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Discuss about the Central Bank of India.

Overview of Indian Banking Industry

The banking industry of India in current scenario is highly developed, however, in terms of products and services as well as sizes; it is still way down from achieving world standards. Banking sector is well regulated and sufficiently capitalized according to Reserve bank of India. It is suggested by liquidity risk and credit market that global downturn has been withstood by Indian banks. There is a consistent growth in demand of banking sector for catering the needs of economy with the continuous development in economic growth of country. Retail as well as whole sale banking in the country has increased with the growth in economic activities. Credit take off has been accelerated along with increasing activities in retail banking sector resulting from changing lifestyle and higher level of income spend among white goods by household (Amel and Mach 2017).

Such increased activities are apart from increase in corporate banking sector activities resulting from acceleration in industrial production and other factors relating side. Market of consumer lending has experienced with the innovation of a more friendly approach and new products by way of banks introducing customized products. Banks are required to become more competitive for customer retention due to increasing pressure resulting from sustained demand.  Substantial investments are required for delivering the services and products in terms of technological drive that has become imperative for banks (Bowman et al. 2015).

Over the past decade, credit take off has been surging ahead and is aided by easier access to credit, strong economic growth, increasing consumerism and rising disposable income. Amount of total credit extended surged to US $ 1288.1 billion as reported in 3rd quarter of financial year 2018. For both retail as well as corporate loans, there is growth in demand and growth has been witnessed in particular sectors such as real estate, agriculture allied sectors, consumer durables. Massive changes would be triggered in the way credit is disbursed resulting from revolution of digital payment. Among twenty five countries, the system, of digital payment in India has evolved with its immediate payment service being the only system at level five in the faster payments innovation index (Popov and Van Horen 2014).

There is increase in number of consumers with access to some form of retail loans such as home loans, personal loans, credit cards. A quantum jump has been witnessed in the market of credit cards with increase in total number of credit cards to 4.33 crore on 2004 compared to 2.69 crore in year 2003. In the past five years, spending on credit card market has increased by 29% and the amount stood at INR 96613 crore  in year 2011-2012 compared to INR 124393 crore in year 2012-2013 (Gomez-Gonzalez et al. 2016).

Growth of Retail and Corporate Banking in India

Consumer lending would have further impetus to growth in light of reform continuation, enhanced spending on infrastructure and speedy project implementation. It is suggested by all such factors that the banking sector of India is poised for robust growth the credit needs of customers would be fulfilled by rapid business acceleration. The technological infrastructure is being upgraded by banking sector by laying greater emphasis on providing improved services to customers and giving competitive edge to banks.  

Banks in India encounter diverse types of issues that have affected overall profitability as well as financial stability.

Quality of Asset: The biggest risk posed to banks in India is the increase in default rates of loans. It can be said that the slowdown in the entire economy in the past few years directed towards an increase in bad loans or else non-performing assets (also referred to as NPAs) (Qian et al. 2015). In essence, these are indicated as the loans that are necessarily not paid back by the borrower. Therefore, this can be referred to as a loss for the bank. Non-performing assets essentially amount to around 2.36% of the loans in particularly the system of banking. In essence, this might perhaps appear to be an alarming figure. Nevertheless, it does not consider restructured assets also exert pressure on level of profitability of bank.

Adequacy of capital: One way a specific bank attempts to ensure shield from bad loan is by setting aside wealth as a stipulation. In essence, this money cannot be utilized for other purposes including lending (Rodnyansky and Darmouni 2017). Consequently, banks have lower level of capital available to utilize for different operations. In essence, capital adequacy ratio enumerates the extent of capital a specific bank has. At the time when capital adequacy drops, the bank has the need to borrow money or else utilize money of depositors for lending. In essence, this money can be considered to be comparatively riskier as well as costlier than own capital of the bank. For instance, a specific depositor can withdraw money at any point in time they wish for. Therefore, a drop in Capital to Risk Assets Ratio (CAR) can be considered to worrisome (Ho et al. 2016). In the past few years, CAR is said to have decreased steadily particularly for Indian banks, particularly for public sector banks. Furthermore, banks fail to raise money easily, essentially public sector banks that have greater number of bad loans (Chen et al. 2017). In itself, if banks necessarily fail to shore up capital quickly, some could fail to satisfy minimum capital requirement established by the Reserve. In this case, banks can encounter several issues.

