Banking Operations & Credit Analysis

(FIN501)
Term Assignment
On
Issues & Challenges of Banking

Post Graduate Diploma in Management

(Term- V ; Batch 2019-2021)

Under the supervision of-

Prof. A.K Puri

Submitted by-

Tanya Mendiratta PGFC 1942

PGDM GENERAL ‘C’
Central Bank of India
Introduction: Founded in 1911, the first Indian commercial bank that was wholly owned
and operated by Indians was the Central Bank of India. The establishment of the bank was
the ultimate realisation of the dream of the bank's founder, Sir Sorabji Pochkhanawala. Sir
Pherozesha Mehta was the first real 'Swadeshi Bank' chairman. In fact, Sir Sorabji
Pochkhanawala was so proud that he proclaimed the Central Bank of India as the 'property
of the nation and the asset of the government'. He also added that 'The Central Bank of
India lives on the confidence of people and sees itself as the bank of the people.'

Type Public
Traded as BSE: 532885
NSE: CENTRALBK
Industry
Banking Financial Services
Founded 21st December 1911
Head Quarters Mumbai
Revenue ₹27,199.29 crore (US$3.8 billion) (2020)
Owner Government of India
Number of Employees 33481

It is one of 12 public sector banks in India to be recapitalised in 2009. It is not the central
bank of India, despite its name. It's a bank for the public. Due to its pan-India presence, the
Central Bank of India is retained as a separate entity in a restructuring initiative of the NDA
government.
In addition to the guidance of the Reserve Bank of India as well as the Government of India,
the Central Bank has played an increasingly active role in supporting main sectors of
agriculture, small-scale industries as well as medium-sized and large-sized industries. A
variety of self-employment schemes have also been launched by the Bank to encourage
employment among trained young people. Due to the distribution of its broad network in all
29 states as well as in 6 out of 7 Union territories in India, the Central Bank of India can truly
be identified as an All India Bank among the public sector banks. Due to its network of 4659
branches, 1 extension counters, along with 10 satellite offices (as of February 2019) at
various centres throughout the country's length and breadth, the Central Bank of India
holds a very prominent position among the public sector banks
The Bank has weathered many hurricanes and faced many obstacles over the past 106 years
of existence. The Bank was able to effectively transform any threat into a business
opportunity and outperformed its banking industry peers.

Issues and Challenges Faced by Banking Sector

 Non-Performing Assets: At present, commercial banks do not have any
machinery to ensure that their loans and advances are actually being used
productively in the greater public interest. They incur enormous losses because of a
high percentage of non-performing assets or outstanding due to borrowers' banks.
The majority of them are also unable to maintain the capital adequacy ratio.
Combined with low asset growth, the issue of high loan write-offs and NPAs is more
severe for public sector banks (PSBs) than for private banks.  The situation will
become better for PSBs once most of the larger NPAs are resolved as per the
Insolvency and Bankruptcy Code or other mechanisms.
 Large Over Dues: A new challenge, a significant amount of overdue development
for farmers, is now faced by the small branches of commercial banks. To the plight of
such banks was added the decision of the former National Front Government to
waive all loans to farmers up to the amount of Rs. 10,000 crores.
 Unhedged forex exposure: In the books of Indian companies who have heavily
borrowed abroad, the wild gyrations in the forex market have the potential to cause
considerable stress. Their capacity to pay back debt to Indian banks can be affected
by this tension. As a result, the RBI requires banks to guarantee that companies they
lend do not expose themselves in dollars to excessive debt.
 Advance to Priority Sector: Progress has been slow as far as progress in the
target sectors is concerned. This is partially due to the fact that nationalisation, i.e.
the allocation of a certain portion of capital to the highest priority and previously
ignored industries, could not be embraced gracefully by bank officials from top to
bottom. This is also due to low and unsatisfactory rates of recovery of loans from
small and agricultural sectors.
 Competition from Non-banking Financial Institutions: Have faced serious
challenges from non-banking financial intermediaries, such as mutual funds, housing
finance firms, leasing and investment companies, as far as deposit mobilisation is
concerned. In attracting public deposits, both of these institutions compete closely
with commercial banks and offer higher interest rates than commercial banks pay.
 Employee and technology: These days, public-sector banks are seeing more
workers retiring. Thus, the older, more seasoned staff are being replaced by younger
staff. This, however, occurs at junior levels. As a consequence, there will be a middle
and senior level virtual vacuum. The lack of middle management could have a
detrimental effect on the decision-making process of banks as this group of officers
played a critical role in translating the strategy of the top management into workable
action plans. In addition, to offer better products, banks-especially government-
 owned banks-need to adopt technology. This will help to make banks more effective
as well.
 Losses in Rural Branches: Roughly 69 percent of the population of India lives in
rural areas. Lately, the government has set some ambitious goals, such as access to
bank accounts for all of the country's households. But many villages do not have
sufficient branches and ATMs to feed the demand in rural areas, even though
everybody gets access to a bank account. The banking sector actually does not have
the infrastructure at the bottom of the pyramid (BOP) to reach out to the consumer.
Many economists say that, due to a huge population, the infrastructure would still
be insufficient. But there is a need for a better system for supervision and tracking.
 Frauds: Individuals tend to use the words NPAs and fraud in the banking sector
interchangeably. There is a line, however, that differentiates the two. An NPA may or
may not be deliberate, and the borrower may want to pay back but is unable to do
so. A fraud, on the other hand, is an intentional act by the borrower in which a scam
of funds is involved. Accounting frauds, Demand Draft Fraud, Uninsured Deposits, Bill
Discounting Fraud, Fraudulent Loans, Cheque Kiting, and the list continues, could
include such frauds. The most relevant example is the recent PNB case in which a
fake Letter of Undertakings worth Rs. 11,000 crores were issued. Other instances
include Vijay Mallya accused of defrauding a consortium of Rs.9,000 crores lenders
and Rotomac Global accused of allegedly cheating a Rs. 3700 Crores consortium of 7
lenders.

