Banking in India Originated in the Last Decades of the 18th Century

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Banking in India originated in the last decades of the 18th century. The first banks were The General

Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now

defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of

Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three

presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which

were established under charters from the British East India Company. For many years the Presidency

banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the

Imperial Bank of India, which, upon India's independence, became the State Bank of India

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a

consequence of the economic crisis of 1848-49. The Allahabad Bank , established in 1865 andstill functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank : A company

that issues stock and requires shareholders to be held liable for the company's debt) It was not thefirst though. That honor belongs to the Bank of Upper India, which was established in 1863, and

which survived until 1913, when it failed, with some of its assets and liabilities being transferredto the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the ConfederateStates, promoters opened banks to finance trading in Indian cotton. With large exposure to

speculative ventures, most of the banks opened in India during that period failed. The depositorslost money and lost interest in keeping deposits with banks. Subsequently, banking in India

remained the exclusive domain of Europeans for next several decades until the beginning of the20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire

d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in

Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of theBritish Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 inFaizabad. It failed in 1958. The next was the Punjab National Bank , established in Lahore in

1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative periodof stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial

and other infrastructure had improved. Indians had established small banks, most of whichserved particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and

a number of Indian joint stock banks. All these banks operated in different segments of theeconomy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign

trade. Indian joint stock banks were generally under capitalized and lacked the experience andmaturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon



to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome

compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi

movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank , Indian Bank , Bank of Baroda, Canara Bank

and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in DakshinaKannada and Udupi district which were unified earlier and known by the name South Canara (

South Kanara ) district. Four nationalised banks started in this district and also a leading privatesector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian

Banking".

During the First World War (1914-1918) through the end of the Second World War (1939-1945),and two years thereafter until the independence of India were challenging for Indian banking.The years of the First World War were turbulent, and it took its toll with banks simply collapsing

despite the Indian economy gaining indirect boost due to war-related economic activities. Atleast 94 banks in India failed between 1913 and 1918 as indicated in the following table:

YearsNumber of banks

that failed

Authorised capital

(Rs. Lakhs)

Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the

Laissez-faire for the Indian banking. The Government of India initiated measures to play an

active role in the economic life of the nation, and the Industrial Policy Resolution adopted by thegovernment in 1948 envisaged a mixed economy. This resulted into greater involvement of thestate in different segments of the economy including banking and finance. The major steps to

regulate banking included:

y The Reserve Bank of India, India's central banking authority, was nationalized onJanuary 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public

Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]



y In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

y The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have

common directors.

Nationalisation

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except

the State Bank of India or SBI, continued to be owned and operated by private persons. By the1960s, the Indian banking industry had become an important tool to facilitate the development of

the Indian economy. At the same time, it had emerged as a large employer, and a debate hadensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of

India, expressed the intention of the Government of India in the annual conference of the AllIndia Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The

meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an ordinance andnationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.

Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking

Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The statedreason for the nationalization was to give the government more control of credit delivery. With

the second dose of nationalization, the Government of India controlled around 91% of the

banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank . It was the only merger between nationalized banks and resulted inthe reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the

nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indianeconomy.

Liberalisation

In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization,licensing a small number of private banks. These came to be known as New Generation tech-

savvy banks, and included Global Trust Bank (the first of such new generation banks to be setup), which later amalgamated with Oriental Bank of Commerce, Axis Bank (earlier as UTI

Bank ), ICICI Bank and HDFC Bank . This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong

contribution from all the three sectors of banks, namely, government banks, private banks andforeign banks.



The next stage for the Indian banking has been set up with the proposed relaxation in the normsfor Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights

which could exceed the present cap of 10%,at present it has gone up to 74% with somerestrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were usedto the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new waveushered in a modern outlook and tech-savvy methods of working for traditional banks.All this

led to the retail boom in India. People not just demanded more from their banks but also receivedmore.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range

and reach-even though reach in rural India still remains a challenge for the private sector andforeign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to

have clean, strong and transparent balance sheets relative to other banks in comparableeconomies in its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government. The stated policy of the Bank on the Indian Rupee is to managevolatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially inits services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&As, takeovers, and assetsales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak

Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowedto hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any

stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive intheir loan recovery efforts in connection with housing, vehicle and personal loans. There are

press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

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 thebeginning of the limited liability and joint stock banking in India and were also vested with the rightof note issue.

In 1921, the three presidency banks were merged to form the Imperial Bank of India, which hadmultiple roles and responsibilities and that functioned as a commercial bank, a banker to thegovernment and a banker¶s bank. Following the establishment of the Reserve Bank of India (RBI) in1935, the central banking responsibilities that the Imperial Bank of India was carrying out came toan end, leading it to become more of a commercial bank. At the time of independence of India, thecapital and reserves of the Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn and advancesat 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 thecreation 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 inJul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as itssubsidiaries. To further accelerate the credit to fl ow to the rural areas and the vital sections of theeconomy 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 thedemand for credit by these sectors and determine resource allocations. The decade of 1960s alsowitnessed significant consolidation in the Indian banking industry with more than 500 banksfunctioning in the 1950s reduced to 89 by 1969.

