A BRIEF HISTORY OF BANKING IN INDIA

A BRIEF HISTORY OF BANKING IN INDIA
1. From the ancient times in India, an indigenous banking system has
prevailed. The businessmen called Shroffs, Seths, Sahukars, Mahajans,
Chettis etc. had been carrying on the business of banking since
ancient times. These indigenous bankers included very small money
lenders to shroffs with huge businesses, who carried on the large and
specialized business even greater than the business of banks.
• The origin of western type commercial Banking in India dates back to
the 18th century.
2. The story of banking starts from Bank of Hindusthan established in
1779 and it was first bank at Calcutta under European management.
• In 1786 General Bank of India was set up.
3. Since Calcutta was the most active trading port in India, mainly
due to the trade of the British Empire, it became a banking center.
• Three Presidency banks were set up under charters from the British
East India Company- Bank of Calcutta, Bank of Bombay and the Bank of
Madras. These worked as quasi central banks in India for many years.
• The Bank of Calcutta established in 1806 immediately became Bank of Bengal.
• In 1921 these 3 banks merged with each other and Imperial Bank of
India got birth. It is today'sState Bank of India.
• The name was changed after India's Independence in 1955. So State
bank of India is the oldest Bank of India.
4. In 1839, there was a fruitless effort by Indian merchants to
establish a Bank called Union Bank. It failed within a decade.
5. Next came Allahabad Bank which was established in 1865 and working
even today.
• The oldest Public Sector Bank in India having branches all over
India and serving the customers for the last 145 years is Allahabad
Bank. Allahabad bank is also known as one of India's Oldest Joint
Stock Bank.
6. The Oldest Joint Stock bank of India was Bank of Upper India
established in 1863 and failed in 1913.
7. The first Bank of India with Limited Liability to be managed by
Indian Board was Oudh Commercial Bank. It was established in 1881 at
Faizabad. This bank failed in 1958.
8. The first bank purely managed by Indian was Punjab National Bank,
established in Lahore in 1895. The Punjab national Bank has not only
survived till date but also is one of the largest banks in India.
9. However, the first Indian commercial bank which was wholly owned
and managed by Indians was Central Bank of India which was established
in 1911.
• Central Bank of India was dreams come true of Sir Sorabji
Pochkhanawala, founder of the Bank.
• Sir Pherozesha Mehta was the first Chairman of this Bank.
10. Many more Indian banks were established between 1906-1911. This
was the era of the Swadeshi Movement in India. Some of the banks are
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
Bank and Central Bank of India.
• Bank of India was the first Indian bank to open a branch outside
India in London in 1946 and the first to open a branch in continental
Europe at Paris in 1974.
• The Bank was founded in September 1906 as a private entity and was
nationalized in July 1969. Since the logo of this Bank is a star, its
head office in Mumbai is located in Star House, Bandra East, Mumbai.
11. There was a district in Today's Karnataka state called South
Canara under the British empire. It was bifurcated in 1859 from Canara
district , thus making Dakshina Kannada and Udupi district. It was the
undivided Dakshina Kannada district. It was renamed as Dakshina
Kannada in 1947. Four banks started operation during the period of
Swadeshi Movement and so this was known as "Cradle of Indian Banking.
• This was the first phase of Indian banking which was a very slow in
development. This era saw many ups and downs in the banking scenario
of the country.
12. The Second Phase starts from 1935 when Reserve bank of India was
established.
• Between the period of 1911-1948, there were more than 1000 banks in
India, almost all small banks. The Reserve Bank of India was
constituted in 1934 as an apex Bank, however without major government
ownership. Government of India came up with the Banking Companies Act
1949. This act was later changed to Banking Regulation (Amendment) Act
1949.
• The Banking Regulation (Amendment) Act of 1965 gave extensive powers
to the Reserve Bank of India. The Reserve Bank of India was made the
Central Banking Authority.
13. The banking sector reforms started immediately after the
independence. These reforms were basically aimed at improving the
confidence level of the public as most banks were not trusted by the
majority of the people. Instead, the deposits with the Postal
department were considered safe.
14. The first major step was Nationalization of the Imperial Bank of
India in 1955 via State Bank of India Act.
• State Bank of India was made to act as the principal agent of RBI
and handle banking transactions of the Union and State Governments.
15. In a major process of nationalization, 7 subsidiaries of the State
Bank of India were nationalized by the Indira Gandhi regime. In 1969,
14 major private commercial banks were nationalized. These 14 banks
Nationalized in 1969 are as follows:
o Central Bank of India
o Bank of Maharastra
o Dena Bank
o Punjab National Bank
o Syndicate Bank
o Canara Bank
o Indian Bank
o Indian Overseas Bank
o Bank of Baroda
o Union Bank
o Allahabad Bank
o Union Bank of India
o UCO Bank
o Bank of India.
16. The above was followed by a second phase of nationalization in
1980, when Government of India acquired the ownership of 6 more banks,
thus bringing the total number of Nationalised Banks to 20. The
private banks at that time were allowed to function side by side with
nationalized banks and the foreign banks were allowed to work under
strict regulation.
17. After the two major phases of nationalization in India, the 80% of
the banking sector came under the public sector / government
ownership.
18. Please note the following sequence of events:
 Creation of Reserve bank of India: 1935
 Nationalization of Reserve Bank of India : 1949 (January )
 Enactment of Banking Regulation Act : 1949 (March)
 Nationalization of State Bank of India : 1955
 Nationalization of SBI Subsidiaries : 1959
 Nationalization of 14 major Banks : 1969
 Creation of Credit Guarantee Corporation: 1971
 Creation of Regional Rural Banks : 1975
 Nationalization of 7 more banks with deposits over Rs. 200 Crore: 1980
19. The result was outstanding. The public deposits in these banks
increased by 800% , as the government ownership gave the public faith
and trust.
20. The third phase of development of banking in India started in the
early 1990s when India started its economic liberalization.