Surge in Credit Take-Off in India

Unhedged exposure of foreign exchange: The wild turn in the market of foreign exchange have the capacity to inflict considerable stresses on books of Indian corporations who have immensely borrowed overseas. In essence, this stress can necessarily affect overall capability to repay debt to Indian banks (Cull et al. 2014). Consequently, the Reserve Bank of India intends to make certain that business concerns lend and expose to needless debt.

Employee as well as technology: Particularly, public sector banks can observe more number of employees to retire nowadays (Cingano et al. 2016). Therefore, there would be a virtual vacuum particularly at middle as well as senior level. As such, the absence of particularly mid level management can direct towards adverse influence on decision making procedure of banks since this section of officers played a vital role in translating strategy of the management into workable activity plans.

Management of balance sheet: In past few years, several banks have attempted to delay keeping aside wealth as proviso (for bad loans in the upcoming period). A specific basis for this is that chief executives of the bank have comparatively short tenure, during which they want to post greater net profits and cheer financiers (Matias Gama and Van Auken 2015). This needs to be appreciated that CEOs would come and go but institutions are perpetual units. The only thing that can spread their subsistence is a stronger as well as healthier balance sheet. Deferring provisions is said to damage during long term. This lessens capability of bank to endure financial stress. Particularly, this is even more problematic taking into consideration poor satisfactoriness of capital in different Indian banks (Bassett et al. 2014)

The Central Bank of India has reported losses for two consecutive years and had a negative return on assets and fraction of bad loans has exceeded 6%.  In the earlier period, the Reserve Bank of India has clarified that PCA inflicted on specific banks is not planned to hold back the standard functions of the bank for the general public. Essentially, the bank accepted roughly a capital of ? 100 crore from the government unit during the fiscal year 2016 and 2017 in a bid to shore up the capital the bank marketed numerous standard loans (Gomez-Gonzalez et al. 2016). As per reports, Central Bank has documented loss of around ? 2439 crore for the year 2017 -2017 against loss of amount ? 1418 crore recorded a year ago (van der Veer and Hoeberichts 2016). The fraction of gross performing loans increased to 17.88% against 11.9% recorded a year ago. Fundamentally, return earned on capital increased to a negative territory for the past two years to roughly 0.80% from particularly 0.48% during 2015 and 2016 (Gomez-Gonzalez et al. 2016). The reports indicating losses of the bank are triggered considering negative return on assets as well as higher ratio of bad loans. Therefore, the primary issue encountered by the assigned bank “Central Bank of India” is that of default, bad loans as well as negative return earned on assets. Subsequently, even though they could satisfy their requirements for capital, their problem for loans increased. According to reports, the stability of funding of the bank dropped. The Non-performing assets (NPA) crisis hit the bank hard that has called for infusion of capital in banks in the upcoming period backed by chain of reforms in order to make certain that banks can engage in responsive form of banking.

Challenges Faced by Banks in India

 Qian et al. (2015) suggests that nowadays banks are not only evaluated based on total number of branches as well as total deposits volume but also on the groundwork of asset standards. Therefore, the NPAs of Central Bank of India are said to exert negative influence on degree of profitability, solvency as well as liquidity of the banks. In the area of consumer lending, the central bank of India nowadays are encountering the issue of NPA. The bank is failing to recover the amount of lending to their borrowers. Therefore, those are the times the entire amount is getting blocked. In essence, the bank faces the issue of liquidity and does not possess adequate cash at hand primarily for the short period of time. Rodnyansky and Darmouni (2017) assert that NPA not only exerts influence on profits of the current period but also on the level of profits of the entire financial year. Again, the bank also lose their goodwill as well as brand equity in particularly market whenever there is issue with NPA that further exert impact on overall value of banks with regard to market credit.

