CHAPTER 1

HISTORY OF BANKING INDUSTRY:

The Reserve Bank of India (RBI), as the central bank of the country, closely monitors
developments in the whole financial sector.

The banking sector is dominated by Scheduled Commercial Banks (SBCs). As at end-March

2002, there were 296 Commercial banks operating in India. This included 27 Public Sector
Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67
scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16
scheduled state co-operative banks.

Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18%
registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the
earlier year.

State Bank of India is still the largest bank in India with the market share of 20% ICICI and
its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in
India with a balance sheet size of Rs. 1040bn.

Higher provisioning norms, tighter asset classification norms, dispensing with the concept of
past due for recognition of NPAs, lowering of ceiling on exposure to a single borrower and
group exposure etc., are among the measures in order to improve the banking sector.

A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the
ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It
is proposed to hike the CAR to 12% by 2004 based on the Basle Committee
recommendations.

Retail Banking is the new mantra in the banking sector. The home loans alone account for
nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail
segment is expected to grow at 30-40% in the coming years.

Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz
words that banks are using to lure customers.With a view to provide an institutional
mechanism for sharing of information on borrowers / potential borrowers by banks and
Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in
August 2000. The Bureau

provides a framework for collecting, processing and sharing credit information on borrowers
of credit institutions. SBI and HDFC are the promoters of the CIBIL.

The RBI is now planning to transfer of its stakes in the SBI, NHB and National bank for
Agricultural and Rural Development to the private players. Also, the Government has sought
to lower its holding in PSBs to a minimum of 33% of total capital by allowing them to raise
capital from the market.

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Banks are free to acquire shares, convertible debentures of corporate and units of equity-
oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including
commercial paper) as on March 31 of the previous year.

The finance ministry spelt out structure of the government-sponsored ARC called the Asset
Reconstruction Company (India) Limited (ARCIL), this pilot project of the ministry would
pave way for smoother functioning of the credit market in the country. The government will
hold 49% stake and private players will hold the rest 51%- the majority being held by ICICI
Bank (24.5%).

REFORMS IN THE BANKING SECTOR:

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969
and resulted in a shift from Class banking to Mass banking. This in turn resulted in a
significant growth in the geographical coverage of banks. Every bank has to earmark a
minimum percentage of their loan portfolio to sectors identified as priority sectors. The
manufacturing sector also grew during the 1970s in protected environs and the banking sector
was a critical source. The next wave of reforms saw the nationalization of 6 more commercial
banks in 1980. Since then the number scheduled commercial banks increased four-fold and
the number of banks branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the early
nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the
new private sector banks and the foreign banks. The new private sector banks first made their
appearance after the guidelines permitting them were issued in January 1993. Eight new
private sector banks are presently in operation. These banks due to their late start have access
to state-of-the-art technology, which in turn helps them to save on manpower costs and
provide better services.

During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25%
share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5%
of the deposits and 47.5% of credit during the same period. The share of foreign banks (
numbering 42 ), regional rural banks and other scheduled commercial banks accounted for
5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in
credit during the year 2000.

CLASSIFICATION OF BANKS:

The Indian banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, non-scheduled banks and scheduled
banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of
ownership, commercial banks can be further grouped into nationalized banks, the State Bank
of India and its group banks, regional rural banks and private sector banks (the old / new

2
domestic and foreign). These banks have over 67,000 branches spread across the country.
The Indian banking industry is a mix of the public sector, private sector and foreign banks.
The private sector banks are again spilt into old banks and new banks.

Banking System in India

Reserve bank of India (Controlling Authority)

Development Financial institutions Banks

IFCI IDBI ICICI NABARD NHB IRBI EXIM Bank ISIDBI

Commercial Regional Rural Land Development Co-operative

Banks Banks Banks Banks

Public Sector Banks Private Sector Banks

SBI Groups Nationalized Banks Indian Banks Foreign Banks

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 RESEARCH METHODOLOGY

The methodology being used involves two basic sources of information primary sources and
secondary source.