Knowledge About TAXES IN INDIA

Value Added Tax

VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.

All over the world, VAT is payable on the goods and services as they form a part of national GDP. It means every seller of goods and service provider charges the tax after availing the input tax credit. It is the form of collecting sales tax under which tax is collected in each stage on the value added of the goods. In practice, the dealer charges the tax on the full price of the goods, sold to the consumer and at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers from whom he purchased the goods and deposits such amount of tax in government treasury.

Method of Collection

There are two methods for collection of VAT in India. In the first method, tax is charged separately on the basis of the tax which is paid on purchase, and the tax that is payable on the sale (shown separately in the invoice). Therefore, the difference between the tax paid on purchase and the tax payable on sale as per the invoice is the VAT.

In the second method, tax is collected and charged on the aggregate value of the tax payable on sale and purchase, by applying the rate of tax applicable to the goods. Therefore, the difference between the sale price and purchase price would be VAT. It means VAT is the tax which consumers ultimately face, which is collected at each stage.

 

Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax.

Sales Tax is a levy on purchase and sale of goods in India and is levied under the authority of both Central Legislation (Central Sales Tax) and State Governments Legislations (Sales Tax). The government levies Sales Tax principally on intra-state sale of goods. States also levy tax on transactions which are "deemed sales" like works contracts and leases.

In addition to Sales Tax, some states also levy additional tax, surcharge, turnover tax and the like. Ordinarily, Sales tax is recovered from the buyer as a part of consideration for sale of goods.

Sales tax is paid by every dealer on the sale of any goods made by him in the course of inter-state trade or commerce, despite the fact that no liability to tax is raised on the sale of goods under the tax laws of the appropriate state.

Sales Tax ID number

A state Sales Tax ID number is essentially a business version of your Social Security number, under which you collect and pay tax for any service or product you sell, which in turn, qualifies for taxation in your state.

The rule of thumb for Sales Tax is that most services are exempt and most products are taxable except for food and drugs, though recent history reflects that states have been gradually adding to the list of services that are taxable.

Service Tax

Service tax is a tax levied on services rendered by a person and the responsibility of payment of the tax is cast on the service provider. It is an indirect tax as it can be recovered from the service receiver by the service provider in course of his business transactions. Service Tax was introduced in India in 1994 by Chapter V of the Finance Act, 1994 . It was imposed on a initial set of three services in 1994 and the scope of the service tax has since been expanded continuously by subsequent Finance Acts. The Finance Act, extends the levy of service tax to the whole of India, except the State of Jammu & Kashmir.

The Central Board of Excise & Customs (CBEC) under Department of Revenue in the Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. In exercise of the powers conferred, the Central Government makes service tax rules for the purpose of the assessment and collection of service tax. The Service Tax is being administered by various Central Excise Commissionerates, working under the Central Board of Excise & Customs. There are six Commissionerates located at metropolitan cities of Delhi, Mumbai, Kolkata, Chennai, Ahmedabad and Bangalore which deal exclusively with work related to Service Tax. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination.

