INTRODUCTION

A Public Sector bank is one in which, the Government of India holds a majority stake. It
is as good as the government running the bank. Since the public decide on who runs the
government, these banks that are fully/partially owned by the government are called public
sector banks.
Public Sector bank means any Government Sector Bank/Institute that goes public...
means that issues it share to general public. It also has a greater share of government (more
than 50%) so that the main motto of social welfare other than Maximizing Profit remains.
Whereas Private Sector Banks are those Banks where the management is controlled
by Private individuals and Government does not have any say in the management of these
banks. Maximizing profit is the basic motto.
Liberalization:
Liberalization (or liberalization) refers to a relaxation of previous government restrictions,
usually in areas of social or economic policy. In some contexts this process or concept is often,
but not always, referred to as deregulation. In the arena of social policy it may refer to a
relaxation of laws restricting. Most often, the term is used to refer to economic liberalization,
especially trade liberalization or capital market liberalization.
Improved Management of Non-Performing Assets (NPAs):
NPA is a banking jargon for bad loans. The management of NPAs by Indian banks has
improved substantially post liberalization. Various reasons can be attributed to the same, like
the establishment of the Debt Recovery Tribunals (DRTs), the adoption of the Corporate Debt
Restructuring (CDR) mechanism etc.
A significant event in NPA management is the passage of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFESI) in
2002. This act of SARFESI has helped allows banks and financial institutions manage their
NPAs better. The lenders can now auction properties (residential and commercial) after giving
sufficient notice, when the borrowers fail to repay their loans. Though the SARFAESI Act was
challenged in the courts, the Supreme Court upheld the Act (Mardia Chemicals v/s ICICI Bank)
in 2004 tilting the balance for the banks. The RBI also has also been encouraging banks to use
the provisions of the SARFAESI Act. The ratio of Gross NPAs as a percentage of Total Assets
has fallen from 12% in 1993 to about 2.5% as on March 31, 2011. Thus, post liberalization,
banks have reduced their NPAs. However with the current slow-down in the Indian economy,
there is a worry that NPAs will rise again.
  Increased Thrust on Risk Management:
Basel I was adopted by banks globally in 1988. However, it suffered from the
disadvantage that it was based on a one size approach to all banks. Therefore a need was felt
for a better methodology - the Basel II. There were three pillars of Basel II: minimum capital
requirements, supervisory review, and market discipline. The purpose of Basel II, which was
initially published in June 2004, thus was to create an international standard that banking
regulators can use when creating regulations about how much capital banks need to put aside
to guard against the types of credit, interest, market and operational risks banks face while
maintaining sufficient consistency so that this does not become a source of competitive
inequality amongst internationally active banks. In this context, the capital adequacy ratio (CAR)
is important. It may be noted that alternatively CAR is also called Capital to Risk Weighted
Assets ratio (CRAR) in conformation with the BASEL II accord. CRAR is the measure of the
amount of a bank’s capital expressed as a percentage of its risk weighted assets. In simple
terms, a bank’s capital is the cushion for potential losses which protects the bank’s depositors.
In case of Indian banks, the CRAR has shown a consistent improvement post
liberalization .It has gone up by a significant 2.3% in just four years from 12.3% in 2005-06 to
14.6% in 2009-10. This again can be attributed to the improved risk management practices and
prudential RBI norms followed by Indian banks.
 Increased lending to priority sectors & improved financial inclusion:
As per RBIs norms, 40% of the lending has to be mandatorily extended to the priority
sector. Small scale industries, agriculture etc are included under this priority sector. RBI has
over a period of time post liberalization broad based the definition of priority sector by RBI and
added new sectors. For example, the definition of small scale sectors was changed in 1998. For
a firm to qualify as a small scale sector, the limit of investment in plant & machinery was raised
substantially from Rs. 65 lakhs to Rs. 3 crores. Consequently, even bigger firms became eligible
for priority sector lending, leading to increased credit to the sector. Inclusion of housing loans up
to Rs. 10 (now Rs. 20) lakhs under priority sector further boosted priority sector lending.
