Chapter - I

INTRODUCTION AND DESIGN OF THE STUDY

1.1 Introduction

1.2 Statement of the Problem

1.3 Significance of the Study

1.4 Objectives of the Study

1.5 Scope of the Study

1.6 Research Methodology

1.7 Sample Composition

1.8 Period of the Study

1.9 Source of Data

1.10 Tools of Analysis

1.11. Operational Definitions

1.12. Limitations of the Study

1.13. Chapter Scheme

Elevating Priority Sector Through Bank Credit 3

Since then, there have been several changes in the scope o f priority sector lending and the target and
sub targets applicable to various bank groups. O n the basis o f the recom m endations o f the internal working
group, set up in reserve bank to examine, review and recommend changes, if any, in the existing policy on
priority sector lending including the segments constituting the priority sector, target and sub-targets, etc.,
and the comments/suggestions received thereon from banks, financial institutions, public and the Indian
banks association (IB A ), it has been decided to include only those sectors that im pact large segments o f
population and the weaker sections, and which are employment-intensive, as part o f the priority sector.

PURPOSE OF PRIORITY SECTOR LENDING

The banks are issue the lending on priority sector in the follow ing purpose.

• Im prove the econom ic condition o f the country.

• Facilitate the c o m m unity by the direct and indirect finance to agriculture people.
• U pliftm ent o f living standard o f rural and agricultural people
• The setup the more sm all industry in the rural area
• Generation em ploym ent in the rural people
• Reduction o f m andatory credit to a large number o f sectors and sections, including marginal
farmers, cottage industries, sm all traders and services and low incom e housing incentives.
• Improve credit flow to small scale industries and food crop agriculture as well as temporary credit.
• Assure credit to new industries and new professions by the non- poor section.
• Im prove the life quality o f weaker section.

SEGMENTS ON PRIORITY SECTOR LENDING

Priority Sectors
The Reserve Bank o f Ind ia classified in the follow ing categories is priority sector namely,
Agricultural and allied activities.

• Developm ent o f D airy and A n im a l Husbandry.

• Developm ent o f Fisheries.
• Developm ent o f Poultry, Piggery etc.
• Developm ent and m aintenance o f Stud farms, Beekeeping, Sericulture, etc. However, breeding o f
race horses cannot be classified under this head.
• Purchase o f B ullock Carts, Cam el Carts, Pack A nim als etc.
• Distribution o f inputs for allied activities such as poultry feed, cattle feed, etc.
• Sm all Scale Industrial U nits, Equipm ent/System for development o f new and renewable source o f
energy, etc.
• Sm all Scale and A ncillary Industries
- F laying and tanning
- Leather goods
- Pottery
- H and pounding o f paddy and cereals
- R ice M ills, in cluding flour m ills and bakeries
- C anning o f fruits and vegetables
- M anufacturing and processing o f agricultural and M arine products and forest produce
including beverage industries
- Other village industries such as carpentry and black-smithy, bee-keeping and honey and
honey products
 CHAPTER-1
INTRODUCTION AND DESIGN OF THE STUDY

1.1 INTRODUCTION

The banking system in India is significantly different from that of other Asian nations
because of the country's uniqueness in geographic, social, and economic scenario. India has a
large population and land size, a diverse culture, and extreme disparities in income, which are
marked among its regions. There are high levels of illiteracy among the people but, at the
same time, the country has a large reservoir of managerial and technologically advanced
talents. About 35 percent of the population resides in metro and urban cities and the rest is
spread in several semi-urban and rural centres. The country's economic policy framework
combines socialistic and capitalistic features with a heavy bias towards public sector
investment. India has followed the path of "growth-led exports" rather than the "expected
growth" of other Asian economies, with emphasis on self-reliance through import
substitution. These features are reflected in the structure, size, and diversity of the country's
banking and financial sector.