Registration

• A person liable to pay service tax should file an application for registration within thirty days from the date on which the service tax on particular taxable service comes into effect or within thirty days from the commencement of his activity.
• Every service provider of a taxable service is required to take registration by filing the Form ST-1 (External website that opens in a new window) in duplicate with the jurisdictional Central Excise Office (External website that opens in a new window).
• A 'registered' service provider is referred to as an 'assessee'.
• A single registration is sufficient even when an assessee is providing more than one taxable services. However, he has to mention all the services being provided by him in the application for registration and the field office shall make suitable entries/endorsements in the registration certificate.
• A fresh registration is required to be obtained in case of transfer of business to another person.
• Any registered assessee when ceases to provide the taxable service shall surrender the registration certificate immediately.
• In case a registered assessee starts providing any new service from the same premises, he need not apply for a fresh registration. He can simply fill in the Form S.T.1 for necessary amendments he desires to make in his existing information. The new form may be submitted to the jurisdictional Superintendent for necessary endorsement of the new service category in his Registration certificate.

In case of Individuals or Proprietary Concerns and Partnership Firm, service tax is to be paid on quarterly basis. The due date for payment of service tax is the 5th of the month immediately following the respective quarter. (Quarters are : April to June, July to September, October to December and January to March). However, payment for the last quarter i.e. January to March is required to be made by 31st of March itself. In case of any other category of service provider than specified above, service tax is to be paid on a monthly basis, by the 5th of the following month. However, payment for the month of March is required to be made by 31st of March itself. Service tax is to be paid on the amount realized / received by the assessee during the relevant period ( i.e. a month or a quarter as the case may be).

The unique feature of Service Tax is reliance on collection of tax, primarily through voluntary compliance. System of self-assessment of Service Tax Returns by service tax assesses was introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly. Central Excise officers are authorized to conduct surveys to bring the prospective service tax assesses under the tax net.

Service tax is payable @ 10% of the 'gross amount' charged by the service provider for providing such taxable service. The Education Cess is payable @ 2%, and Secondary and Higher Education Cess payable @ 1% of the service tax payable.

Service Tax Exemptions

The Central Government can grant partial or total exemption by issuing an exemption notification. But it cannot be granted by the Government with retrospective effect. The general exemptions are :-

• Small service providers whose turnover is less than Rs.4 lakhs per annum are exempt from service tax.
• There is no service tax on export of services.
• Services provided to UN and International Agencies and supplies to SEZ(Special Economic Zones) are exempt from service tax.
• Service tax is not payable on value of goods and material supplied while providing services. Such exclusion is permissible only if Cenvat credit on such goods and material is not taken.

Wealth Tax

The Wealth Tax Act is an important direct tax legislation, which came into existence on 1 st April 1957. Wealth tax is levied on the benefits derived from property ownership. The tax is to be paid year after year on the same property on its market value, whether or not such property yield any income.

An assessee or a person, who is liable to pay wealth tax under the Wealth Tax Act, includes legal envoy, perpetrator or administrator of a deceased person and a person deemed to be an agent of a non-resident. Under the Act, tax is charged on the following persons in respect of the wealth held by them during the assessment year:

• A company.
• A Hindu Undivided Family (HUF), which is a type of assessee recognised under the Act, consisting of all persons lineally descended from a common ancestor and deriving income from joint family corpus. Hindu, Jain, Buddhist, and Sikh families have been so recognised.
• An association of persons or a body of individuals.
• Non-corporative taxpayers whose accounts are to be statutorily audited.
• Those who fall in the 1-by-6 category (External website that opens in a new window).

Chargeability to tax also depends upon the residential status of the assessee and the citizenship of a person.

It may be noted here that productive assets like shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax. The non-productive assets include jewellery, bullion, motorcars, aircraft, urban land, etc. Foreign nationals are exempt from wealth tax on non-Indian assets. The details of Wealth Tax can be accessed through Acts and Rules as framed by the Constitution. Click on the links below for more:

• Wealth Tax Act (External website that opens in a new window)
• Wealth Tax Rules (External website that opens in a new window)

To file your Wealth Tax Returns, you need to fill Form BA, Form A and Form B. Visit the link below to download these forms.