Primary sources of Information

Meetings and discussion with the Chief Manager and the Senior Manager of both
Credit and Credit Risk Management Department
Meetings with the clients

Secondary sources of Information

Loan Policy and Internal Circulars of the bank

Research papers, power point presentations and PDF files prepared by the bank and
its related officials
Referring to information provided by CIBIL, Income Tax files, Registrar of
Companies (Ministry of Corporate Affairs), and Auditor reports

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 LIMITATIONS

Like any other study this study too is not free from limitations. The major limitations of the
study are listed below:

1. The major limitation of this study shall be data availability as the data is proprietary
and not readily shared for dissemination.

2. Also the geographical scope of the project was limited to PNB Circle Office and the
loans studied were of solely of businesses established majorly in Jhansi.

3. The credit appraisal decision are more of intuition and experience and since the time
period was limited, hence best efforts were made to grasp the process as much as
possible

4. Due to ever changing environment, many risks are unexpected and the remedial
measures available are based on general experience from the past. Therefore risks can
only be minimized cannot be erased completely. Hence, out of the various ways in
which risks can be managed, none of the methods is perfect and may be very diverse
even for the work in a similar situation in the future

5
CHAPTER 2

Chapter 5 COMPANY PROFILE

ORIGIN
Punjab under the British especially after annexation in 1849 witnessed a period of rapid
development giving rise to a new educated class fired with a desire for freedom from the
yoke of slavery. Amongst the cherished desires of this new class was also an overriding
ambition to start a Swadeshi Bank with Indian Capital and management representing all
sections of the Indian community. The idea was first mooted by Rai Mool Raj of Arya Samaj
who, as reported by Lala Lajpat Rai, had long cherished the idea that Indians should have a
national bank of their own. He felt keenly "the fact that the Indian capital was being used to
run English banks and companies, the profits accruing from which went entirely to the
Britishers whilst Indians had to contend themselves with a small interest on their own
capital".

At the instance of Rai Mool Raj, Lala Lajpat Rai sent round a circular to selected friends
insisting on an Indian Joint Stock Bank as the first special step in constructive Swadeshi. Lala
Harkrishan Lal who had returned from England with ideas regarding commerce and industry,
was eager to give them practical shape.

'PNB was born on May 19, 1894. The founding board was drawn from different parts of India
professing different faiths and a varied back-ground with, however, the common objective of
providing country with a truly national bank which would further the economic interest of the
country.

The Bank opened for business on 12 April, 1895. The first Board of 7 Directors comprised of
Sardar Dayal Singh Majithia, who was also the founder of Dayal Singh College and the
Tribune; Lala Lalchand one of the founders of DAV College and President of its
Management Society; Kali Prosanna Roy, eminent Bengali pleader who was also the
Chairman of the Reception committee of the Indian National Congress at its Lahore session
in 1900; Lala Harkishan Lal who became widely known as the first industrialist of Punjab;
EC Jessawala, a well known Parsi merchant and partner of Jamshedji & Co. of Lahore; Lala
Prabhu Dayal, a leading Rais, merchant and philanthropist of Multan; Bakshi Jaishi Ram, an
eminent Civil Lawyer of Lahore; and Lala Dholan Dass, a great banker, merchant and Rais of

6
Amritsar. Thus a Bengali, Parsi, a Sikh and a few Hindus joined hands in a purely national
and cosmopolitan spirit to found this Bank which opened its doors to the public on 12th of
April 1895. They went about it with a Missionary Zeal. Sh. Dayal Singh Majithia was the
first Chairman, Lala Harkishan Lal, the first secretary to the Board and Shri Bulaki Ram
Shastri Barrister at Lahore, was appointed Manager.

A Maiden Dividend of 4% was declared after only 7 months of operation. Lala Lajpat Rai
was the first to open an account with the bank which was housed in the building opposite the
Arya Samaj Mandir in Anarkali in Lahore. His younger brother joined the Bank as a
Manager. Authorised total capital of the Bank was Rs. 2 lakhs, the working capital was Rs.
20000. It had total staff strength of nine and the total monthly salary amounted to Rs. 320.