Issues & Challenges faced by Central Bank of India:

 Competition with Foreign Banks: Foreign banks and smaller banks in the
private sector have experienced higher deposit increases. One explanation seems
to be that non-nationalized banks offer customer service to bettors. This creates
the impression that there has probably been a diversion of deposits from
nationalised banks to other banks.
 Capital adequacy: Setting aside money as a 'provision' is one way a bank tries
to ensure that it is protected from bad loans. This money, including lending,
cannot be used for any other purposes. As a consequence, banks have less
capital available to use for their various activities. The Ratio of Capital Adequacy
measures how much capital a bank has. The bank has to borrow money when
this fall or use the money of depositors to lend. However, this money is riskier
and more expensive than the capital of the bank itself. For instance, any time
they want, a depositor can withdraw his or her money. A drop in CAR (often
referred to as CRAR or Ratio of Capital to Risk Assets) is therefore worrisome.
CRAR has declined steadily for Indian banks over the last few years, particularly
for public-sector banks. In addition, bank particularly public sector banks with a
higher number of bad loans, are unable to raise money easily. Some could fail to
meet the minimum capital requirement set by the RBI if bank do not shore up
their capital soon. They could face severe problems in such a case.
 Weak Momentum: Promoters are decreasing their shareholding which tells
that the promoters, who are the actual owners of the company have a low
confidence towards the future of their own company and the promoters are
continuously decreasing their stake.
 Book Value per Share: Book value per share is deteriorating from the past 2
years. For several reasons, a bank stock trades below its book value, the primary
one being a lack of investor confidence in the future of the company. If it is
widely believed that the performance of the company will worsen, its stock may
trade at a discount to its book value.
 Customer Service and Advice: Because of the COVID-19 standards,
individuals are more likely to move to online platforms for different banking
activities. The demand for digital services is increasing as a result of this. Bank
must therefore ensure that the needs of all customers and those who are not
familiar with online platforms are met, provide education on how to use digital
tools, keep ATMs stocked and operational. As a result, bank have to keep an eye
on cybersecurity and fraud protection tools to save customer interest.
 Operating Model Adjustments, Cost Elasticity, and Innovation: It is
said that banks will face few problem related to cost increases and revenue
reductions due to economic crises over the coming few quarters. Some projects
need to be reviewed by banks so that they can properly allocate the resources
needed to reduce the crisis. They should invest in areas in which COVID-19 is
least affected. There are numerous digital tools for efficient functioning that
bank need to follow.
 Red Flag: The bank pays high interest compared to the earnings.
 Non-performing Assets: The greatest risk to the central bank of India is the
rise in bad loans. In recent years, the slowdown in the economy has led to a rise
in bad loans or non-performing assets (NPAs). These are loans which the
borrower does not pay back. Thus, they represent a loss for the bank. In the
banking system, net NPAs amount to just 2.36 percent of total loans. This may
not seem like a figure that is alarming. However, when a borrower is unable to
pay back and the bank makes the loan more flexible for repayment over a longer
period of time, it does not take into account restructured assets. Restructured
assets put pressure on the profitability of a bank, too. Together, 10.9 percent of
the overall loans in the system account for such strained properties. And these
are merely loans that are recognised as stressed assets. According to an IMF
survey, 36.9 percent of the total debt in India is at risk. However, bank have the
ability to withstand a loss of just 7.9 percent. So, if these debts, too, turn bad,
bank will face significant losses.