The banking sector plays an important role in the development of Indian economy.
Before the dawn of independence, the development of the banking sector was not
satisfactory. Initially the East India Company established the banks namely Bank of Calcutta
in 1806, Bank of Bombay in 1840, and Bank of Madras in 1843. Later in 1921, these banks
were amalgamated and Imperial Bank of India was formed. Soon after independence, the
banking sector underwent a remarkable change. Moreover, the government was unable to
control the commercial banks and divert the funds in accordance with the expectation of the
government. Hence, these banks were brought under the control of government during 1969.
As a result in 1980, 14 major commercial banks were nationalized and another 6 banks were
nationalized in 1980. In 1993, New Banks of India merged with Punjab National Banks
(PNB), which brought the number of nationalized banks in India to 19. It was a state
sponsored commercial banking institutions, entrusted with the specific task of providing bank
facilities to the low income group of sections and enlarging the branch network. It has also
been entrusted with the responsibility of branch expansion in remote areas. So, the bankers
introduced new and innovative schemes in the year 2005-06, that is, appointed the Business
Correspondence / Business Facilitator (BC/BF) m.odel to serve the poor people.'
 The banking system in India has come a long way during the last two centuries. Its
growth was faster and converge was wider since 1969, with an extensive branch network
which has diversified credit pattern. Traditional banking has gradually yielded to
sophistication in credit management. In other words, the banking and finance industry in
India is experiencing a period of dramatic change with disintermediation and interest rates.
There is sudden flow of ability especially in the private and foreign banks in India. The
present banking scenario is such that private sector, public sector and co-operative sector
exist side by side. Apart from Commercial Banks, there are Industrial Banks and
Development Banks. While appraising the service of commercial banks it is found that
different banks follow different strategies to develop and render new services.

Credit is the life line of trade, industry and commerce. Infusion of credit to the
economic sector is as important as that of understanding the needs of the factors and
dispensation of the credit in required quantum and in appropriate time. A banker has to be
practical as well as prudent while enabling credit to the needs of the people. The concept of
credit management is undergoing unimaginable changes. From the days, when bankers were
shy of expanding credit, because of interference of political parties and modem government
rules and regulations, they have reached a stage where they would like to find new avenues of
credit. Credit innovations are emerging in the present context. The commercial banks act as
catalysts in the economic development of a country. This is achieved by mobilizing almost
one third of the Gross National Product through their various deposit schemes. About 65 to
75 percent of these funds are deployed as bank credit in various sector of the economy. Thus,
deposit mobilizing and lending credit dispensation are the two most important functions of
the commercial banks. Banks are the trustees of the public funds and savings.

The issue of loan is crucial and important for every banker as it produces a major
portion of the banks income. This is also one of the major area of concern and attracts the
attention of the top management. An established loan policy translates into a concrete and
unified direction for the implementation of the management's policies, plans and programmes
in this significant area. An imaginative and well conceived loan's policy is also an
outstanding marketing vehicle to assist top management in achieving desired goals of growth.
Well crafted loans are the major source of a new deposit business. A good proportion of these
new deposits becomes available for additional loans, which in turn attracts new deposits and
so forth.
 Loans and advances have always been one of the principle sources of income for
commercial banks in India. The interest earned from loans and other loan related products not
only offsets the interest paid on deposits but also contributes to the banks' operating
expenditure and profits. The interest earning loan portfolio is a prerequisite for sound
lending. Banks in India have to operate in rapidly changing and highly competitive markets.
The borrowers have also become more demanding in terms of cost of credit, loan products
and quality of services. Bank lending is a strategic marketing function based on innovative
products, loan pricing and service quality.

The bank has to deploy its funds in three main areas such as cash, investments and
loans and advances. The first two are determined largely by the RBI from time to time. At
present, the Cash Reserve Deployment (CRD) of fiinds in ratio is 4.75 percent of total time
and banks demand liabilities. Cash Reserve Ratio (CRR) is kept in current account with RBI.
This can vary between 3 and 15 percent, depending upon the decision of the Central
Monetary Authority.