The first branch outside Lahore was opened in Rawalpindi in 1900. The Bank made slow, but
steady progress in the first decade of its existence. Lala Lajpat Rai joined the Board of
Directors soon after. in 1913, the banking industry in India was hit by a severe crisis
following the failure of the Peoples Bank of India founded by Lala Harkishan Lal. As many
as 78 banks failed during this crisis. Punjab National Bank survived. Mr. JH Maynard, the
then Financial Commissioner, Punjab, remarked...."Your Bank survived...no doubt due to
good management". It spoke volumes for the measure of confidence reposed by the public in
the Bank's management.

The years 1926 to 1936 were turbulent and loss ridden ones for the banking industry the
world over. The 1929 Wall Street crash plunged the world into a severe economic crisis.

It was during this period that the Jalianwala Bagh Committee account was opened in the
Bank, which in the decade that followed, was operated by Mahatma Gandhi and Pandit
Jawaharlal Nehru. The five years from 1941 to 1946 were ones of unprecedented growth.
From a modest base of 71, the number of branches increased to 278. Deposits grew from Rs.
10 crores to Rs. 62 crores. On March 31, 1947, the Bank officials decided to leave Lahore
and transfer the registered office of the Bank to Delhi and permission for transfer was
obtained from the Lahore High Court on June 20, 1947.

PNB was then housed in the precincts of Sreeniwas in the salubrious Civil Lines, Delhi.
Many a staff member fell victim to the widespread riots in the discharge of their duties. The
conditions deteriorated further. The Bank was forced to close 92 offices in West Pakistan
constituting 33 percent of the total number and having 40% of the total deposits. The Bank,
however, continued to maintain a few caretaker branches.

The Bank then embarked on its task of rehabilitating the displaced account holders. The
migrants from Pakistan were repaid their deposits based upon whatever evidence they could
produce. Such gestures cemented their trusts in the bank and PNB became a symbol of Trust
and a name you can bank upon. Surplus staff posed a big problem. Fast expansion became a
priority. The policy paid rich dividends by opening up an era of phenomenal growth.

7
In 1951, the Bank took over the assets and liabilities of Bharat Bank Ltd. and became the
second largest bank in the private sector. In 1962, it amalgamated the Indo-Commercial Bank
with it. From its dwindled deposits of Rs. 43 crores in 1949 it rose to cross the Rs. 355 crores
mark by the July 1969. Its number of offices had increased to 569 and advances from Rs. 19
crores in 1949 to Rs. 243 crores by July 1969 when it was nationalised.

Since inception in 1895, PNB has always been a "People's bank" serving millions of people
throughout the country and also had the proud distinction of serving great national leaders
like Sarvshri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi Ahmed
Kidwai, Smt. Indira Gandhi etc. amongst other who banked with us.

(1865-1928)

LALA LAJPAT RAI AND PNB

Lalaji was keenly concerned with the fact that though Indian capital was being used to run
English Banks and companies, the profits went entirely to the British, while Indians had to
contend themselves with a small interest on their capital. He echoed this sentiment in one of
his writing while concurring with Rai Mul Raj of Arya Samaj who had long cherished the
idea that Indians should have a National Bank of their own. At the instance of Rai Mul Raj,
Lala Lajpat Rai sent a circular to selected friends insisting on an Indian joint stock Bank as
the first step in constructive Swadeshi and the response was satisfactory
After filing and registering the memorandum and Articles of Association on 19 May, 1894,
the bank was incorporated under Act VI of the 1882 Indian Companies Act. The prospectus
of the bank was published in the Tribune, and the Urdu Akhbar-e-Am and Paisa Akhbar. On
23rd May, 1894, the founders met at the Lahore residence of Sh. Dyal Singh Majithia, the
first Chairman of PNB, and resolved to go ahead with the scheme. They decided to hire a
house in the famous Anarkali Bazar of Lahore opposite the post office and near well known
stores of Rama Brothers.On 12th April 1895, the Bank opened for business, a day before the
great Punjab festival of Baishakhi. The essence of the Banks culture was clear at this first
meeting itself. The fourteen original shareholders and seven directors took only a modest
number of shares; the control of the Bank was to lie with the large, dispersed shareholders, a
purely professional approach that was as uncommon then as it is today.
8
PROFILE
Punjab National Bank, Indias first Swadeshi Bank, commenced its operations on April 12,
1895 from Lahore, with an authorised capital of Rs 2 lac and working capital of Rs 20,000.
The far-sighted visionaries and patriots like Lala Lajpat Rai, Mr. E C Jessawala, Babu Kali
Prasono Roy, Lala Harkishan Lal and Sardar Dyal Singh Majithia displayed courage in
giving expression to the spirit of nationalism by establishing the first bank purely managed by
the Indians with Indian Capital.