For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization of 14major banks was announced that each had a minimum of Rs 500 mn and above of aggregatedeposits. In 1980, eight more banks were nationalised. In 1976, the Regional Rural Banks Act cameinto being, that allowed the opening of specialized regional rural banks to exclusively cater to thecredit 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 decadesof 1950-70 to about 25 % post nationalisation period. Aggregate deposits which registered annualgrowth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s. Growth of bankcredit increased from an average annual growth of 13% in the 1960s to about 19% in the 1970s and1980s. Branch network expanded significantly leading to increase in the banking coverage.

Indian banking, which experienced rapid growth following the nationalization, began to facepressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was gearingup towards new prudential norms and operational standards pertaining to capital adequacy,accounting and risk management, transparency and disclosure etc. In the early 1990s, Indiaembarked on an ambitious economic reform programme in which the banking sector reforms formeda major part. The Committee on Financial System (1991) more popularly known as the NarasimhamCommittee 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 NewPrivate Sector Banks and entry of a number of new Foreign Banks (c) freeing of deposit and lendingrates (except the saving deposit rate), (d) allowing Public Sector Banks access to public equitymarkets for raising capital and diluting the government stake,(e) greater transparency and disclosurestandards 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 theapproach of the banks towards aspects such as competition, profitability and productivity and theneed 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. Inaddition to significant growth in business, Indian banks experienced sharp growth in profitability,greater emphasis on prudential norms with higher provisioning levels, reduction in the nonperforming assets and surge in capital adequacy. All bank groups witnessed sharp growth inperformance and profitability. Indian banking industry is preparing for smooth transition towardsmore intense competition arising from further liberalization of banking sector that was envisaged inthe 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 andwhich (a) have paid up capital and reserves of an aggregate real and exchangeable value of not lessthan Rs 0.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a mannerdetrimental to the interest of their depositors, are eligible for inclusion in the Second Schedule to theReserve Bank of India Act, 1934, and when included are known as µScheduled Commercial Banks¶.Scheduled Commercial Banks in India are categorized in five different groups according to theirownership and/or nature of operation. These bank groups are (i) State Bank of India and itsassociates, (ii) Nationalised Banks, (iii) Regional Rural Banks, (iv) Foreign Banks and (v) Other IndianScheduled Commercial Banks (in the private sector). All Scheduled Banks comprise ScheduleCommercial and Scheduled Co-operative Banks. Scheduled Cooperative banks consist of ScheduledState 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 banksfunctioning in India was 222, of which 133 were regional rural banks. There are 71,177 bank XIVoffices spread across the country, of which 43 % are located in rural areas, 22% in semi-urbanareas, 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 itsseven associate banks, 19 nationalised banks and the IDBI Ltd, 19 Old Private Sector Banks, 8 NewPrivate 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 BankLtd and Bank of Punjab Ltd with Centurion Bank Ltd to become Centurion Bank of Punjab Ltd, whileone Foreign bank UFJ Bank Ltd merged with Bank of Tokyo-Mitsubishi Ltd. ING Bank NV closed itsbusiness 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 onApr 19, 2007, Sangli Bank, another old private sector bank was merged with ICICI Bank, a newprivate sector bank.

Shareholding Pattern

As of Mar 2006, only four Nationalised Bank had 100% ownership of the Government. These areCentral 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% inother nationalised banks. In Feb 2007, Indian Bank came out with a public issue thus leaving onlythree nationalised banks having 100% government ownership. Foreign institutional holding up to20% of the paid up is allowed in respect of Public Sector Banks including State Bank of India andmany of the banks have reached the threshold level for FII investment. In respect of Private SectorBanks 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 andcompares 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 followingfeatures of the performance of Indian banks:

y Average growth rate of real aggregate credit in India rose from 6.1% during the period 1995-99 to 14.6 % in 2000-04.

y The average growth rate of real aggregate credit in India during 2000-04 in India is higher ascompared 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%).

y Commercial banks in India account for a major share of the bank credit (97%) as comparedto Latin America (68%), Other Asia (74%) and Central Europe (83%).

y Real bank credit to the private sector has shown sustained growth in India, and has movedfrom 3.9% a year in 1990-94 to 6.9% a year in 1995-99 to 13.5 % a year in 2000-04. In2005, 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.y 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 from11.3% to 12.9% and operating costs as a percentage of total assets reduced from 2.4% to2.3%. NPAs in China in 2004 stood at 6%.

y In India, return on assets of banks during the period 1999-2004 moved up from 0.4% to1.1%, and return on equity from 8.5% to 20.9% where as in China the former rose from0.1% to 0.3%.

IV. BUSINESS OF COMMERCIAL BANKS

1. Balance Sheet GrowthIn 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 to86.9% as compared to 82.8% in FY05. Banking industry gained from the by rapid rise in thereal economy, leading to surge in several areas of business.

2. C apital 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 fourfold increase in this regard.

3. Deposits and AdvancesDeposits 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. Asper a recent RBI report, FY06 was the second consecutive year, when increase in credit inabsolute terms was more than the absolute increase in aggregate deposits.