As suggested by Ho et al. (2016), one of primary issues of lending system in the bank is essentially the directed systems of loan under which commercial banks have the necessity of a prescribed percent of their credit (that stands at 40%) to diverse priority sectors. As rightly indicated by Chen et al. (2017), evaluation of proposals of loan evaluations is also slack and consequently repayment is also very poor. The long legal hassles, alterations in labour laws, inadequacy of sincere effort, industrial recession as well as government policies are said to trigger the issue of consumer lending of the bank under consideration.  Cull et al. (2014) say that the issue that India encounters is not that of the stringent prudential regulations but that of the following:

- Legal impediments as well as time eating characteristic of proposal of asset disposal

- Postponement of issues in a bid to reflect higher levels of earnings

-Manipulation of particularly debtors utilizing political influence (Cingano et al. 2016)

Central bank of India is a public sector bank having 29 satellite offices and 4703 branches where individuals are offered with different types of banking facilities whether it is deposits or loans. Banks sells several types of credit cards for catering different needs of individual ranging from basic services to premium services. Types of credit cards issued by central banks are titanium credit cards, Visa Gold credit card, Visa Platinum credit card, Aspire credit card and world credit card.

Types of credit cards

Meaning

Titanium credit cards

It is a card that does not come with any joining or annual fee and is valid for period of five years from issue date.

Visa Gold credit card

This card is premium card that is acceptable at international level.

Visa Platinum credit card

Using this card, customers will be able to avail discount across various lifestyle expenses and is accepted both in abroad and India.

Aspire credit card

This card is available with the bank Aspie deposit scheme that has chip installed in it for porvi9ng enhanced security services.

World credit card

This is a card that is designed especially for the purpose of meeting international travelers’ requirements.

Quality of Assets and NPA in Indian Banks

A range of loan products are provided by Central bank of India to customers seeking financial services and such products are customized according to specific needs of customers. Such loans involves personal loans, loan for women, vehicle loans, loan against property, educational loans, home loans and loans schemes for IDA members. Personal loan is available for employees of non corporate clients. Schemes under personal loans involve loan for corporate employees, cent ratna scheme, cent liquid scheme, cent personal gold loan scheme, cent personal loan scheme, cent doctor scheme, cent suvidha and cent teacher. Loan for women involves cent Kalyani and cent vehicle under vehicle loans. Educational loan involves schemes such as cent Vidyarthi for IIM students, Cent Vidyarthi for executive MBA, Cent Vidyarthi for vocational training and education. Loan against property involves cent rental, cent mortgage, cent trade and cent mortgage scheme for educational institutions. Home loans involves cent home loan scheme, cent home double plus scheme, cent home loan scheme for employees of public sector unit or state or central government and facility of over draft top up to cent home loan beneficiaries (Liu et al. 2018). Some other forms of loan include home loan balance transfer, loan against property, gold loans, car loan and business loan. Some other types of investment that is available to customers involves saving account, fixed deposits and mutual funds.