PERFORMANCE
During the long history of over 121 years of the Bank, 7 banks have merged with PNB and it
has become stronger and stronger with a network of 6690 branches and 9463 ATMs as on
31st March16. Today the Bank stands tall amongst nationalized banks in major financial
parameters i.e., Global Business, Domestic Business, Domestic Deposits, Domestic
Advances, CASA Deposits Savings Deposits and Operating Profit.

The performance highlights of the Bank in terms of business and profit are shown below:

Rs. in crore
YoY
Parameter Mar11 Mar12 Mar13 Mar14 Mar15 Mar16 Growth
Deposits 312889 379588 391560 451397 501379 553051 10.3
Advances 242107 293775 308796 349269 380534 412326 8.4
Total Business 554996 673363 700356 800666 881913 965377 9.5
Operating Profit 9056 10614 10907 11384 11955 12216 2.2
Net Profit 4433 4884 4748 3343 3062 -3974 -

During FY16, the Bank has crossed several landmarks i.e., Rs 9.65 lakh crore Global
Business,

9
Rs 8.50 lakh crore Domestic Business,Rs 5.50 lakh crore Global Deposits, Rs 4.00 lakh crore
Net Advances, Rs 2.00 lakh crore CASA Deposits and Rs 12,000 crore Operating Profit.

On the liability side, with continuous focus on the low cost deposits, the Bank has achieved
the milestone of Rs 2,00,000 crore during FY16. CASA deposits grew by 11.9% on YoY
basis as on 31st March16. This growth was supported by the Saving Deposits which reached
Rs1.69 lakh crore (YoY growth 12.8%) and Current Deposits which touched Rs 36157 crore
(YoY growth 7.7%). Within Advances, the share of small ticket advances i.e., Retail,
Agriculture and MSME to Domestic Non Food Credit increased from 55.6% in March15 to
56.0% in March16.

In terms of Bottom-line parameters, the Banks Operating Profit at Rs 12216 crore during
FY16 stood highest amongst Nationalized Banks. In fact, PNB is the only bank amongst
nationalized banks to have Operating Profit over Rs 10,000 crore for five consecutive years.
However, the increased provisioning requirement for NPAs resulted into Net Loss of Rs 3974
crore in FY16 as compared to Net Profit of Rs 3062 crore in FY15.

In terms of key financial ratios, the Banks Domestic Net Interest Margin at 2.95% during
FY16 was one of the highest amongst nationalized banks. Due to reduction in bulk deposits,
the Cost of Deposits moved southward from 6.09% in FY15 to 5.85% in FY16. Further, the
Cost to Income ratio also improved from 46.74% in FY15 to 44.94% in FY16. The Bank
has been able to maintain its Capital Adequacy Ratio above the regulatory requirement. The
Banks CRAR stood at 11.28% which constituted Tier I ratio of 8.41% and Tier II ratio of
2.87%.

The Banks Gross NPA and Net NPA stood at Rs 55,818 crore and Rs 35,423 crore,
respectively as on 31st March16. In terms of ratios, the Gross NPA and Net NPA ratio stood
at 12.90% and 8.61%, respectively.

The Bank laid specific focus on recovery of the bad debts to arrest the fresh slippages and
proactive monitoring of loan portfolios across businesses. The Bank has created a War
Room at Head Office wherein round the clock NPA monitoring is undertaken in a systematic
manner. The Bank has also taken other steps such as Debt Recovery Tribunal Cases
Monitoring System, SARFAESI tool Portal, Online Portal for monitoring of DRT Cases, E-
auction campaign, Mega Campaign Of Sale Of Secured Assets-22.02.16 to 17.03.16, etc. to
speed up recovery.

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