Table 5: Deposits/Advances/Investments of Bank Groups in India (In Rs mn)


4. Group-wise Performance The growth in deposits across the different bank groups showed substantial variation. PublicSector 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 with50.7% and Foreign Banks with 31.7% showed a sharp rise. Borrowings of the Public SectorBanks grew at 24%, but that of the Foreign Banks was much higher (30%). Due toredemption of the India Millennium Deposits in Dec 2005, banks¶ non-resident foreigncurrency deposits showed a sizeable decline. Loans and advances growth too was on similartrends. 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 NewPrivate Sector Banks it was 50.2 % as against 33% in FY05, and for Foreign Banks it was29.5% as against 24 % in FY05. In the non-food credit, apart from retail credit which grew at40.9%; infrastructure (24%), basic metals (14.1%) and textiles (11.2%) were the othermajor 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 retailbanking showed still higher growth rates. In FY06, loans to housing rose by 33.4%, creditcard receivables by 47.9%, auto loans by 75%, and other personal loans by 39.1% takingthe 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 sectorsalso rose significantly. Loans to capital market rose by 39.2%, to real estate markets by81.78% and to commodities by 85.56% with the growth in these three segments reaching to77.65% in FY06.



1. Table 6: Advances to Sensitive Sectors as a percentage to Total Loans


2. Priority Sector Advances Credit to priority sector increased at a robust rate of 33.7% in FY06 on the top of 40.3% inthe previous year. A major portion of the credit growth in the priority sector is accounted byagriculture 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 %

3. M arket 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 SectorBanks hold 75% market share in major areas of business.



1. 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

1. Access to Equity M arketsBanks 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 Rs24560 mn in FY04 to Rs 89220 mn in FY05 to Rs 110670 mn in FY06. Encouraged by theresponse 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, SyndicateBank, Andhra Bank, Bank of Baroda and Union Bank of India. The five Private Sector Bankswere Lakshmi Vilas Bank Ltd, Yes Bank Ltd, ICICI Bank Ltd., The South Indian Bank Ltd andThe United Western Bank Ltd. The size of the share issue of these banks was Rs 6270 mnwhere as the premium was at Rs 104400 mn. Banks also tapped private placement marketfor resource mobilization in a big way by raising Rs 301510 mn of which Public Sector Banksaccounted 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 furthergrowth with lower valuation prevailing at present in many banks.



Source : Bombay Stock Exchange.

2. 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, withdecline in reported sub standard, doubtful and loss assets. The proportion of standard assetsrose 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 thescheduled commercial banks declined by Rs 73090 mn over and above the decline of Rs65610 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 OldPrivate Sector Banks, 7.3% with the New Private Sector Banks and 3.7% with the ForeignBanks.

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 mnthrough one-time settlement and compromise schemes, Rs 2230 mn though Lok Adalats, Rs47100 mn through Debt Recovery Tribunals and Rs 34230 mn through SARFAESI Act. AssetReconstruction Company of India Ltd (ARCIL) acquired 559 cases amounting to Rs 211260mn from banks.

Table 9: Asset Classification in Banks (as % of Total Assets)




3. Distribution of Network The expansion in the distribution network of the banks is increasingly evident from thegrowth of the automated teller machines. There is a surge in the growth of off-site ATMs withtheir share in the total ATMs rising to 32% in respect of Public Sector Banks, 67% in StateBank group, 32% in Old Private Sector Banks, 63% in New Private Sector Banks and 73% inForeign 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 93branches operating abroad in 26 countries. All scheduled commercial banks together have106 branches abroad.



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


4. M ajor Trends in BusinessIndian banking, in addition to improvements in performance and efficiency, has alsoexperienced significant changes in the structure of asset and liabilities. The major changes onthe 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 termdeposits. The share of demand deposits in total deposits increased from 14.7% in FY01 to17% in FY06. The share of short term deposits in total time deposits increased from 43.8% inFY00 to 58.2% in FY06. The narrowing of interest rate spread between short and long termdeposits has reduced the preference for long term deposits.

Banks are moving away from investments to loans due to more lending opportunities offeredby the higher economic growth. The rate of bank credit growth which was at 14.4% in FY03rose sharply to reach 30% each in the FY05 and FY06. Bank credit has picked up momentumon the back of rising growth of real economy. A period of low interest rates induced banks toshift their preference from investments to advances, which led to the share of gross advancesin total assets of all commercial banks reaching 54.7% in FY06 from 45% in two years priorto 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 creditgrowth to a significant extent. Retail loans as a percentage of Gross Advances rose fromabout 22% in FY04 to 25.5% in FY06. Within the retail loans, housing segment showed thehighest growth of 50% in FY05 and 34% in FY06. As per the RBI data, banks direct exposureto commercial real estate more than doubled in FY06.

Despite sharp rise in the credit growth, improved risk management processes and proceduresof 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 withmore opportunities in expanding credit and pursuing higher levels of growth in retail lending.

Documents

Banking in India Originated in the Last Decades of the 18th Century