A Comparative Study on Measuring Relative Performance of Indian Banks

CONTENTS

Preface

Acknowledgement

1. Introduction

2. Review of literature

3. Significance or relevance of this study

4. Objectives of the study

5. Data source and methodology of the study

6. A brief history of Indian banking industry
6.1 The post-reform era
6.2 A short history and background of selected public and private sector banks

7. Analysis and interpretation of results
7.1 Comparison in performance between public and private sectors banks
7.2 Analysis of profits and profitability
7.3 Analysis of earnings and expenses of selected banks
7.4 Analysis of responsiveness of earnings to expenses
7.5 Analysis of productivity of selected public and private sector banks
7.6 Analysis of Non-performing assets (NPA)

8. Suggestions to improve the performance

9. Conclusion

Bibliography

About the author

Dr. Jayanta Kumar Nandi is presently working as Assistant Professor in the Department of Commerce, Ghatal Rabindra Satabarsiki Mahavidyalaya, West Midnapore, West Bengal, India. He has over 11 years of under-graduate and post graduate teaching and research experience. He did his B.Com (Hons.) and M.Com degrees from the University of Burdwan in the years 2002 and 2004 respectively and stood first class in both these examinations. He did his M.Phil in the area of finance in 2008 from the University of Burdwan, West Bengal, India. Dr. Nandi completed his Ph.D in 2013 from the University of Burdwan in the area of banking finance. His specialization is in accounting and finance and his research publications are in the area of banking and insurance, corporate finance, investor behavior and risk management. He has published several research articles in reputed national and international journals and presented research papers in national and international conferences in more than twenty five occasions. He has recently completed a minor research project sponsored by Indian Council of Social Science Research (ICSSR).

Preface

With the nationalization of the most of the major commercial banks in 1969, restrictions on entry and expansion of private and foreign banks were gradually increased. The Reserve Bank of India (RBI) also began enforcing uniform interest rates, spreads and service changes among nationalized banks. The success of our giant five year plan is dependent, among other things on the smooth and satisfactory performance of the role by banking industry of our country. Banks thus pay special attention in financing business of innovation for providing cheap and adequate credit. And this is done by different private and public sector banks in money market in our country.

Since 1992-93, the structure of the Indian banking system has undergone significant changes in terms of scope, opportunities and operational buoyancy. The commercial banks have been facing and increasing degree of competition in the intermediation process from term lending institutions, non-banking intermediaries, chit funds and the capital market. Besides, new banking services like ATM and internet banking have been emerged due to the advancement of computers and information technology. In this backdrop, the present study seeks to examine the trends in the financial performances of 15 banking companies, major players in the Indian money market, during the period 1996-97 to 2006-07. In this study 8 major public sector banks and 7 private sector banks in India have been selected. The performances of public sector banks have become more market driven with growing emphasis placed on profitability. Though there is a phenomenal development in both public and private sector banks in India after reforms yet the private sector is still lagging behind comparatively in this study.

A COMPARATIVE STUDY ON MEASURING RELATIVE PERFORMANCE OF INDIAN BANKS

Acknowledgement

I take this opportunity to acknowledge some of the persons, who over a long time have influenced me to carry out my research work.

I am highly grateful to Sir Dr. Chitta Ranjan Sarkar- Reader, Deptt. of Commerce, The University of Burdwan, without whose guidance and help this work would have been incomplete. I am thankful and I convey my sincere gratitude to him for spending his valuable time to guide me throughout this work.

I am also thankful and I convey my sincere gratitude to Prof. Jaydeb Sarkhel, Prof. Tapas Kumar Bose, Prof. Pradip Kumar Chakraborty, Prof. Santanu Kumar Ghosh, Prof. Uttam Kumar Dutta, Dr. Debasish Sur, Dr. Debdas Rakshit, Sri Sajal Das who have guided me and encouraged me to my research work. Thanks are also due to all the non-teaching staff of the commerce department and the friends and relatives for inspiring me to complete the study.

Place: Arambagh. Hooghly.

