Banking Financial Institutions

The analysis of the business operations and financial performance of financial institutions (FIs), non-banking financial companies (NBFCs), and primary dealers (PDs) shows that:

• Financial assistance sanctioned and disbursed by FIs continued to expand during 2006-07. While sanctions grew at a lower rate as compared with previous year, disbursements witnessed a sharp rise. 

• The combined balance sheets of FIs during 2006-07 expanded at a high rate as compared with the previous year. On the asset side, loans and advances continued to expand, albeit with some moderation.  

• While non-interest income of FIs increased significantly during 2006-07, the operating expenses of FIs registered a decline, resulting in a sharp rise in operating profits.  

• The capital adequacy ratio of FIs continued to be significantly higher than the minimum prescribed. Asset quality of FIs improved during the year. 

• Total assets of NBFCs (excluding RNBCs) expanded at a higher rate during 2006-07 as compared to 2005-06.

• Financial performance of NBFCs turned around during 2006-07. This was entirely on account of sharp rise in fund based income, which offset the sharp increase in operating expenditure and financial expenditure.  

• Asset quality of various types of NBFCs as reflected in the various categories of NPAs (sub-standard, doubtful, loss) remained broadly at the previous year’s level.  

• The increase in income of RNBCs during 2006-07 was more than the increase in the expenditure, as a result of which the operating profit of RNBCs increased.

• The liabilities/ assets of non-deposit taking systemically important non-banking finance companies (with asset size of Rs. 100 crore and above) (NBFCs-ND-SI) increased during the year ended March 2007 over the previous year.  

• The gross NPAs to total assets ratio of NBFCs-ND-SI declined during the year ended March 2007.  

• As a result of sharp increase in expenditure, net profits of PDs declined during 2006-07. 

• The CRAR of PDs continued to be much in excess of the stipulated minimum of 15 per cent of aggregate risk-weighted assets.  

The Reserve Reserve Bank report said:

• Financial markets remained orderly during 2006-07, barring some occasions when the money market turned volatile mainly due to large capital inflows and movements in Government cash balances.  However, orderly conditions were restored.  

• The activity in the money market has witnessed further significant migration from the uncollateralised to the collateralised segment during 2006-07.

• Foreign exchange markets showed a two-way movement during 2006-07.

• Yields in Government securities market hardened during the latter part of 2006-07 and the first half of 2007-08, reflecting domestic developments as well as global events.

• The net mobilizations of resources by mutual funds under equity oriented schemes during 2006-07 declined, reflecting the risk aversion tendency among investors particularly in view of the stock market touching record peaks.  

• The stock markets registered large gains with occasional bouts of volatility due mainly to global developments.

• Continuing the upward trend during 2007-08, the BSE Sensex closed at an all-time high level of 19976 on November 2, 2007.

• The volume and value of transactions through RTGS increased manifold. 

Source: Reserve Bank of India report on Trend and Progress of Banking in India, 2006-07

 

Consolidated Balance Sheet of Public Sector Banks (2006-07)
(In Rs. crore)