Download forms for Return of Net Wealth

 

Income Tax

Posted by admin on September 4th, 2011

Income tax is a tax paid to the central government on personal income. It is the direct tax paid on income by an individual or a company/firm within a given financial year. The Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT)and is part of the Department of Revenue under the Ministry of Finance , Government of India.

Detailed information on all types of taxation in India can be found here.

The Income Tax Act, 1961 as amended by Finance Act 2010 , under Section 139 makes it obligatory upon any person to file return if the person's total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax.

Provided that a person referred to, who is not required to furnish a return under this sub-section and residing in such area as may be specified by notification in the Official Gazette, and who during the previous year incurs an expenditure of fifty thousand rupees or more towards consumption of electricity or at any time during the previous year fulfils any one of the following conditions, namely:

• is in occupation of an immovable property exceeding a specified floor area, whether by way of ownership, tenancy or otherwise, as may be specified; or
• is the owner or the lessee of a motor vehicle other than a two-wheeled motor vehicle, whether having any detachable side car having extra wheel attached to such two-wheeled motor vehicle or not; or
• has incurred expenditure for himself or any other person on travel to any foreign country; or
• is the holder of a credit card, not being an "add-on" card, issued by any bank or institution; or
• is a member of a club where entrance fee charged is twenty-five thousand rupees or more.

The tax liability to be computed for AY 2012 -2013 is as per the under:-

(i) In case of individuals (other than women and individuals who are of the age of 60 years or more at any time during the financial year 2011-12) -

Income (In Rs.): Tax Liability (In Rs.)

• Upto Rs.1,80,000 : Nil
• Between Rs.1,80,001 – Rs.5,00,000 : 10%
• Between Rs.5,00,001 – Rs.8,00,000 : 20%
• Above Rs.8,00,000 : 30%

(ii) In case of women (other than women who are of the age of 60 years or more at any time during the financial year 2011-12)-

Income (In Rs.) : Tax Liability (In Rs.)

• Upto Rs.1,90,000 : Nil
• Between Rs.1,90,001 – Rs.5,00,000 : 10%
• Between Rs.5,00,001 – Rs.8,00,000 : 20%
• Above Rs.8,00,000 : 30%

(iii) In case of individuals who are of the age between 60 and 80 years at any time during the financial year 2011-12-

Income (In Rs.) : Tax Liability (In Rs.)

• Upto Rs.2,50,000 : Nil
• Between Rs.2,50,001 – Rs.3,00,000 : 10%
• Between Rs.3,00,001 – Rs.5,00,000 : 20%
• Above Rs.5,00,000 : 30%

(iv) In case of individuals who are of the age of 80 years or more at any time during the financial year 2011-12-

Income (In Rs.) : Tax Liability (In Rs.)

• Upto Rs.5,00,000 : Nil
• Between Rs.5,00,001 – Rs.8,00,000 : 20%
• Above Rs.8,00,000 : 30%

Indian Banking Sector 2010 : Opportunities and Challenges

Indian Banking Sector 2010 : Opportunities and Challenges
 
The current economic situation provides a lot of opportunities as well as challenges to the existing banks. It is up to the banks to leverage the opportunities to meet the challenges to the best of their abilities.

 

The past year witnessed a lot of turmoil in the Indian banking industry owing to the global financial crisis. The Reserve Bank of India (RBI), Ministry of Finance and other regulatory authorities have made several notable efforts to improve regulation in the sector. Many big banks operating in the market have made use of the changed regulations (viz., change in CRR and interest rate) to provide better options to potential and new customers. Adoption of new practices to cater to the demanding economy situation has enabled the banks to meet the changing customer requirements. Compared to other regional banks, over the last few years, Indian banks have performed favorably on growth, asset quality and profitability. The banking index has grown at a compounded annual rate of over 51% from April 2001 compared to the market index for the same period, which registered a growth rate of 27%.

The crisis that hit the financial services industry initially in the US and almost immediately in the entire world has moved our focus towards critical systemic issues—not only in the US banking business but also in India. Globally, these systemic issues are being tackled at the legislative and regulatory levels; in India, the solution to the systemic issues will require significant inputs and regulatory, industry and infrastructural interventions. To ensure survival, banks tried to quickly assess their liquidity reserves and capital position to check if they had any exposure to the failing global entities. Additionally, this check also meant a clear pulling down of new/additional credit outflow, unless and until their positions were clear. Over a short span of time, the situation resulted in banks totally stopping the outflow of new credit.