West Bengal. India

JAYANTA KUMAR NANDI

List of Tables

1 showing liquidity and credit-based indicators of financial development 16 (As percent GDP at current market prices)

2 showing the progress of commercial banking in India

3 showing share of selected public sector banks – assets, deposits and 39 profits (%)

4 showing share of selected private sector banks – assets, deposits and 39 profits (%)

5 showing net interest income (spread) to total assets (%)

6 showing key performance indicators for public sector banks (as % of 43 total assets)

7 shows key performance indicators for private sector banks (as % of 43 total assets)

8 shows profile of banks by category in 2000-01 to 2006-2007

9 shows key performance indicators for public sector banks (as % of 46 total assets) and statistical significance

10 shows key performance indicators for private sector banks (as % of 47 total assets) and statistical significance

11 shows earnings and expenses of public and private sector banks (₹ in 49 crores)

12 showing profitability of public and private sector banks during 2002 to 2007

13 showing responsiveness of earnings to expenses of the selected banks

14 productivity of selected public and private sector banks

15 showing capital risk weighted asset ratio (%) of selected public and 53 private sector banks

16 showing non-performing assets (NPA) of public sector and private 56 sector banks (%)

List of charts and graphs

1 showing Indian banking system

2 showing the market share of public and private sector banks

3 showing share of net interest income to total assets (%)

4 showing key performance indicators

5 showing profile of banks by category

6 showing efficiency of asset management

1. Introduction

Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in a modern society. It plays a pivotal role in the economic development of a country and forms the core of the money market in an advanced country.

Generally it (bank) collects money from those who have to spare or who are saving it out of their income and lend this money out to those who require it. This is valuable and necessary in any community. But the role of commercial banks is not only confined to savings and its transmission to those who are in a position to invest it in a profitable enterprise; but also an instrument of credit creation. The role of bank has been transformed as prime mover of economic change, particularly in developing countries. It is necessarily more complex in view of dynamic contribution expected from time to time in the challenging task of optimum economic growth. A distinguishing feature of Indian banking industry presently in the complex range of functions, it discharges a major role to assisting the economic development of a country. The financial sector plays a major role in mobilization and allocation of financial savings from the net savers to the borrowers. The banks form the most important segment of the financial sector. The structure of the banking industry affects its performance and efficiency in turn affects the bank’s ability to collect savings and channel them into productive investment. The effective role of intermediation by banks adds gains to the real sector of the economy.

2. Review of literature

Most of the authors found that the measured efficiency varies considerably depending on the choice of measurement method. One interesting finding was that output inefficiencies are on average larger than input inefficiencies, which suggests that most of the inefficiencies are in the form of deficient revenues rather than excessive costs. This suggests that focusing on the cost function could understate bank inefficiency.

The author also found that higher government ownership is associated with slower subsequent development of the financial system, lower efficiency in the financial sector and lower economic growth. Further, they find that government ownership of banks tends to be more prevalent in less- developed countries. Whatever the author’s results for developing countries in general, it would be hard to argue that government ownership of banks has not contributed to financial development in India. Indeed, as highlighted earlier, the fact of financial deepening is, perhaps, among the least-contested propositions about government ownership of banks in India. This would hold even if we went by some of the measures that the authors employ: growth of private credit/GDP, growth of liquid liabilities/GDP, growth of commercial bank assets/total bank assets, and growth of stock market capitalization/GDP.

Moreover, this study also finds that state ownership need not always be bad for growth. Barth, Caprio and Levine (2001) showed that greater state ownership is associated with higher interest rate spreads, lower levels of private credit, lower stock market activity and less non bank credit. They also find that state ownership tends to heighten the probability of crises, although this finding was not statistically significant. Reviewing further evidence on the subject of government ownership, the World Bank concludes there is a strong case for moving to sell government banks, but, for reasons that are clear, it qualifies its recommendation with the comment that ‘the findings do not demand elimination of all state ownership’. The World Bank study also examines the experience of bank privatization in several countries and documents the gains from ownership, it underlines, are for ‘other things equal’, such as the ‘quality of financial infrastructure and the regulatory environment’. It cites the examples of Chile and Mexico, where there were major banking crises (including costs of 42 percent and 20 percent of GDP respectively) following privatization. This happened because of an underdeveloped supervisory and regulatory framework. The bank concludes that there must be a ‘deliberate and credible’ phasing out of state ownership, going hand-in-hand with a strengthening of the environment.