Public Sector Banks
	As on March 31, 2006		As on March 31, 2007
	Amount	% to total	Amount	% to total
LIABILITIES
1. Capital	12329.80	0.61	12416.31	0.51
2. Reserves & Surplus	102714.03	5.10	123210.48	5.05
3. Deposits	1622481.09	80.53	1994199.57	81.73
3.1 Demand Deposits	197353.32	9.79	235401.27	9.65
3.2 Savings Bank Deposits	450787.73	22.37	518171.05	21.25
3.3 Term Deposits	974340.05	48.36	1240327.25	50.83
4. Borrowings	115787.37	5.72	121772.60	4.99
5. Other Liabilities and Provisions	162099.10	8.05	188386.96	7.72
Total Liabilities	2014874.09	100.00	2439985.92	100.00
ASSETS
1. Cash & balances with RBI	112769.50	5.60	142211.48	5.83
2. Balances with banks and money at call & short notice	74416.42	3.69	94450.80	3.87
3. Investments	633556.80	31.41	664645.47	27.24
3.1 Govt. Securities	519875.05	25.80	538374.89	22.06
3a. In India	516129.96	25.62	534953.25	21.92
3b. Outside India	3745.09	0.19	3421.64	0.14
3.2 In other approved securities	13382.65	0.66	12338.56	0.51
3.3 In non-approved securities	100299.19	4.98	113932.01	4.67
4. LOANS & ADVANCES	1106287.71	54.91	1440122.88	59.02
4.1 Bills purchased & discounted	75705.19	3.76	92695.50	3.80
4.2 Cash credit, Overdrafts etc.	443376.58	22.01	557345.56	22.84
4.3 Term loans	587205.95	29.14	790081.82	32.38
5. Fixed Assets	14668.92	0.73	20195.16	0.83
6. Other assets	73174.63	3.63	78360.13	3.21
Total Assets	2014874.09	100.00	2439985.92	100.00
Nationalized Banks
	As on March 31, 2006		As on March 31, 2007
	Amount	% to total
LIABILITIES
1. Capital	10570.20	0.86	10656.16	0.70
2. Reserves & Surplus	60441.49	4.90	73729.42	4.82
3. Deposits	1054071.06	85.39	1317369.93	86.08
3.1 Demand Deposits	106824.15	8.65	128777.70	8.41
3.2 savings Bank Deposits	298238.24	24.16	342354.26	22.37
3.3 Term Deposits	649008.67	52.57	846237.97	55.30
4. Borrowings	30657.87	2.48	31045.30	2.03
5. Other Liabilites & Provisions	78721.78	6.38	97550.64	6.37
Total Liabilities	1234462.40	100.00	1530351.44	100.00
ASSETS
1. Cash & balances with RBI	79060.86	6.40	91977.73	6.01
2. Balances with banks and money at call & short notice	43506.46	3.52	63824.50	4.17
3. Investments	383445.02	31.06	427305.90	27.92
3.1 Govt. Securities	310817.25	25.18	344728.68	22.53
3a. In India	307719.48	24.03	341874.76	22.34
3b. Outside India	3097.77	0.25	2853.93	0.19
3.2 In other approved securities	9080.13	0.74	8228.05	0.54
3.3 In non-approved securities	63547.65	5.15	74349.17	4.86
4. LOANS & ADVANCES	681869.31	55.24	895225.99	58.50
4.1 Bills purchased & discounted	42117.86	3.41	53314.39	3.48
4.2 Cash credit, Overdrafts etc.	306330.31	24.81	371171.82	24.25
4.3 Term loans	333421.14	27.01	470739.79	30.76
5. Fixed Assets	9900.86	0.80	13455.22	0.88
6. Other assets	36679.88	2.97	38552.10	2.52
Total Assets	1234462.40	100.00	1530351.44	100.00
State Bank Group
	As on March 31, 2006		As on March 31, 2007
	Amount	% to total
LIABILITIES
1. Capital	1035.80	0.15	1035.80	0.13
2. Reserves & Surplus	36624.28	5.20	41905.56	5.20
3. Deposits	542409.12	78.40	633475.60	78.61
3.1 Demand Deposits	85354.50	12.34	99634.96.	12.36
3.2 savings Bank Deposits	150050.52	21.69	172082.37	21.36
3.3 Term Deposits	307004.10	44.37	361758.27	44.89
4. Borrowings	37084.29	5.43	48322.92	6.00
5. Other Liabilites & Provisions	74693.41	10.73	81055.27	10.06
Total Liabilities	691846.91	100.00	805795.15	100.00
ASSETS
1. Cash & balances with RBI	31028.55	4.48	44827.28	5.56
2. Balances with banks and money at call & short notice	28227.28	4.08	29111.68	3.67
3. Investments	224761.34	32.51	211664.25	26.27
3.1 Govt. Securities	193125.05	27.94	177454.82	22.02
3a. In India	192477.72	27.85	176887.11	21.95
3b. Outside India	647.33	0.09	567.72	0.07
3.2 In other approved securities	4302.53	0.62	4093.27	0.51
3.3 In non-approved securities	27333.77	3.95	30116.16	3.74
4. LOANS & ADVANCES	371679.93	53.70	482426.07	59.87
4.1 Bills purchased & discounted	31369.41	4.53	37086.93	4.60
4.2 Cash credit, Overdrafts etc	139962.87	20.22	180696.10	22.42
4.3 Term loans	200347.05	28.94	264643.04	32.81
5. Fixed Assets	3950.71	0.57	3961.58	0.49
6. Other assets	32199.70	4.65	33804..30	4.20
Total Assets	691846.91	100.00	805795.15	100.00
1 crore : 10 million Source : Reserve Bank of India