The Statutory Liquidity Ratio (SLR) comprises of two namely, cash in hand and
balances at other banks and investment in government and other approved securities. In
April 2012, these put together made up about 30 percent of total time and demand liabilities
of a bank. The remaining 70 to 71 percent funds are left for lending to different sections of
economy. Thus credit extended by the banks is a major avenue of deployment of funds.'^

1.2 STATEMENT OF THE PROBLEM

Finance is the lifeblood of a business and is also a problem to business. A business

cannot move without adequate finance. Every business house requires money for which they
approach the banks for the finance, and the banks provide loan to the business institutions
after assessing the repayment capacity and other aspects of business units. Lending money is
one of the core functions of banks. By deploying money in the form of loans and advances,
banks earn interest which is the dominant source of income for them. The banks adopt
cautions in lending money. Scientific appraisal of the project, timely disbursement and proper
monitoring of credit pave way for better credit management in banks.
 In India credit management has assumed much significance in the post reform period.
Introduction of potential accounting norms such as income recognition nonns, asset
classification norms and provisioning norms had resulted in the emergence of sophisticated
tools of credit management. Today banks have become a part and parcel of our life. There
was a time when the dwellers of city alone could enjoy their services. The banks offer access
to even a common man and their activities extend to areas hitherto untouched. Apart from
their traditional business oriented functions, they have come out to fulfill national
responsibilities. Banks cater to the needs of agriculturists, industrialists, traders and to all the
other sections of the society. Thus, they accelerate the economic growth of a country and
steer the wheels of economy towards its goals of self reliance in all fields. It naturally
increases our interest in knowing more about the bank and the various men and activities
connected with it.

Accepting deposits and lending money are the core functions of a bank. Through this
process of financial intermediation, banks channelize the funds for productive endeavours
and pave way for economic growth. They encourage savings by mobilizing deposits and
provide fiinds for a variety of economic activities. Banks offer a wide range of deposits and
advances to fulfill the requirements of different segments of the society. Banks lend in the
form of credit card, overdraft, term loans and discounting bills. When a bank lends money it
is able to generate interest, which is the dominant source of income for a bank. In fact,
through the interest earned from advances, a bank is able to pay interest to the depositors,
meet out its operating expenditure and gain some surplus in the form of profit. Loans and
advances also generate reasonable volume of non-fund based business, thus creating non-
interest income in the form of commission, exchange, fee and the like .

In India, prior to nationalization of banks, they were lending mostly to large industrial
houses, whereas agriculture, small scale industries, and tiny sector were totally out of the
focus of bank credit. Moreover, banks adopted security oriented approach in their lending
decisions. But after nationalization of banks in 1969 and 1980, there were significant changes
in the lending operations of the banks. With massive branch expansion and introduction of
priority sector lending, banks began to lend to the hitherto neglected sector such as
agriculture, small scale industries, tiny sector and so on. They were driven by the principle of
diversification while lending, with due focus on the purpose of the loan.
 Financial Sector Reforms introduced in the Indian Banking Sector in 1994 and in
1998 have given a new dimension to the lending policies of banks. Banks have begun to
concentrate much on recovery of advances in order to minimize the volume of nonperforming
assets (NPAs). As NPAs affect the profitability of the banks severely through the impact of
asset classification and provisioning norms, banks are extra cautious while lending. Interest
rate deregulation in the aftermath of reforms has given more freedom to bank to price their
loans and advances scientifically. At present, they adopt a competitive interest rate policy
based on the base rate and risk rating.

Retail lending has gained popularity among banks and retail loans such as housing
loan, consumer loan, education loan, weaker section loans and so on, are considered very safe
and profitable for banks. They have widened their retail loan portfolios by exploiting the
strong demand for retail loans due to a sizeable increase in the disposable income of people in
the liberalized era. In short the lending practices of banks in India have become more
pragmatic; aggressive marketing strategies, technology driven appraisal and sophisticated
tools of credit management have become the hall mark of the lending policies of banks in
India. Hence the researcher has made an attempt to compare and study the credit management
of private and public sector banks in India.