As regards studies on bank efficiency and profitability in the Indian context, perhaps because profitability was not the objective of Indian banks, there have not been many attempts to compare profitability in the various categories of banks. Many of the studies (Swami and Subrahmanyam, 1993 for instance) have attempted to focus on profitability within public sector banks in attempt to set benchmarks for laggards.

The authors use advances, investments and deposits as outputs, and interest expenses and operating expenses as inputs. They found public sector banks had the higher efficiency between the categories. However, public sector banks stated showing a decline in efficiency after 1987. The main results accord with the general perception that in the nationalized era, public sector banks were successful in achieving deposit and loan expansion. Sarker and Das (1997) compare performance at public, private and foreign banks for the year 1994-95 by using measures of profitability, productivity and financial management. They found public sector banks compared poorly with the other two categories. However, they caution that no firm inference can be derived from a comparison done for a single year. Das (1997) analyses overall efficiency- technical, allocative and scale- at PSBs. In the period 1990-6, the study found a decline in overall efficiency. This occurred because there was a decline in technical efficiency, both pure and scale, which was not offset by an improvement in allocative efficiency. However, the study pointed out that the deterioration in technical efficiency was mainly on account of four nationalized banks.

Sarkar and Bhaumik (1998) compared performance across the three categories of banks in India, public, private and foreign, using two measures of profitability: return on assets and operating profit ratio, and four efficiency measures: net interest margin, operating profit to staff expenses, operating cost ratio, and staff expense ratio (all ratios except operating profit to staff expenses having average total assets in the denominator). The authors attempted these comparisons after controlling for a variety of non-ownership factors that might impact on performance: assets size, the proportion of investment in government securities, the proportion of directed credit, the proportion of rural and semi- urban branches, and the proportion of non-interest income to total income.

They found that, in the comparison between private banks and PSBs, there was only a weak ownership effect. Traded prive banks were superior to PSBs with respect to profitability measures but not with respect to efficiency measures. Non-traded private banks did not significantly differ from PSBs in respect of either profitability or efficiency.

There was, however, a strong ownership effect between foreign banks and private banks, with the former outperforming the latter with respect to all indicators. The authors conclude that the results showed that private enterprises may not be unambiguously superior to public enterprises in a developing economy. They ascribe the particular ordering that they found-foreign, traded private, non0traded private, and public-to the link between performance and the market for corporate control. The stronger the link, they suggest, the better the performance.

3. Significance or relevance of this study

Government regulation, in most of the countries shielded the banks from the forces of competition. India is no exception for this. With the nationalization of the most of the Major commercial banks in 1969, restrictions on entry and expansion of private and foreign banks were gradually increased. The Reserve Bank of India also began enforcing uniform interest rates, spreads and service changes among nationalized banks.

This cause of lack competition either among public banks or between the public and private banks and gradually eroded the spirit of competition from the banking sector. In addition, the labour policies of the public sector where employees salaries and promotions are not linked to their job performance has also led to a steady decline in the efficiency, quality of customer services and work culture in the banks.

In added some areas of concern in the form of increasing non-performing assets, declining profitability and efficiency, which were threatening the viability of commercial banks. The lack of transparency of financial statements of the banks had made it difficult to draw firm conclusions about their performance. In the light of this facets of banking, the ghosh committee in 1985, Vaghul group in 1987 and Narasimham Committee in 1991 were appointed to improve the productivity, profitability and efficiency of the financial sector in general and baking sector in particular.