According to Indian Banks Association Data, retail credit growth dropped drastically from 30% in 2007 to 10% in 2008, owing to increased pressure on existing loan portfolios and the fear of anticipated mass job losses which would result in high NPAs. Analysts and credit rating agencies in their reports showed marginal to moderate increases in NPLs in assets such as two-wheelers, commercial vehicles and unsecured loans. Growth in mortgages, which forms 50% of banks' retail portfolio, was also hit due to upward movement in interest rates, restriction on collection practices and soaring real estate prices.

Indian banks had to clean up their systems and practices to ensure stability in a recovering economy. Four challenges must be addressed before success can be achieved.

• The market is witnessing haphazard growth, driven by new products and services, which include credit cards, consumer finance and wealth management on the retail side, and fee-based income and investment banking on the wholesale banking side. Continuous growth in these new products and services requires new skills in sales and marketing, credit, operations and, above all, a potential customer base to provide these offerings.

• There will be no windfall treasury gains, which banks used to enjoy as a result of the decade-long secular decline in interest rates provided. This will expose the weaker banks and put them in trouble to a large extent.

• Growing interest in India will encourage foreign banks to set shop in India, thereby intensifying the competition for domestic and other existing players.

• As India is experiencing demographic shifts resulting from changes in age profile and household income, now consumers will demand improved institutional capabilities and enhanced service levels from banks.

As has been mentioned earlier, in India, regulators need to play a major role in revolutionalizing and bringing about changes in the economy. Of late, it has been realized that there is a need to create a market-driven banking sector, with ample stress on social development. This requires dedicated efforts by the regulators in six important areas, which are as follows:

• Focus strongly on `social development' by shifting from universal directed norms to an explicit incentive-driven system by introducing credit guarantees and market subsidies to encourage leading public sector, private and foreign players to leverage technology to innovate and profitably provide banking services to lower income and rural markets, thereby improving financial inclusion in the economy.

• Like the biggest financial markets of the world, create a super regulator rather than having separate regulators for each and every participant in the financial services industry.

• Focus on corporate governance and ensure that the same is improved by primarily focusing on board independence and accountability.

• Speed up the process of creation of world-class supporting infrastructure (e.g., payments, Asset Reconstruction Companies (ARCs), credit bureaus, and back-office utilities) to enable the banking sector focus on core activities.

• Undertake labor reforms, focusing on enhancing human capital, to help the public sector and old private banks compete with the newly established and much more efficient private banks and foreign banks entering the country.

Not only the regulators need to gear up, but even the banks need to pull up their socks and bring about some changes to support the reforms which the regulators aim to bring in:

• Public sector banks need to improve certain areas of their work performance, viz., sales and marketing, service operations, risk management and the overall organizational performance ethic. Last but not the least is to enhance the human capital, which will be the single biggest challenge and definitely the most time-consuming one also.

• What is true for public sector banks is also true for old private sector banks, as they have to also strengthen their basic skills. Additionally, they have to ensure their proactive participation in the Indian banking sector. This is of utmost importance to them, because the same will keep them up-to-date in this fiercely competitive market.

• New private banks can achieve an altogether new height in their growth in the Indian banking sector by continuing to engineer new and differentiated business models to profitably, efficiently and effectively service segments like the rural/low income and affluent/HNI segments, and by keeping an eye open for the acquisition of small banks to grow and reach the next level of performance in their service platforms. Attracting, developing and retaining management capacity would be another critical factor for achieving this and would be the biggest challenge that these banks will have to face.

• Foreign banks entering India will have to be innovative in their approaches to win the largest customer base and share of wallet and above all, to build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they need to be an active player in the game for potential acquisition opportunities, as and when they emerge, to ensure growth and establishment in India. They need to sustain and maintain a long-term value-creation mindset, which will not be an easy task by any means.

Thus, banking in India involves the cooperation and participation of many stakeholders for the desired changes to be made in the existing system. Last year, during the economic slowdown, when the banking system globally went for a toss, the Indian banking industry emerged as a strong performer owing to the coordinated efforts of policy makers and the banks in bringing these policies to action for the best of the economy.

The Indian banking industry gathered the strength to sustain during such times through its huge deposit base, which is consistently on a growth path, central bank's proactive measures to steadily improve banks' balance sheet strength, and a demand in the economy for physical asset creation. These factors enabled the Indian banking sector to become stronger on the capitalization front and also ensure lower level NPAs and better spreads in the past one-and-a-half decade.