1.3 SIGNIFICANCE OF THE STUDY

In our present day's highly competitive and dynamic scenario, Indian banks too are
introducing newer approaches for extending credit to their customers. The banks in India
have to contend with a credit market, which has become highly selective in respect of pricing
of loan products and quality of services.
Banks are the catalyst of economic development of all the countries whether
developed or developing. In India, banks have been playing a unique role in mobilizing
savings, credit disbursement, investment and providing other services; therefore they are the
heart of our financial system. As per the report released by the RBI, the commercial banks
deposited amount touched around Rs 59,09,100 crores, outstanding bank credit amount to
Rs.46,11,900 crores and investment of Rs. 17,37,800 crores as on march 2012. The ability of
the banking system to perform its tasks efficiently and in harmony with our need and
economic goals depends on a large measure on the wise management of its resources.
 Credit has always been one of the principle sources of income for commercial banks.
The extension of credit on a sound basis is very essential for the growth and prosperity of
bank. The central banks of any developed as well as developing countries are much focused
on the quality of credit portfolio of commercial banks due to the implementation based on the
committee reports. The globally accepted standards of capital adequacy, norms for asset
classification, income recognition and provisioning, exposure norms, risk management,
supervision and control of bank credit are some of the key areas. In India, the central
government implemented various credit policies based on the recommendation made by the
two reports of the Narasimham committee, that is, committee on financial system in 1991 and
the committee on banking sector reforms in 1998 which helped in making the system of
banks sound and strong.
1.4 OBJECTIVES OF THE STUDY

This study is undertaken with the following objectives:

1. To evaluate the loans and advances offered by the public sector banks in India.

2. To analyse loans and advances provided by the private sector banks in India.

3. To compare the loans and advances lent by both the private and public sector banks.

4. To assess the non-performing assets of both the private and public sector banks.

5. To offer suggestions based on findings of the study.

1.5 SCOPE OF THE STUDY

The present study examines the lending performance of commercial banks. The study
comprises the theoretical background of credit management, lending performance of both the
Pvt.SBs and PSBs in India. This study analyses the type of credit offered by the PSBs and
Pvt.SBs in India. It is done by measuring the progress of loans and advance and its
classification by analyzing the loan status of the bank through various financial tools and also
by framing some models and lastly by examining the extent and causes of Non-Performing
Assets (NPAs) of the banks.

1.6 RESEARCH METHODOLOGY

The study was purely based on the secondary data. These were collected from annual
accounts of the RBI report, books, magazines, journals and the like. Moreover, unstructured
interview schedule has been prepared by the researcher and the discussions were also held
6
with various branch managers and the special officers of the bank, to collect the relevant
information relating to effective credit management.

1.7 SAMPLE COMPOSITION

The study covers the credit portfolio of all scheduled Commercial Banks in India
except foreign banks and Regional Rural Banks (RRBs). Thus, the study includes the
following groups of commercial banks:

a) State Bank of India and its associate banks (SBI & its associate banks),
b) Nationalized Banks (NBs),
c) Old Private Sector Banks (OPSBs) and
d) New Private Sector Banks (NPSBs).

For this purpose, the detailed information were also collected from the various special
issues of RBI publication from the RBI bulletin, as this study was restricted to the private and
public sector banks in India.

1.8 PERIOD OF THE STUDY

This study covers a period of 11 years commencing from 2002 - 03 to 2012-13.

1.9 SOURCE OF DATA

The data were collected from the annual accounts, reports of trends and progress of
banking in India, reports of State Level Bankers Committee, RBI bulletin, IBA bulletin,
www.iba.org, www.rbi.org.in, www.financeindia.org.in, political and economic weekly,
published and unpublished M Phil dissertations, Ph.D theses and Business World news paper
of the private and public sector banks in India.

