PRIVATE BANKS

India is one of the largest country, with a huge financial systems

characterized by variety of institutions and instruments. Initially
all the banks in India were private banks, which were founded in
the pre-independence era to cater to the banking needs of the
people. In 1921, three major banks i.e. Banks of Bengal, Bank of
Bombay, and Bank of Madras, merged to form Imperial Bank of
India in 1935. In 1955, after the declaration of first-five year plan,
Imperial Bank of India was rechristened as State Bank of India
(SBI).
The Reserve Bank of India (RBI) was also established as a private
body and took over the central banking responsibilities from the
Imperial Bank of India. It got nationalized in the year 1949.
Following this, occurred the nationalization of major 14 banks in
India on 19 July 1969 and nationalization of 6 more commercial
banks In 1980, thereby enabling major control over banking
business of India.
Entry of New Banks in the Private Sector
The new millennium has brought with it challenges as well as
opportunities in various fields of economic activities including
banking. The financial reforms launched during the early 1990s
have dramatically changed the banking scenario in the country
and new private sector banks were allowed entry into the market.
Reserves Bank of India encouraged setting up of private banks as
part of its policy of liberalization of the Indian banking industry.
HDFC was amongst the first to receive an 'in principle' approval
from the Reserve Bank of India (RBI) to set up a bank in private
sector.
Categorization of Private banks
The private banks those got established after 1993 i.e. after
banking sector reform bracketed as New Generation Private
Sector Banks and they are well distinguished from old generation
private sector banks.

Old Private Sector Banks

1. Bank of Rajasthan Ltd.

2. Catholic Syrian Bank Ltd
3. City Union Bank Ltd
4. Dhanalakshmi Bank Ltd.
5. Federal Bank Ltd
6. ING Vysya Bank Ltd
7. Jammu and Kashmir Bank Ltd
8. Karnataka Bank Ltd.
9. Karur Vysya Bank Ltd
10.
Lakshmi Vilas Bank Ltd
11.
Nainital Bank Ltd
12.
Ratnakar Bank Ltd
13.
SBI Commercial and International Bank Ltd.
14.
South Indian Bank Ltd.
15.
Tamilnad Mercantile Bank Ltd.
16.
United Western Bank Ltd.
New generation Private sector banks
1.
2.
3.
4.
5.
6.

Axis Bank (Formerly UTI Bank Ltd)

HDFC Bank
ICICI Bank
IndusInd Bank
Kotak Mahindra Bank
Yes Bank

Features of new generation Private sector banks

a. Technology- The private banks have used technology to
provide quality service through lower cost delivery
mechanisms.
b. Convergence- The new private banks are able to provide a
range of financial services under one roof, thus increasing
their fee based revenues.
c. High-end Customers- The new generation private sector
banks mainly concentrate on high-end and high middle
income segments.

d. Priority sector targets - The new generation private sector

banks which rely on indirect financing to accomplish the
priority sector targets.
e. Lucrative Business Areas -They made a strong presence in
the most lucrative business areas in the country because of
technology up gradation.
f. Operating Expenses - their operating expenses is low as
compared to the PSU banks and their efficiency ratios
(employees productivity and profitability ratios) is also high.
g. Value added services to customers and they undertake all
most all the modern method of banking such as the internet
banking, mobile banking, etc.
Advantage over public sector banks
They took advantage of the following problems concerning the
nationalized / state sector banks
1. Large number of unprofitable branches
2. Excess staffing
3. Mounting Non Performing Assets on account of intervention
of Govt.
4. Laggard in technology
5. Development of innovative consumer oriented products
6. Lesser focus on marketing
They have made banking more efficient and customer friendly. In
the process they have jolted public sector banks out of
complacency and forced them to become more competitive.
Disadvantages of Private Banks
Private Banks runs like a business. Even though, there are
lots of advantages to this, the major disappointment comes
on the service charges, which is very much higher.
Deficient in public disclosure.
Unorganized HR System

 The minimum balance for deposit accounts is much higher

than the public sector banks .
Low focus on priority sector lending and financial inclusion.
MERGER OF PRIVATE SECTOR BANKS
Times bank with the HDFC Bank and that of ICICI Bank with Bank
of Madura points at the possibility of further consolidation in the
industry for adding values. While in both these cases market
immediately reacted sharply by increasing their capitalization and
shareholders of both these banks saw appreciable increase in
their wealth. This just goes on to prove that among other factors,
bankers now will have to constantly seek to invest in technology
and also be open to strategic
alliances, M&A, restructuring and other exercises
IMPACT OF NEW PRIVATE SECTOR BANKS ON THE
PERFORMANCE OF THE OLD PRIVATE SECTOR BANKS
With advent of latest technologies, professionalism, innovative
product and services etc. the new generation private sector banks
have set in dramatic changes and made visible impact on the
business of the old private banks in the area of Growth, Credit
Quality, Operational Efficiency, Profitability etc. Therefore the old
private banks are forced to equip it to face the rising competition
from the new private sector banks.
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At present, Private Banks in India include leading banks like ICICI

Banks, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank,
Kotak Mahindra Bank, SBI Commercial and International Bank, etc.
Undoubtedly, being tech-savvy and full of expertise, private banks
have played a major role in the development of Indian banking
industry.

As per the guidelines for licensing of new banks in the private

sector issued in January 1993, RBI had granted licenses to 10
banks. The main provisions/requirements are listed below:

Initial minimum paid-up capital shall be Rs. 200 crore; this will be
raised to Rs. 300 crore within three years of commencement of
business.

Promoters contribution shall be a minimum of 40 per cent of the paidup capital of the bank at any point of time; their contribution of 40 per
cent shall be locked in for 5 years from the date of licensing of the
bank and excess stake above 40 per cent shall be diluted after one
year of banks operations.

Initial capital other than promoters contribution could be raised

through public issue or private placement.

While augmenting capital to Rs. 300 crore within three years,

promoters need to bring in at least 40 percent of the fresh capital,
which will also be locked in for 5 years. The remaining portion of fresh
capital could be raised through public issue or private placement.

NRI participation in the primary equity of the new bank shall be to the
maximum extent of 40 per cent. In the case of a foreign banking
company or finance company (including multilateral institutions) as a
technical collaborator or a co-promoter, equity participation shall be
limited to 20 per cent within the 40 per cent ceiling. Shortfall in NRI
contribution to foreign equity can be met through contribution by
designated multilateral institutions.

No large industrial house can promote a new bank. Individual

companies connected with large industrial houses can, however,
contribute up to 10 per cent of the equity of a new bank, which will
maintain an arms length relationship with companies in the promoter
group and the individual company/ies investing in equity. No credit
facilities shall be extended to them.

NBFCs with good track record can become banks, subject to specified
criteria

A minimum capital adequacy ratio of 10 per cent shall be maintained

on a continuous basis from commencement of operations.

Priority sector lending target is 40 per cent of net bank credit, as in the
case of other domestic banks; it is also necessary to open 25 per cent
of the branches in rural/semi-urban areas.