Commercial banks have played a vital role in giving direction to economic development by catering the financial requirement of trade and industry in the country. By encouraging thrift among the people, commercial banks have fastened the process of capital formation. Banks draw the community savings into the organized sector which can then be allotted among the different economic activities according to the priorities laid down by planning authorities in the country. ‘The banks are not only the safe deposit vaults for these savings, but taking the banking system as a whole, they also create deposits in the process of their lending operations. But the important function of a banker is the provision of convenient machinery by which people can make payments to each other without having to walk round each others’ house with bags of coins. Banks also exercise influence on the level of economic activities through the creation of manufacturing of money. Through their lending policies they divert the economic activity to the needs of the country.

In view of this, the role of commercial banks in underdeveloped countries and planned economies like India becomes particularly important. Though levels of income in India are very low, yet these are pocket, where savings could accrue. But they do not find appropriate avenues for its employment, of which the commercial banks are a significant organ, help in capital formation a necessary condition for growth. As admitted by the lending bankers, ‘banking is the kingpin of the chariot of economic process. As such its role in expending economy of a country like ours can neither be under estimated nor overlooked. The success of our giant five year plan is dependent, among other things on the smooth and satisfactory performance of the role by banking industry of our country.’ Innovation is the most essential tool for progress. Innovation is the function of the entrepreneur; the entrepreneur can’t bring about these innovations for lack of bank credit. Banks thus pay special attention in financing business of innovation for providing cheap and adequate credit. And this is done by different private and public sector banks in money market in our country.

Since 1992-93, the structure of the Indian banking system has undergone significant changes in terms of scope, opportunities and operational buoyancy. The commercial banks have been facing and increasing degree of competition in the intermediation process from term lending institutions, non-banking intermediaries, chit funds and the capital market. To compare with them efficiently the commercial banks were permitted to undertake newer activities like investment banking, securities trading, insurance business etc, on a selective basis. Besides, new banking services like ATM and internet banking have been emerged due to the advancement of computers and information technology.

The whole success of economic growth of our country mainly depends on the performance of these banks. So it is the high time to evaluate the financial performances of the Indian banking companies. In this backdrop, the present study seeks to examine the trends in the financial performances of 15 banking companies, major players in the Indian money market, during the period 1996-97 to 2006-07.

The selected banks are:

Abbildung in dieser Leseprobe nicht enthalten

In our study we have selected 8 major public sector banks and 7 private sector banks in India. The performances of public sector banks have become more market driven with growing emphasis placed on profitability. Though there is a phenomenal development in both public and private sector banks in India after reforms yet the private sector is still lagging behind comparatively in our study.

4. Objectives of the study

This study has the following objectives:-

a. To make a comparative analysis of the financial performance of selected public and private sector banks in India during the period envisaged in the study, i.e. 1997-98 to 2006-07.
b. To find out the strengths and weaknesses of the selected private and public sector banks in terms of their financial performance through the technique of ratio analysis.
c. To suggest measures to improve the performance of relatively weaker section of (public or private) banks.

5. Data source and methodology of the study

The data of the selected banking companies for the period 1996-97 to 2006-07 used in this study have been collected from the secondary sources, i.e. Reserve Bank of India Publication, viz., Statistical Tables Relating to Banks in India and websites of Reserve Bank of India, Indian Bank’s Association Bulletins, Capitaline corporate database, Reserve Bank of India’s Report on Trend and Progress in Banking (RBI, 2000).

The selected parameters like operating profits and operating expenses, return on assets, earnings and expenses, responsiveness of earnings to expenses, capital asset risk weighted assets ratio, net profit to total assets ratio, net interest income (interest income- interest expense) to total assets, intermediation costs to total assets and non-performing assets of public sector and private sector banks were taken to study the operational performance where as percentage, tables have been used for the analysis. The technique of ratio analysis, simple statistical techniques like measure of central tendency, t- test has been used at appropriate places.

6. A brief history of Indian banking industry

The origin of banking, in the modern era, is traced in Italy. The word ‘bank’ also seems to have originated from Italy. The word ‘bank’ is supposed to have been derived from the German language ‘Banck’, meaning a mound or heap, from which Italians adopted ‘Banco’ which means a bench at which the money changers used to change one kind of money into another and transact their banking business.

