An Overview of Indian Banking Sector Literature Review

Indian Banking Sector – An Overview

Through a huge number of banks, the system of Indian banking is expressed by means of combined ownership. The sector of commercial banking consists of 33 foreign banks, 40 private sector banks, and 27 public sector banks where majority ownership is included by the government. In 2003-04, whole assets of bank add up to a small amount exceeding 70 percent of GDP (Gross Domestic Product). In 2003-04, while the foreign and private banks apprehend 25 percent, the public sector banks comprise of about 75 of the banking system assets. Through contrast, the share of the public sector banks of entire banking system assets has been a little above 90 percent, during the year 1991. In the year 1992, in prior to the introduction of financial sector development, the government sector in each and every sphere of economic action has a principal role, and towards the requirements of development which is planned the system of Indian financial has effectively accommodated.

The rule for an administered interest rate has been resulted in financial intermediation of low-quality and high-cost, and the preemption of a huge amount of bank deposits result in the form of reserves. The existence of the interest rates structure that has been found difficult and it is taking place from the concerns of both social and economic, regarding the supply of acknowledgment credit towards definite sectors which resulted in cross subsidization, where the larger rates stimulating to non-concessional borrowers were involved. On deposits and lending, through specified regulatory instructions, the administered interest rates system was distinguished which in further leads to interest rates in large quantity.

Therefore, among the commercial banks lending rates and deposits rates the spreads have been increased, and in the credit risk the administered lending rates does not make any issue. During the banking system operations, the lack of prudential norms, accountability, and transparency also results in the expanding of non-performing assets trouble. The bank’s functional autonomy and operational independence has been confined by the inflexibility in management structures and licensing of branches which has increased the overhead costs on the expenditure front.

During this period, the financial environment by means of underdeveloped and segmented financial markets was distinguished. Therefore, this has resulted in the incompetent allocation of scarce resources and distortion of interest rates.  In relation to exposure norms, provisioning, asset classification, income recognition, and capital adequacy, the execution of prudential norms has been found. The economy of world has also observed most important variations like ‘corresponding with the movement towards financial services and global iteration’, even though these reforms were employed .

For the purpose of present reform process, on banking sector reforms a second government-appointed committee has provided the blueprint, against such conditions.

During the reform period, the noteworthy and critical reforms in the financial system have incorporated the following: 

• Permitting the banks to select their lending rates and deposit, by liberalizing the interest rate rule.
• Establishing micro-prudential measures like income recognition, provisioning norms for loans, accounting norms, capital adequacy requirements, asset classification, and exposure norms.
• Authorizing higher disclosure to make sure of larger transparency in the balance sheets.
•  Introducing competition by allowing the establishment of new foreign banks and also permitting more liberal entry of foreign banks.
• Assuming a consultative method so as to originate policy through measures that are being ushered by the participants of market to supply lead time useful to the market players in order to create required adjustments.
• Reducing the statutory reserve necessities to the present levels of 25 for statutory liquidity ratios and 5 percent for cash ratios.
• Expanding the public sector banks ownership in order to increase their capital up to 49 percent from the market by means of enabling the state-owned banks. Since the end of March 2004, seventeen state-owned banks has increased about 82 billion rupees and accessed the capital market. 

            As a result of the reforms, in the system of banking the share of entire assets of public sector banks was decreased to 75 percent from 90 percent between the year 1991 and 2004. The concentration ratio of five-bank asset has turned down to 0.43 in 2003-04 and to 0.44 in 1995-96, from 0.51 percent in the year 1991-92. Still it showed a turn down to 0.41 percent in 2003-04 and 0.48 in 1995-96, from 0.68 in the year 1991-92.    

Table:

Year/bank group*	1990-91			1996-97			2003-04
	SOB	Pvt.	Forgn.	SOB	Pvt.	Forgn.	SOB	Pvt.	Forgn.
No. of banks	28	25	23	27	34	42	27	30	33
Total assets	2929	119	154	5563	606	561	14714	3673	1363
Total deposits	2087	94	85	4493	498	373	12268	2685	798
Total credit	1306	50	51	2202	281	265	6327	1709	605
Credit-deposit ratio (%)	63	52	60	49	56	71	52	64	76
Share (percent)
Total assets	92	4	4	83	9	8	75	19	6
Total deposits	92	4	4	84	9	7	74	16	10
Total credit	93	4	3	80	10	10	73	20	7
Total income	246	11	15	536	74	76	1376	332	130
of which: interest income	239	9	13	465	64	62	1095	255	90
Total expenditure	241	11	13	540	61	56	1211	297	108
Of which: interest expenses	183	6	9	309	31.7	32	657	175	43
Net profit	5	0.3	2	71	13	20	165	35	22

 *SOB- State-owned Banks; Pvt-Private Sector banks; Forgn- Foreign Banks

                   In the private sector, the new banks entry diminished the concentration of asset which further might have made the competition stronger. The basic idea is that efficiency is improved through competition. However, this may not true always. One argument is that the excessive risk-taking may be directed by means of increased competition. To achieve economies of scope and scale in order that the concentration increased may directs to the improvements of efficiency, an argument was made by others that consolidation or concentration is required. 

In the system of Indian banking, the degree of competition is estimated. InIndia, the banking sector was made as an interesting case study by several factors. At first, through the objective of profitability, productivity, and enhancing efficiency,Indiaexperience liberalization of the banking sector, during the 1990s. Secondly, the banking sector experience a significant transformation that is being driven by the requirement for making a competitive economy, productive, and market-driven so as to maintain accentuate growth and larger investment levels.

Thirdly, in markets that are emerging the studies of competition relate to countries through a subsequent consolidation and history of banking crises. Concentration enlarged because of consolidation, and the tested studies in these countries, whether this resulted in increase in the power of institutions or increase in the competition. It is quiet fascinating to observe in the Indian context, whether penetration of foreign and private banks and diversification of public sector banks consists of any impact on competition.