1.10 TOOLS OF ANALYSIS

The nature and scope of the loans and advances offered by the private and public
sector banks had been analyzed with the help of secondary data by using statistical package
like Microsoft excel sheet 2007, SPPS 16 version and E-views.

These analysis tables have been utilized to present the data in a suitable form. The
mean had been used for describing the relationship between the whole year of loans and
advances of both Pvt.SBs and PSBs.
 The standard deviation had been administered for the purpose of measuring of
variability of loans and advances; if low standard deviation indicates that the loans are to be
very close to the average whereas high standard deviation indicates that the advance is spread
out over the large range. The coefficient of variation had been utilized to measure the
performance of the loans and advances by the banks; a lower coefficient of variation indicates
a higher performance of advances offered.

The Compound Annual Growth Rate (CAGR) had been used to measure the annual
growth over from the initial advances amount to the last year ending advances offered by the
banks. The growth rate had been calculated to find out the growth over the previous year.

The Multiple Regression Analysis was calculated to assess the influences of the
variations on loans and advances of the banks throughout the study.

The Structural Equation Model (SEM) had been used to study the performance of bill
finance, term loan and demand loan offered by the PSBs in India.

The SEM had also been used to understand the performance of advances offered by
the Pvt.SBs in the area of bill finance, term loan and demand loan.

The SEM had been applied to compare the performance of loans and advances offered
by both the PSBs and Pvt.SBs in India.

The General Autoregressive Conditional Heteroscedasticity (GARCH) model had

been formulated to find out the credit volatility performance of the banks. Hence the
researcher had attempted to assess the credit volatility of both the PSBs and Pvt.SBs
individually, and this GARCH model had also been used to compare the performance of both
the banks.

All banks face the problem of the NPAs in the present days. The government, RBI
and banks try to reduce this problem. The researcher had used a model which is suggested by
the RBI to find out the NPAs status of the Pvt.SBs and PSBs.

The SEM had been used to find out how one asset influences other assets, such assets
are standard asset, sub-standard asset, and doubtful asset and loss asset.
1.11. OPERATIONAL DEFINITIONS

1.11.1 CREDIT MANAGEMENT

Credit Management is the process of controlling and collecting payments from customers.
This is the function within a bank or financial institution to control credit policies that would
improve revenues and reduce financial risks to the banks as well as the financial institutions.

11.2 RESERVE BANK OF INDIA (RBI)

The Reserve Bank of India (RBI) is India's central banking institution, which controls the
monetary policy of the Indian rupee; hence, it is the banker to the Government. It controls all
banks for which it is called bankers' bank.
11.3 COMMERCIAL BANKS (CBs)

All banks are commercial banks except RBI. It is a type of bank that provides services to
the customers such as accepting deposits, making business loans, and offering basic
investment products. It refers to a bank or a division of a bank that mostly deals with deposits
and loans from corporations or large businesses, as opposed to individual members of the
public.

11.4 PUBLIC SECTOR BANKS (PSBs)

Public sector banks (PSBs) are banks where a majority of the stake (more than 50
percent) is held by the government.

11.5 SBI AND ITS ASSOCIATE BANKS (SBI and Its Associate banks)

State Bank of India (SBI) is a multinational banking and financial services company
based in India. It is a government-owned corporation with its headquarters in Mumbai of
Maharashtra.
11.6 NATIONALIZED BANKS (NBs)
Nationalized banks mean the Central and State government owned banks. The 14 major
banks were nationalized in the year 1969, and another 6 banks were nationalized in 1980. In
1993, New Bank of India merged with Punjab National Bank (PNB), which brought the
number of nationalized banks in India to 19"*.
11.7 PRIVATE SECTOR BANKS (Pvt. SBs)

The Pvt.SBs are banks where greater parts of stake or equity are held by the private
shareholders and not by government.

