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BANKING SECTOR: CHALLENGES FOR PUBLIC SECTOR BANKS OF INDIA

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Volume 3, Issue 11 (November, 2014) Online ISSN Published by: Abhinav Publication Abhinav National Monthly Refereed Journal of Research in BANKING SECTOR: CHALLENGES FOR PUBLIC SECTOR BANKS OF
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Volume 3, Issue 11 (November, 2014) Online ISSN Published by: Abhinav Publication Abhinav National Monthly Refereed Journal of Research in BANKING SECTOR: CHALLENGES FOR PUBLIC SECTOR BANKS OF INDIA Anita Sheopuri 1 Assistant Professor, VNS Business School, Bhopal, India Dr. Anuj Sheopuri 2 Associate Professor, Bansal Management Group of Institutes, Bhopal, India ABSTRACT In Indian financial system Indian Banking sector is an integral part, which has undergone dramatic change ever since Liberalization, Privatization, and Globalization (LPG) has taken place. India is the largest country having many and varied financial institutions both public and private banks, who are controlled and governed by Reserve Bank of India, and Ministry of Finance. If we see the rich history of Indian banking sector, then it is not wrong to say that it was well-developed even prior to the independence of the country in The first bank in India, called The General Bank of India was established in the year The Bank of Bengal / Calcutta (1809), Bank of Bombay (1840) and Bank of Madras (1843) was established by the then The East India Company. The next bank was Bank of Hindustan which was established in At that time these three banks (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks. Allahabad Bank which started in 1865 was the first to be completely run by Indians. After independence, Government of India took an important step, by introducing reforms in the structure of Indian banks. In 1955, the Imperial Bank of India was nationalized and was given the name State Bank of India , to act as the principal agent of Reserve Bank of India and was given the right / control to handle banking transactions all over the country. The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the banks. The main objective of reforms in India was to enhance the efficiency and performance of banks so that their economic standing also improves. In the early years of 1990 s when the Government of India, opened the market through LPG, many private and foreign banks rushed to set up their business in India, as there was a gap (gap of service given by public banks and services expected). In order to pull up the socks and prepare our banking sector for this change, the Indian government started diluting its equity in Public Sector Banks (PSB) from early 1990s in a phased manner. In recent years the economist and banking sector specialist witnessed that though the public bank s infrastructure and size of business is too large and have enough experience, but they are facing the problems and difficulties from the functioning of private banks. Hence, public banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep their economy rolling for their survival. The main point or focus is of survival for the public bank is to innovate and to take advantage of the new business opportunities and at the same time ensure continuous assessment of risks. Keywords: Liberalization; Privatization; Globalization; Risk Management; Open Appraisal System Available online on 54 INTRODUCTION Indian banks, to be specific the public sector banks are facing a number of challenges ever since the banking industry was opened up for private players. Actually, the public sector banks are governed by the norms and instructions of the Central / State Government, the political parties work for the masses, and want to gain more votes, so they don t give importance nor give the heed to the profitability of banks, etc. Thus the banks are forced to introduce social banking practices, which have resulted in increased non performing assets, decreased profitability and hampered the operational efficiency. The competition with private banks forced public sector banks to take up serious measures for improving profitability and efficiency of operations. It is rightly said that before opening up the market, the Indian public had only one choice for the banks i.e. public banks, but after opening up the market to the foreign and private banks, several private banks with better and fast services with pleasing marketing skills made the competition stiffer. Human resource management is the area where many initiatives were implemented for streamlining banking operations. In this research paper Human Resource Management challenges faced by public sector banks are analyzed and suggestions made are summarized. There are two factors, in which one can easily correlate the functioning of the banks. First factor is balance sheet, profitability and non-performing assets of banks. Another factor is the management of human resource, the way and method in which the management utilizes it. In November 1991, The Narasimham Committee placed the report in front of the central government containing the reforms of the financial sector, which was later issued. These reforms aimed at improving the efficiency of the banking system, introducing transparency in operations, and ensuring that the sector is operating on a sound financial grip. The Committee came into conclusion that government sector banks are ailing with acute problems such as - poor loan recovery, weak capital position, high cost and low profitability, etc. and such problems were not aroused by / due to ownership i.e. they are government or public banks, but due to the various policies that are being practiced by the banks (Bery, 1994). The performance of the private and foreign banks has been stronger than that of the public sector banks. The reason is that private banks are not having the burden of a large network of branches, especially in low range of business areas, they have been able to introduce technology to upgrade operational efficiency, and their business strategy has concentrated more on high yielding and profitable areas. The non - performing assets of public sector banks is also high in comparison with their counterparts. Lot of attention has been given to the performance evaluation of banks (Seifrd and Zhu, 1999). A number of studies were conducted to compare different types of banks operating in India based on different performance / efficiency criteria / factors from time to time. After the nationalization of banks were done, the position of public sector banks started worsening, which raised the concern. This resulted in that Reserve Bank of India formed number of committees, notably Tondon