The Bank of Venice, founded in 1157, was the first public banking institution. The Bank of Barcelona and the Bank of Genoa were established in 1401 and 1407 respectively. Banking is a business like any other business. An indication of the financial position of a business concern may be obtained by examining its statement of liabilities and assets, called the ‘Balance Sheet’.

In 1770, first Indian bank known as the Bank of Hindustan was started later; the East India Company started three presidency banks with Government participation. These were- the Bank of Bombay-1840, Bank of Madras-1843 and the Bank of Calcutta-1840. in 1947, there were 648 commercial banks with 4819 branches in India. The Reserve Bank of India was nationalized in 1949 and the Banking Company’s Act was passed in the same year. This act was later also known as Banking Regulation Act-1949 (it was changed in 1965).

In India, though the money market is still characterized by the existence of the organized and unorganized segments, the institutions in the organized money market have grown significantly and are playing an increasingly important role. The unorganized sector, comprising the money lenders and indigenous bankers, caters to the credit needs of a large no. of persons especially in the countryside. Amongst the institutions in the organized sector of the money market, commercial banks and co-operative banks have been existence the past several decades. The Regional Rural Bank came into existence since the middle of seventies. Thus, with the phenomenon geographical expansion of the commercial banks and setting up of Regional Rural Banks during the recent past, the organized sector of money market has penetrated into rural areas as well.

Besides the aforesaid institutions, which mainly serve as sources of short-term credit to industry, trade, commerce and agriculture, a variety of specialized financial institutions have been set up in the country to cater to the specific needs of industry, agriculture and foreign trade.

In the field of Industrial finance, the Industrial Development Bank of India (IDBI), set up in 1964, is the apex bank, which undertakes, besides direct financing of big industrial projects, refinancing of term loans granted by other financial institutions including the commercial banks. There are two prominent all-India institutions in this field, namely, the Industrial Financial Corporation of India Ltd. (IFCI) and the Industrial Credit and Investment Corporation of India (ICICI). Besides the State Financial Corporations (SIDCs) have been set up to meet the requirements of small and medium scale industries in the respective states. Industrial Reconstruction Bank of India (IRBI) was set up to bring back of normalcy the industrial units which fall sick. In March 1997 it was renamed as Industrial Development Bank of India and joined the rank of full-fledged development financial institutions. Small Industries Development Bank of India was set up in 1990 as a subsidiary of Industrial Development Bank of India to cater exclusively to the requirements of the Small Scale sector in the country. It was de linked from IDBI in March 1997, and acquired the status as the apex bank in the field of financing small scale industries. All these institutions, engaged as they are in the task of development, are now designated as ‘development banks’ which are distinct from the traditional commercial banks. Development banking has had its genesis in the post-independence period in India and has contributed significantly to the industrial growth of the country during this period. A few specialized development financial institutions have also been set up in India, e.g. Indian Railway Financial Corporation, Power Finance Corporation in India, Tourism Finance Corporation.

The establishment of the State Bank of India in public sector in 1955 was another landmark in the history of Indian banking. It was experienced that the State Bank was catering effectively to the needs of the people. The ‘social control’ of banks in India could not be regarded as a measure conferring maximum benefit to the society and did not satisfy the rising expectation of the people.

The rising discontent among the people, mounting unemployment of working classes, increasing disparities among the common people, overgrowing inflationary trends in the economy ultimately led to bank nationalization in the country.

The Govt. of India promulgated in ordinance called the Banking Companies Ordinance, 1969 on July 19, 1969. Fourteen Indian commercial banks each having the total deposit not less than ₹50 crores were nationalized, on the last Friday of June 1969.

These 14 banks are:-

2. The Central Bank of India Ltd.
3. The Bank of India Ltd.
4. The Punjab National Bank Ltd.
5. The Bank of Baroda Ltd.
6. United Commercial Bank Ltd.
7. The Canara Bank Ltd.
8. The Dena Bank Ltd.
9. The United Bank of India Ltd.
10. The Syndicate Bank Ltd.
11. The Union bank of India Ltd.
12. The Allahabad Bank Ltd.
13. The Bank of Maharashtra Ltd.
14. The Indian Bank Ltd.
15. The Indian Oversease Bank Ltd.

