New prudential norms, capital adequacy prescriptions, identification of bad debts, provision requirements etc. were enforced and interest rates were deregulated. As a result of these reforms, new private sector banks were allowed entry into the market. Many of these new private sector banks have brought them state-of-the-art technology and lean structures.These new private sector banks have built a wide network of branches, set superior standards in productivity, they introduced global best practices and more importantly they have built durable competencies by attracting the best manpower, and creating strong brand image in the financial market within a short span of time. This forced the old private sector banks to respond to the new challenges with aggressive restructuring measures.
On the other hand, some of the old private banks have not introduced innovative services, not set the superior standards in productivity and even not shown their competencies so all of that they given indirect benefit to new private sector banks. This research mainly focuses on the impact of the entry of these new private sector banks on the old private sector banks in Indian banking sector. The Indian Banking Sector: A Snapshot India is the largest country in South Asia with a huge financial systems characterized by variety of institutions and instruments.The Indian financial sector was well developed even before political independence of the country in 1947. The first bank in India, though conservative was established in 1786 (General Bank of India was the first joint stock bank). In the first half of the 19th century, the East India Company, established three bank: the Bank of Bengal in 1809, the Bank of Bombay in 1804 and Bank of Madras in 1843.
These three banks were amalgamated in 1920 and the Imperial Bank of India was established on Jan 27, 1921. With the passing of the SBI Act in 1955, the Imperial Bank of India was taken over by the newly constituted SBI.The Reserve Bank, which is the Central Bank, was created in 1935 by passing the Reserve Bank of India act 1934. In the wake of the Swadeshi Movement, two successive nationalization of banks taken on July 19, 1969, 14 major banks of the country were nationalized and on April 15, 1980, 6 more commercial private sector banks were also taken over by the government. The present commercial banking system in India may be distinguished into public sector banks, private sector banks, and foreign banks. Most of the studies by Vyas and Dhade (2006), Raman and Srinviasan (2005), Ganesan P.
001), Rayapati Vijaya Sree (2003), Gupta V. and Jain P. K. (2003) compared the performance of public, private and foreign banks by using measures of profitability, productivity and financial management.
They found that public sector banks fared poorly on all measures when compared with the private and foreign banks. Better performance from commercial banks is possible only if it incorporates profit making as one of the responsibilities. Kantawala Amita S. (2004), Ketkar W Kusum et al. , (2004) analyze the performance of banks from a profitability point of view by using various financial parameters.
These studies mainly reveal the authors' concern about the declining trends of public sector banks and increasing prominence of new private sector banks and foreign banks. Sathye (2003) measured the productive efficiency of banks in India. It was done using Data Envelopment Analysis. This study compared the mean efficiency score of Indians Banks with the mean efficiency score of world and also stated that the efficiency of private sector commercial banks, as a group is paradoxically lower than that of public sector banks and foreign banks in India. Private Banks in IndiaPrivate banking in India was practiced since the beginning of banking system in India. All the banks in India were earlier private banks.
They were started in the pre-independence era to cater to the banking needs of the people. But after nationalization of banks in 1969 public sector banks came occupied dominant role in the banking structure. PSBs and old private sector banks realized their new role and also welcomed the new generation banks in 1994 when 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. Among the 29 private sector banks in India today, we have 21 old and 8 new banks, which are able to sustain the competition.
These new private banks have the advantage of starting with a clean state, adequate capital resources, well-trained and professional manpower, and absence of non-performing loans in their books, computerization, and lean organizational system. Handful of branches in chosen centers, a new variety of products and services etc.