11.8 OLD PRIVATE SECTOR BANKS (OPSBs)

The banks, which were not nationalized at the time of bank nationalization that took
place during 1969 and 1980, are known to be the Old Private Sector Banks. These were not
nationalized, because of their small size and regional focus. Most of the old private-sector
banks are closely held by certain communities and their operations are mostly restricted to
the areas in and around their place of origin. Their Board of Directors mainly consist of
locally prominent personalities from trade and business circles.

11.9 NEW PRIVATE SECTOR BANKS (NPSBs)

The NPSBs, which came in operation after 1991, with the introduction of economic and
financial sector reforms are called "New Private Sector Banks". These banks should have a
minimum net worth Rs. 200 crores. These are called new generation private sector banks.

11.10. SHORT TERM LOAN

Short term credit is a credit which is repayable within 12 months

11.11. MEDIUM TERM CREDIT

Medium term credit is the one, which is repayable after 12 months and within five
years.

11.12. LONG TERM CREDIT

Long term credit is the one, which is repayable after a period of five years and upto
twenty years.

11.13. NON PERFORMING ASSET (NPAs)

Credit facilities in respect of which interest or instalment of principle is in arrears for

more than 90 days.

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1.12. LIMITATIONS OF THE STUDY.

The following are the limitations of the study:

1. The study is restricted to only eleven years from 2002-03 to 2012-13.

2. The analysis is made purely from the financial point of view.

3. This study does not include Foreign Banks, RRBs and Co-operative Banks.
4. The reliability and correctness of the study depends on the information provided in
the report on trend and progress of banks in India.

5. The study concentrates only on the quantitative analysis of financial data. The
emerging trends in the qualitative aspects of performance of a bank in areas such as
customer relationship management, marketing strategies, impact of technology on
profitability are not considered.

1.13. CHAPTER SCHEME

This work is presented in eight chapters

The first chapter presents the introduction of the study, statement of the problem,
objectives of the study, methodology and framework of analysis, scope of the study, period
of study, limitations of the study and the chapter scheme.

The second chapter presents a bird's view of the review of literatures in three
dimensions namely priority sector, non priority sector and non performing assets in India
and abroad.

The theoretical backgrounds of the credit management are presented in the third
chapter. It includes the significance of credit, principle of lending, schedule 9 of banking
balance sheet, priority sector advances, non priority sector advances, RBI guidelines for
interest rates on advances, concept of NPAs, classification of NPAs, consequence of NPAs,
effective credit management and so on.

The fourth chapter deals with the various loans and advances of public sector banks in
India and such advances include bill finance, term loan, demand loan, secured advances,
unsecured advances, priority sector advances, government guarantee loan programme,
public advances, syndicated loan, foreign bill finance and so on.

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 The fifth chapter evaluates the perfomiance of loan and advances of the private sector
bank. The advances include bill finance, term loan, demand loan, secured advances,
unsecured advances, priority sector advances, government guarantee loan programme,
public advances, syndicated loan, foreign bill finance and so on.

The comparative analysis of loans and advances of both public and private sector
banks are given in the sixth chapter.

The seventh chapter analyzes the position of NPAs of the Bank. This chapter includes
gross NPAs, net NPAs, standard asset, sub standard asset, doubtful asset, loss asset,
comparative analysis of NPAs through SEM model, RBI suggested model and so on.

The eighth chapter is the summation of the findings, suggestions and conclusion of
the study.

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REFERENCES
1. Bhide, M G, Prasad A, Ghosh, Saibal (2002), 'Basking Sector Reforms: A Critical
Overview, EPW, Feb 2-8 Vol. 37, No 05.
2. Ganesan, P., "Public Sector banks and Priority Sector Advances- A critical Analysis",
South Economist, Vol.37, No.8, August 15, 1998, pp: 12-16.
3. G.S. popli and S.K. Puri "Strategic Credit Management in Banks" PHI Learning private
Ltd, New Delhi-2013. P. 2.
4. Ibid- P. xix

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