These banks are now wholly managed by the Govt. of India through the Board of Directors. Besides, 14 commercial banks nationalized in July, 1969, 6 more private commercial banks were taken over by the Govt. on April 15, 1960 under the Banking Companies Acquisition and Transfer of Undertakings Ordinance 1960.

These banks are:-

1. The Andhra Bank Ltd.
2. Corporation Bank Ltd.
3. The New Bank of India Ltd.
4. The Oriental bank of Commerce Ltd.
5. The Punjab and Sindh Bank Ltd.
6. The Vijaya Bank Ltd.

The basis of nationalization of these banks was that the demand and time liabilities of each of these banks exceeded ₹200 crores as on March14, 1960. The reasons for sudden nationalization of these banks were the same ones as in 1969.

For financing agriculture and allied activities in the rural areas, though co-operative credit societies and central co-operative banks have been participating since long, commercial banks began their active participation after the nationalization of major banks in 1969. Long and medium term credit to the agriculturists is being provided by another specialized institution, namely, the Land Development Banks which have a two tier structure- Primary Land Development Banks at the district levels and State Land Development Banks at the state level. National Agriculture and Rural Development (NABARD) is the full-fledged apex institution in the field of agriculture and rural development.

During 1988 two important financial institutions were established. National Housing Bank was set up in July 1988 as the apex banking institution in the field of housing finance. Discount and Finance House of India Ltd. Was established to deal in money market instruments in order to provide liquidity in the money market.

Based recommendations of the Narasimham Committee, the Reserve Bank of India initiated major reform measures that sought to improve bank efficiency through entry regulation, branch deli censing and deregulation of interest rates and to allow the public sector banks to rise up their equity in the capital market. The reforms also sought to improve banking profitability through gradual reduction of the cash reserve ratio, the statutory liquidity ratio and relaxation of several quantitative restrictions on the composition of selected portfolios.

Besides these institutions which are mainly engaged to meeting the credit needs of various segments of the economy, there are a few other institutions, which are essentially engaged in the business of investing in the corporate, government and semi-government securities and other instruments. They are the insurance institutions- Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), and the Unit Trust of India (UTI). These institutions mobilize the savings of the people and channelize them into desirable securities. Hence they are called the investing institutions or institutional investors. To facilitate the banking business and to foster the growth of banking habit, two other institutions have been set up. The deposit insurance and credit guarantee corporation of India undertakes the twin functions of extending the insurance cover to the depositors in the banks and protect the interest of banks by providing guarantees in respect of advances granted by them to small scale industries and the priority and neglected sectors of the economy. The Export Credit Guarantee Corporation (ECGC) provides protection to the banks in respect of risks inherent in financing the export trade.

With the setting up and growth of all these institutions, Indian banking and financial system may be claimed to have the first set up comparable to any advanced as shown in the following chart:

Abbildung in dieser Leseprobe nicht enthalten

6.1 The post-reform era

With the move towards a market-oriented economy in 1991 and also with concerns rising about the financial position of many of the state-owned banks, the government constituted a committee under the chairmanship of M. Narasimham, a former governor of the Reserve Bank of India (RBI), to outline a blueprint for reform of the banking sector. Another committee with the same chairman was set up later and it submitted its report in 1998.

The package of financial-sector reforms unveiled since 1992 has been based on the reports of these two committees. Very briefly, lending and deposit rates were deregulated (the only regulated rate that remains is that of savings deposits); the statutory liquidity ratio was lowered to 25 percent; prudential norms for bank capital were laid down in keeping with the Basle norms; accounting norms for provisions and non-performing assets were tightened; there was greater freedom for foreign banks to enter the Indian market and for the existing ones to open new branches; the dividing lines between commercial banks (with their focus on working capital) and the development banks (which had been confined to long-term loans) were blurred; new domestic banks were licensed; and mergers were made possible.