From the above discussion, it can be seen that Central Bank of India offers a wide range of products and services ranging from credit cards to different types of loans suitable to financial requirements of customers. In this section, the products and services offered by Central bank are compared to one of its nearest competitors that is, State bank of India. The market capitalization of State bank of India stood at INR 229763.51 crore compared to Central bank of India at INR 17659.46 crore. State bank of India is one of the leading and largest commercial bank operating in India. Among all the contemporaries, services offered by State bank are most innovative and varied. Products and services are designed for suiting all types of needs of customers. It has banking subsidiaries, foreign subsidiaries and joint venture and non banking subsidiaries. Central bank of India on other hand has limited offering of consumer lending services and products compared to SBI. Products and services offered by State bank of India comprise of NRI services, personal banking, International, agriculture, corporate, domestic treasury and for small and medium enterprises (Lamoreaux et al. 2014). International banking services involves wholesale banking, international banking, global trade services, corresponding banking and remittances from India. Retail banking group of bank offers services such as recurring deposits, term deposits, educational loan, housing loan, for pensioners, personal loan, against debentures and shares, against mortgage of property, plus scheme, against share and debentures, rate of interest, plus scheme and medi plus scheme (Bowman et al. 2015).

Adequacy of Capital in Indian Banks


Some of the loan products that is disbursed by State bank of India using its wide network of branches include SBI Saral personal loans, home loans, easy travel loans, car loans, gram nivas scheme, education loans, property loans, loan against debentures and shares, loan to pensioners, festival loans, loans for earnest money deposits, teacher plus scheme, medi plus scheme, tribal plus scheme, rent plus, credit khazana and career loans offered by State bank of India. Car loans are offered by bank for acquisition of old vehicle, new vehicle and two wheelers at both floating and fixed rate. Some of personal loans are offered by the bank against third party (Abedifa et al. 2018). In addition to this, loans are offered against mortgage of property, gold ornaments, bonds, debentures and shares.

Other product that is offered by SBI is Life Insurance that is a joint enterprise of bank and BNP Paribas Cardiff. 74% of overall shares are owned by the bank and a special model of multi distribution is employed by State bank of India. Such distribution model involves institutional partnership, Bancassurance partners, corporate solutions distribution channels and retail agencies. The marketing of insurance products is being done by SBI Life in combinations with offerings such as personal and housing loans. Such marketing is done by Insurance group in connections with state bank groups (Lamoreaux et al. 2014).

Conclusion

From the above discussion of products and services offered by two leading public sector banks of India, it can be inferred that SBI offers a more structured and wide range of services and products as against CBI. Products offered by SBI is segregated in terms of personal banking, International banking, corporate banking, small and medium enterprise (Bodea and Hicks 2015). Hence, SBI has its operation at international level compared to CBI that operates nationally.  

Recommendations

In order to check the issues of consumer lending system, management of the bank can consider the following points:

- Controlling consumers: In addition to altering the manner minimum disbursements work, management of banks can consider controlling the use of credit card as well as overdraft limits of customers. Therefore, there can be need of maintaining rules for different credit providers. Currently, in case if a particular credit company intends to enhance the specific limit of credit onus, customers can reject it (Cingano et al. 2016). The same thing can be reversed and customers can get supplementary credit in case if customers have explicitly agreed to the same.

Unhedged Foreign Exchange Exposure of Indian Banks

-Recognizing pecuniary difficulty: The lending code also institutes indicators that can indicate that a specific person might be in difficulty. In essence, this needs to be expanded for including individuals who are continuously making minimum disbursements necessarily on credit card debt and are still getting charged particular interest on that specific card (Rodnyansky and Darmouni 2017).

- Multifactor process of authentication: The best advance can be implementation of a multi-factor structure of security. This approach is mainly from the perspective of software perspective, tied to old styled method of calling up clients to confirm a questionable monetary transaction. This can reduce the headache of the institution along with fraud losses of the business of Central Bank of India.

- Monitor Transactions: There is a daily limit on each and every user and these limits are on mainframe processor in the specific bank together with file limits along with batch limits (Cingano et al. 2016). Therefore, when anything is added or deducted out of the ordinary banks can spot the same. Therefore, Central Bank of India can closely monitor transactions for spotting the fraudsters. 

References

Abedifar, P., Molyneux, P. and Tarazi, A., 2018. Non-interest income and bank lending. Journal of Banking & Finance, 87, pp.411-426.