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Consolidated  Balance Sheet of Foreign Banks (2006-07)
(In Rs. crore)

	As on March 31, 2006		As on March 31, 2006
	Amount	% to total	Amount	% to total
LIABILITIES
1. Capital	8940.17	4.43	12999.36	4.68
2. Reserves & Surplus	15346.41	7.61	20076.09	7.22
3. Deposits	113744.99	56.43	150793.58	54.24
3.1 Demand Deposits	38696.61	19.20	43256.75	15.56
3.2 Savings Bank deposits	18783.18	9.32	21839.14	7.86
3.3 Term Deposits	56265.20	27.91	85697.69	30.82
4. Borrowings	40161.78	19.92	50966.06	18.33
5. Other Liabilities and Provisions	23392.33	11.60	43181.39	15.33
Total Liabilities	201585.69	100.00	278016.49	100.00
ASSETS
1. Cash & Balance with RBI	8108.24	4.07	12144.71	4.37
2. Balances with banks and money at call & short  notice	18752.17	9.41	26674.26	9.59
3. Investments	52383.57	26.28	71469.30	25.71
3.1 In Govt. Securities a. In India b. Outside India	40880.14	20.51	56230.61	20.23
3.2 In other approved securities	84.85	0.04	84.99	0.03
3.3 In non-approved securities	11418.58	5.73	15153.70	5.45
4. Loans & Advances	97561.93	48.94	126338.57	45.44
4.1 Bills purchased & discounted	9520.08	4.78	11543.78	4.15
4.2 Cash credit, Overdrafts, etc.	41168.29	20.65	52568.83	18.91
4.3 Term Loans	46872.57	23.51	62225.96	22.38
5. Fixed Assets	2412.12	1.21	3000.85	1.08
6. Other Assets	20139.99	10.10	38388.80	13.81
Total Assets	199358.03	100.00	278016.49	100.00
1 crore : 10 million Source : Reserve Bank of India

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Consolidated  Balance Sheet of Private Sector Banks (2006-07)
(Rs in crore)

Item
	As on March 31, 2006		As on March 31, 2007
	Amount	Percent to total	Amount	Percent to total
LIABILITIES
Capital	3936.54	0.69	4143.73	0.56
Reserves and Surplus	39886.93	6.98	46328.98	6.22
Deposits	428455.61	74.95	551987.07	74.05
3.1 Demand Deposits	56895.28	9.95	73340.02	9.84
3.2 Savings Bank deposits	73303.91	12.82	91341.76	12.25
3.3 Term Deposits	298256.42	52.17	387305.29	51.96
4. Borrowings	49486.52	8.66	70131.41	9.41
5. Other liabilities and Provisions	49865.56	8.73	72812.81	9.77
Total Liabilities	571631.15	100.00	745404.00	100.00
ASSETS
1. Cash and balances with RBI	23597.68	4.13	41016.70	5.50
2. Balances with banks and money at call and short notice	23275.11	4.07	37288.38	5.00
3. Investments	180567.87	31.59	214654.74	28.80
3.1 In Government Securities (a=b)	129666.09	22.68	159851.45	21.44
(a) In India	129454.06	22.65	159549.45	21.40
(b) Outside India	212.03	0.04	302.03	0.04
3.2 In other approved securities	482.30	0.08	337.08	0.05
3.3 in non-approved securities	50419.41	8.82	54466.19	7.31
4. Loans and advances	312961.77	54.75	414754.81	55.64
4.1 Bills purchased 7 discounted	18432.43	3.22	20185.71	2.71
4.2 cash Credits, Overdrafts etc.	8045530	14.07	102952.16	13.81
4.3 Term loans	214074.05	37.45	291616.95	39.12
5. Fixed Assets	8000.53	1.40	8166.82	1.10
6. Other Assets	23228.17	4.06	29522.55	3.96
Total Assets	571631.15	100.00	745404.00	100.00
1 crore : 10 million Source : Reserve Bank of India

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