The government has, in the post-reform years, recapitalized banks through a total infusion of funds of ₹204 bn; the funds so acquired by banks were invested in Recapitalization Bonds issued by the government. On top of it all, a halting movement towards privatization began with nine banks being allowed to raise fresh equity from the markets, resulting in a lowering of the government’s stakes in these banks. Towards the end of 2000, the government introduced legislation in parliament seeking approval for the lowering of its equity holding in nationalized banks to 33 percent.

Although the government stated for the record that such dilution would take place through fresh issue of shares to the general public, there was some skepticism initially as to whether this was feasible, given the comatose state of the Indian stock market and the weak balance sheet of many of the PSBs in question.

On the other hand, the road to acquisition of PSBs is strewn with statutory and regulatory obstacles. The RBI is averse, in principle, to industrial houses getting into banking. At the same time, the existing private sector banks are too small and lack the financial muscle to acquire PSBs. The possibility of acquisition of Indian banks has been talked about, but this too faces a number of roadblocks- although many of these have recently been removed.

Total foreign ownership in banking (comprising direct and portfolio investment) had, until recently, been restricted to 49 percent, with a ceiling of 20 percent on foreign direct investment (FDI). The Reserve Bank of India (RBI) amended the rules in February 2002 to allow FDI alone up to a limit of 49 percent. Further, the government in its budget for 2002-03 removed the restriction on 10 percent voting rights that applies to private ownership in banking in the case of foreign banks. Another change in rules is that foreign banks can now set up subsidiaries; earlier, they were allowed to set up branches only. (Foreign banks now have to choose between the two forms.)

But other obstacles to foreign bank expansion remain. PSBs are governed by the banking (Companies) Act and not by the Companies Act that applies to other companies. Under the former, government control over banks and the ‘public sector character’ of PSBs would continue even after the government equity holding fell below 50 percent. This would make PSB acquisitions unattractive to foreign banks even if parliament were to pass legislation, currently pending, that would allow the government’s equity in PSBs to fall to 33 percent. Thus, privatization of PSBs would require further legislation under which they come to be governed by the Companies Act that relates to companies in general and not by the banking (Companies) Act, as is the case now. This would result in the ‘public-sector character’ proviso falling away. But all this is in the future. So far as the past decade is concerned, we can say that there has been decisive shift from banking driven by social objectives to one with a profit orientation and based on international norms for capital and accounting. There is reason to believe that the performance of public-sector banks has improved as a result.

Table 1 showing liquidity and credit-based indicators of financial development (As percent GDP at current market prices)

Abbildung in dieser Leseprobe nicht enthalten

Source: Report on Currency and Finance (1999), RBI

Table 2 showing the progress of commercial banking in India

Abbildung in dieser Leseprobe nicht enthalten

Source: Report on Currency and Finance (1999), RBI

6.2 A short history and background of selected public and private sector banks

Allahabad Bank (ABL), the oldest joint stock bank, was set up in 1865 by a group of Europeans. In 1920, the bank was taken over by P&O Banking Corporation at a bid price of Rs 436 per share. The head office and the Registered Office of the bank were then shifted to Kolkata in 1923 for business considerations and operational convenience. In 1927 the bank went into the fold of Chartered Bank that acquired the controlling interest in the P&O Banking Corporation. However, in 1969 along with 13 other major commercial banks, ABL too was nationalized. At the time of nationalization, the bank had a network of 151 branches. In 1989 United Industrial Bank was amalgamated with the bank. The bank made a foray into merchant banking activity in 1984 and subsequently transferred the merchant banking activities to All Bank Finance (AFL), a wholly-owned subsidiary in 1991. Consequent to the SEBI Rules and Regulation the company surrendered its merchant banking registration in 1998 and got itself registered as an NBFC with RBI. ABL, wholly owned by the government of India (GOI), came out with its first initial public offer (IPO) in Oct 2002 for 10,00,00,000 equity shares of Rs 10 each at par aggregating Rs 100 crore through the fixed price route. The main object of the issue is to augment the long-term resources of the bank and the capital base of the bank to meet its future capital adequacy requirements. After the issue, the shareholding of GOI will come down to around71.2%.

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