Amel, D. and Mach, T., 2017. The impact of the small business lending fund on community bank lending to small businesses. Economic Notes: Review of Banking, Finance and Monetary Economics, 46(2), pp.307-328.

Bassett, W.F., Chosak, M.B., Driscoll, J.C. and Zakrajšek, E., 2014. Changes in bank lending standards and the macroeconomy. Journal of Monetary Economics, 62, pp.23-40.

Bodea, C. and Hicks, R., 2015. Price stability and central bank independence: Discipline, credibility, and democratic institutions. International Organization, 69(1), pp.35-61.

Bowman, D., Cai, F., Davies, S. and Kamin, S., 2015. Quantitative easing and bank lending: Evidence from Japan. Journal of International Money and Finance, 57, pp.15-30.

Brei, M. and Schclarek, A., 2015. A theoretical model of bank lending: Does ownership matter in times of crisis?. Journal of Banking & Finance, 50, pp.298-307.

Chen, B.S., Hanson, S.G. and Stein, J.C., 2017. The decline of big-bank lending to small business: Dynamic impacts on local credit and labor markets (No. w23843). National Bureau of Economic Research.

Cingano, F., Manaresi, F. and Sette, E., 2016. Does credit crunch investment down? New evidence on the real effects of the bank-lending channel. The Review of Financial Studies, 29(10), pp.2737-2773.

Cull, R., Harten, S., Nishida, I. and Bull, G., 2014. Benchmarking the financial performance, growth, and outreach of greenfield microfinance institutions in Sub-Saharan Africa. The World Bank.

Gomez-Gonzalez, J.E., Kutan, A.M., Ojeda-Joya, J.N. and Ortiz, M.C., 2016. The Bank Lending Channel of Monetary Policy: Does the Financial Structure of Banks Matter?. Borradores de Economía; No. 953.

Ho, P.H., Huang, C.W., Lin, C.Y. and Yen, J.F., 2016. CEO overconfidence and financial crisis: Evidence from bank lending and leverage. Journal of Financial Economics, 120(1), pp.194-209.

India and India, B. (2018). Banking Sector in India: Market Size, Industry Analysis, Govt Initiatives | IBEF. [online] Ibef.org. Available at: https://www.ibef.org/industry/banking-india.aspx [Accessed 4 Jul. 2018].

Ippolito, F., Ozdagli, A.K. and Perez-Orive, A., 2018. The transmission of monetary policy through bank lending: The floating rate channel. Journal of Monetary Economics, 95, pp.49-71.

Lamoreaux, P.T., Michas, P.N. and Schultz, W.L., 2014. Do accounting and audit quality affect World Bank lending?. The Accounting Review, 90(2), pp.703-738.

Liu, Q., Pan, X. and Tian, G.G., 2018. To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China. Journal of Banking & Finance, 86, pp.177-193.

Matias Gama, A.P. and Van Auken, H., 2015. The interdependence between trade credit and bank lending: commitment in intermediary firm relationships. Journal of Small Business Management, 53(4), pp.886-904.

Popov, A. and Van Horen, N., 2014. Exporting sovereign stress: Evidence from syndicated bank lending during the euro area sovereign debt crisis. Review of Finance, 19(5), pp.1825-1866.

Qian, J., Strahan, P.E. and Yang, Z., 2015. The impact of incentives and communication costs on information production and use: Evidence from bank lending. The Journal of Finance, 70(4), pp.1457-1493.

Rodnyansky, A. and Darmouni, O.M., 2017. The effects of quantitative easing on bank lending behavior. The Review of Financial Studies, 30(11), pp.3858-3887.

van der Veer, K.J. and Hoeberichts, M.M., 2016. The level effect of bank lending standards on business lending. Journal of Banking & Finance, 66, pp.79-88.

Zhao, F. and Moser, J., 2017. Bank lending and interest-rate derivatives. International Journal of Financial Research, 8(4), p.23.

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