Committee in 1975, Luther Committee in 1977, Chakravarty Committee in 1986 and Narsimham Committee in 1991 which inter-alia examined various factors and gave number of suggestions to improve the efficiency of the banks in India. According to CRISIL study (2002) it was concluded that lower operating expenses improved the profitability of banks, contrary to the popular perception that only trading profits helped the banking sector shore up their bottom lines. Human Resource Management is crucial to any business which is dealing with goods or service, and a bank is a service industry too, hence it has to give importance to its employees also and the system followed. There are two different kind of problems faced by the banks i.e. employees retention and management of risk. It is the question of, how you are managing the people and how you are managing the risks which determines your success in the banking business. Tackling risk efficiently may not be possible without skilled manpower. Though the interest rate on (deposits + loans) is important but, there may be other reasons / factors as to why people select and stay with a particular bank. Banks must try to distinguish themselves by creating their own niches, especially creating transparent working / situations with a high level of competitiveness. Those who do not meet the customer expectations or does not fulfill the demands will find survival difficult. Banks must communicative VOL. 3, ISSUE 11 (November 2014) 55 and emphasize the services i.e. Unique Selling Preposition (USP) in order to attract and retain certain customers. Services should be consistent, novel; internationally acclaimed, socially responsible, etc. be emphasized and to be worked upon. Since 1994, the performance of the private banks is growing up steadily; it is proved that in the period of ( ) it saw the highest turnover for the private sector banks i.e. 25.8%. The growth of employment opportunities in the private banks was also higher, despite turnover rate was also high which shows clearly aggressiveness, the main focus of banks was technological up-gradation to reach a wider customer base and to offer a variety of financial services. The second distinguishing feature of employment practices in the private banks is the structural composition of the banking sector employees. There are three categories in banks officers, clerical, and subordinate staff. The growth rate in the commercial banks from to was 1.21% in overall employment. It declined to 0.27% during 1995 to 2000 as the banks started downsizing. The employment rate also declined amongst the clerical and subordinate staff too. For the officer s cadre the growth in employment was 1.81% in the first half of the decade and this declined to 0.89% in the latter half of the decade. For the clerical staff, the growth in employment was 0.80% in the first half of the decade and this slipped to 0.89% in the second half of the decade. The growth in employment of subordinate staff also declined significantly from 1.41% in the first half of the decade to 0.34% in the latter part of the 1990 s. The recruitment in public sector banks was standardized with the introduction of the Banking Service Recruitment Boards in by the government having directives to restrict intake and to improve the productivity. The Narasimham Committee urged the banks by allowing them to make their own recruitments, as special skills were required and to allow clerical recruitment to continue to take place through the boards. At present the subordinate staff is selected through the local employment exchange. For officers and clerical staff the number of vacancies are determined depending on business growth of a particular bank i.e. - branch expansion, existing pattern of staffing and wastages. The promotion of workers in nationalized banks from subordinate staff to clerk and from clerk to officer is the discretion of a particular bank. In July 1973 the Government of India appointed Pillai Committee to standardize the pay scales, allowances, and perks of officers, which submitted its report in May With certain modifications, the suggestions were adopted resulting that Officers Service Regulation came into force. The Pillai Committee noted that to remove frustration and bring see through norms in the promotions for the meritorious employees, the scale system should be introduced i.e. Top Management (2 scales), Senior Management (2 scales), Middle Management (2 scales) and Junior Management (1 scale). The Pillai Committee recommended promotions to at senior and middle level should be on merit basis, having weight-age given on service record, professional qualifications, etc. The merit rule thus replaced the seniority rule for promotions in middle and senior positions. It was in mid 90's when the private sector banks entered into the market, the period between was golden period as these banks grew by leaps and bounds. They have increased their incomes, profit margins, asset sizes and outperformed their public sector counterparts. The private sector banks include Axis, HDFC, and ICICI, etc. whereas the public sector banks consists of 19 nationalized banks, IDBI bank and State Bank group. In conclusion, we may say that the human resource of the banks have enabled or created the vast gap of performance among two sectors. In order to achieve better results and remain competitive in a highly volatile and regulatory environment, this capital of human resource with better policies should be formed and practiced. OBJECTIVES 1. To examine the reforms done, and problems faced by the Indian banking sector after LPG. 2. To study the human resource policies practiced by public and private sector banks. 3. To review the financial performance of public, and private banks in India, and to enquire about the areas where public banks lack behind their counterparts. VOL. 3, ISSUE 11 (November 2014) 56 4. To know the threats faced by both public and private sector banks in terms of business and for their employees. Banks Network In order to penetrate in the market and amass more and more share of market, banks have created network of branches and ATMs as their strategy so that they can continue to enlarge their geographical area with potential for growth. Indirectly the banks will serve the public and thus it will suffice growth of their businesses too. Source: RBI If we see the above graph, it clearly shows that % increase of growth of private sector banks against their counterpart s i.e. public banks (State Bank of India and Nationalized Banks) in the year 2008 it touched 40% and their counterparts i.e. public sector banks are on average 10% since 4 years ( ). The private sector banks are spreading its wings at a much faster rate than public