The strength provided through timely measures has helped the industry and the economy in many ways. Last year, the economy witnessed perhaps the biggest and positive impact of higher credit growth in infrastructure- related companies—power, telecom and others. However, it was partially compensated by the reduction in other funding sources such as private equity and foreign institutional investors.

The alarm will start ringing if the regulator decides to continue with the stimulus package for long. With dried-up liquidity and no borrowers (given the low credit growth), the banking system will continue to invest excessively in government securities, leading to fiscal deficit eventually.

However, an increase in domestic liquidity has had a cascading effect on the asset price inflation. According to a report by Tata Securities, the YTD growth in deposits is 9%, while the credit growth is only 5.4%, resulting in the banks' looking for other investment opportunities. The high liquidity with banks forced them to invest in the liquid funds of mutual funds, which in turn invested in commercial papers of corporates at a lower coupon— corporates would have otherwise borrowed at a higher cost from the banks for their working capital requirements.

The second half of the year, which is typically the time for maximum activity in the economy, usually witnesses a higher demand for bank credit, compared to the first six months of the financial year. The three broad segments of bank credit are: Capex and Infrastructure Credit; Working Capital Loans; and Consumer Loans.

It is expected that growth would be highest in the case of infrastructure credit and consumer loans. Additionally, it is also expected that the demand for working capital loans is likely to be low, as commodity prices (crude oil and metals) continue to be low, and thus companies will have to work with low working capital requirements on a yearly basis.

Infrastructure is expected to catalyze credit growth in the Indian economy. According to the allocations made by the authorities concerned, the planned outlay on infrastructure under the 11^th Five Year Plan under the projected investment in infrastructure should be around Rs 4,500 bn per annum for the next three years. According to a report from Tata Securities, infrastructure as a percentage of total bank credit exists at 10.2% currently, and it is projected to grow at more than 40% y-o-y in the next three years.

Consumer demand has been very resilient. There has also been a rise in the purchasing power in smaller cities and rural areas, along with job stability in large cities and Pay Commission benefits. Research by Tata Securities suggests that secured retail loans in the mortgage and vehicle financing segments are seeing good demand and will drive the overall bank credit growth. The research also states that in the absence of a pickup in corporate working capital loans, banks are eager to grow the secured consumer loans portfolio. It is expected that a price correction in the real estate market and gentle interest rates are factors which will promote growth in loan portfolios.

The downturn which the economy witnessed has discouraged the banks from having any exposure to unsecured consumer credit, and a revival in this segment is not expected to happen soon. According to a research report from Tata Securities, retail loans showed a CAGR of 22% during FY05-FY09. Within the retail segment, housing loans grew by 20% CAGR during the same period and consisted ~10% of the total bank credit. Thus, the banks, which had a big challenge on the unsecured loan front, had at the same time a bigger opportunity in the mortgage-backed security portfolio.

Abundant liquidity in the banking system during FY10 has been ensured through secular growth in deposits, low credit demand and prudent borrowing schedule issued by the government to maintain a balanced growth. According to a research report, despite the huge borrowings of Rs 4,510 bn by the government in FY10, the money held in reverse repo by banks remained considerably high. This will provide an opportunity to the banks to utilize the money in the most efficient and effective way to the benefit of both the customers and the economy as a whole, comprising various stakeholders.

Having talked about comfortable liquidity and the much-wanted stability in the banking system, one can expect that bond yields will remain in a higher range and would not fall significantly. Other reasons which are likely to support this fact includes:

• Lower than expected government borrowings

• Reduced global risk premium

• Higher credit growth

This brings another opportunity for the

banks to earn higher income.

Besides the favorable condition for liquidity and high bond yield, it is expected that the Net Interest Margin (NIM) will not expand much. The banks need to have higher incremental CD ratio, improvement in spreads and stable yield on investments to improve NIMs. Banks are expected to have a low cost of deposits owing to a stable interest rate scenario and ample liquidity in the system.

Another important area which requires critical attention is fee income. In the past few years, fee income has been the major contributor of revenue for private sector banks. Private sector banks have leveraged those areas to achieve the above, which public sector banks have not been able to, viz., transaction- related services and third party products sales, among others, to increase this non-fund based income.

Thus, we can very well say that the current situation has provided a lot of opportunities and challenges to the existing banks. Now, it is up to the banks as to how well they leverage the opportunities to meet the challenges to the best of their capacities.