Similarly the addition of food processing and cold storage sectors helped increase priority sector
lending. All these changes have led to Indian banks viewing the priority sector as an opportunity
than an obligation. Lending to these sectors has increased manifold leading to improved
financial inclusion. Thus though much more needs to be done in terms of financial inclusion one
should also acknowledge the fact that Indian banks have made progress on this front.
Global growth did not recover as expected across most major developed and rapid-
growth economies in 2013-14. During the year gone by, the central bankers across the globe
took decisive steps to restore confidence in markets and broader economy. In Europe, the
banking situation improved in part due to the long-term refinancing operations of the European
Central Bank (ECB), which helped ensure there was plenty of liquidity in the system. In the US,
the picture was more upbeat but still mixed. And although businesses and consumers started to
borrow again, credit growth remained tepid. The global economic environment broadly
strengthened, and is expected to improve further, with much of the growth impetus emanating
from advanced economies. There was acute financial volatility in emerging market economies,
and increases in the cost of capital which dampened investments and weighed on growth. The
banking sector, being the barometer of the economy, is reflective of the macro-economic
variables. While the Indian economy is yet to catch strength, the Indian banking system
continues to deal with improvement in asset quality, execution of prudent risk management
practices and capital adequacy. The Reserve Bank of India (RBI) maintained a status quo in
interest rate since January 2014. However, despite the retail inflation softening in recent
periods, it'll be a little while before the Central Bank would opt for rate cut. Indian banking
industry, with total asset size of Rs 81 trillion (USD 1.34 trillion), is expanding continuously but
on a cautious note. The fact that the industry is plagued by bad loans, the lenders have chosen
to go slow in terms of credit off take. Fiscal 2014 saw a combination of various external and
internal events that kept markets turbulent, interest rates high and investor confidence low,
resulting in shrinking investment and GDP growth.
While the medium term prospects point towards an improving growth scenario, given the
improved macroeconomic fundamentals it is highly likely that there will only be a modest
economic recovery in FY15. That said, the Indian economy is now on the threshold of a major
transformation, with expectations of policy initiatives by the change in guard at the Centre.
Positive business sentiments, improved consumer confidence and more controlled inflation
should help boost the economic growth. With a new and stable Government in place now, a
clear revival in the investment climate is sure to come. Higher spending on infrastructure,
speedy implementation of projects and continuation of reforms will provide further impetus to
growth. A moderate recovery is likely to be seen in FY15 and the real GDP is expected to grow
by 5.3%-5.5%. While the CPI inflation is expected to remain an important challenge for India, it
should witness a downward trajectory during the major part of FY15. The worst seems to be
over for the Indian banking industry, as there will be increased clarity on macroeconomic and
political fronts during FY15. On the positive side, liquidity remains steady, inflation is expected
to move downwards for the major part of FY15 and the RBI is in full control to manage any
volatility. Macroeconomic improvements and potential for post-election reforms should see a
gradual reduction in stressed loans on lower slippages and higher recoveries. Recovery in
macroeconomic environment and expected revival in economic growth will help to mitigate risks
and resolve problems of asset quality. Not just that, the banking industry may see more
participants and greater healthy competition. Two new banks have already received licences
from the RBI i.e. IDFC and Bandhan Group, which apart from providing impetus to financial
inclusion, is expected to intensify competition in the banking sector in the medium term. In
addition, by postponing the implementation of Basel III capital norm by one year, RBI has given
some breathing space to banks struggling with stressed margins and lower profitability on
account of increase in NPAs. The RBI's new norms will further encourage banks to identify
potential bad loans and take corrective actions. The overall credit growth may revive marginally
at 14-15% in FY15; private sector banks may continue to outpace PSBs in credit growth. Overall
(PSBs + private banks) gross NPAs could remain at 4-4.2% by FY15 as against 3.9% in FY14.
Banks need to raise capital of Rs. 1.8-2 trillion over the next two years (FY15-FY16); of which
45-50% may be issued in the form of additional Tier 1, 35-40 % through Tier II and balance
through common equity. However, if there are no seekers for additional Tier 1 capital
instruments, Indian banks may need to mop up Rs. 1-1.3 trillion common equity capital over the
next two years as mentioned by a rating agency report.