sector banks. The customer base of these banks has grown manifold since they are able to provide innovative services to the customers at a much faster pace. This is leading them to capture more market share and eating up some of the share of their public sector counterparts. Banks Growth Each and every bank (private or public) aims to grow and it may be judged by various parameters i.e. asset base, customer base, net profits and less NPAs and many others. Source: RBI % Growth in Balance Sheet Size % Growth in Total Income Private Sector Banks 10.86% 23.51% -2.19% 14.63% Public Sector Banks 17.93% 19.21% 12.46% 16.71% The public sector bank s balance sheet and income grew at a normal rate during , but comparing with private sector banks, the rates or percentage has shown phenomenal increase during that shows their ability to do profitable business. Productivity Productivity is one of the measures of judging the efficiency of banks. This growth or rate is important to the banks because it means that the banks can meet its obligations to employees, shareholders, and governments (taxes and regulation), and still remain competitive in the market place. As in other VOL. 3, ISSUE 11 (November 2014) 57 businesses or organizations, in the banking industry too, the productivity is measured by profit per employee, business per employee. Source: RBI The ratios given / shown sometimes may mislead, since private banks smartly improve their ratios by trimming their employees during recessionary environment. This is because during the period of , when the balance sheets and profits of private sector banks declined, still they managed to keep up the productivity rates higher. This was only possible when there is large lay-off of employees which is actually what had happened with these banks during the period It was only during 2010 and after when the business of banks started picking up again, and then they started to hire employees. Overall public sector banks scores higher when it comes to employee retention which is also evident from the graph. It is correct that during latter half of 1990 s the profitability of the public sector banks improved in relation with the performance of the private and foreign banks. However, the share of the total deposits raised by public banks declined and private banks attracted deposits at more favorable net interest rates. Private banks have adopted better risk-management practices and this resulted in increased prudence on their part which led to greater expenditures on provisioning which has reduced their profitability. Moreover, private banks give importance to technological up-gradation as to provide better customer support and manage assets better. The turnover per employee in the private banks also improved over the decade and relative to the turnover per employee of public sector banks by the end of the decade it was twice the figure for the beginning of the decade. Private banks improved their efficiency relatively faster during the course of the decade, and public banks lagged behind. Change is the only constant feature in this competitive world and banking is not an exception. Adjust, adapt and change should be the key mantra for the survival in the market. The major challenge faced by banks today is the ever rising customer expectation and maintaining the market share with growth rate. Till now, public sector banks that were a dominating force in the Indian banking industry have lacked a proactive HR environment. Banks are beginning to recognize human resource as an area of core competence, and seek to pursue and retain the best talent in the industry. It has been realized that skill development is important for staff, so that the resource may stay and attrition rate is decreased. In order to keep the employees motivated and develop them, the banks are tying up with professional agencies for in-house training. VOL. 3, ISSUE 11 (November 2014) 58 Source: FICCI As per the report of Federation of Indian Chambers of Commerce & Industry (FICCI), Indian Banking System: The Current State & Road Ahead, Annual Survey 2010, clearly states that the major challenge faced by banks (private and public) today is not only the ever rising customer expectation, but poaching of the skilled / experienced employees and high attrition rates are some of the common problems faced by both types of banks. Thus, on the whole, we see that public sector banks, private sector banks face difficulty in hiring the right person and to retain them for a longer period. Source: RBI Bulletin 2012 As per the bulletin published by the Reserve Bank of India during 2012, the table suggests that public sector banks are no longer the major employment providers as they used to be; now the private sector banks have more scope for employment. The employee strength of PSBs has gone down or remained static between and but that of private sector banks have gone up. As per the reports the per-employee expenses of PSBs is higher than that of private sector banks, which is around 130% higher during The main difference between public and private sector banks is their work culture and the spirit (what purpose they are doing the business). It has been observed that the work culture of public sector banks is based on socio-economic responsibility, in which profitability is secondary. On the other hand, private sector banks work towards profitability and work culture is purely of corporate style. Management of human resource in any organization is the utmost priority VOL. 3, ISSUE 11 (November 2014) 59 and should be handled with care, as it is scarce both in quality and quantity. And, it is a basic principle that any resource that is short needs to be properly utilized for the benefit of society in large and, therefore there is need to pay attention to the process followed. This is more relevant for public sector banks today on the following grounds / areas. Planning Acquiring the right people Retaining / developing the people Managing people separation / exit Each and every bank whether it is private or public is using human resource to gain competitive advantage, in which career planning and appraisal system is playing a pivotal role, which is beneficial for both i.e. employees and employers in the long run. In private banking system, employee can progress on the basis of his / her performance but in public sector system he / she gets promotion as per policy. It is suggested that the bank should introduce open appraisal system wherein the marks awarded to the reviewer must be disclosed. In many organizations open appraisal systems are working. Mostly promotions are given in accordance with the performance of the job. It is suggest
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