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special featurePankaj K. Agarwal *Performance of Public Sector Banks in theNew Economy : A Comparison withPrivate Sector BanksDr. R. N. Rai **AbstractBanking sector has long been considered the backboneof any economy. Recent banking crises in US andother countries and ensuing recession globally havesevere repercussions on employment, incomes andoverall well- being of the global economic system.The new economy ushered in private sector banksin India almost a decade back to increase competition.Public sector banks (PSBs) still retain the largestshare of the market in banking space, but privatebanks have been considered to pose a formidablesurvival threat to PSBs. The present article attemptsto compare the performance of PSBs with theirprivate sector counterparts on globally acceptedCAMEL model.Key Words : Private Sector Banks, CAMEL, PublicSector BanksINTRODUCTIONThe importance of banks in economic developmentof nations cannot be overemphasized. However,importance of a strong banking system entered eventhe popular imagination in the wake of banking crisisof west. Enhancing efficiency and performance of thebanking system is a key objective of economic reformsof many countries including India. Indian banking isparticularly interesting because of different andchanging regulatory environment and diversity ofownership : SBI group, nationalized banks, privatelyowned Indian and foreign banks. The public sectorbanks (PSBs) acquired a place of prominence in thefinancial intermediation process over the years. Theymade significant strides in expanding geographicalcoverage, mobilizing savings and providing fundsfor investments in priority sectors. Such a processwas achieved within a highly regulated environmentwith interest rates, credit allocation and entry beingcontrolled by the Reserve Bank of India. Howeverduring late 1980s, most banks were plagued withpoor profitability and under-capitalization with a highproportion of non-performing assets and hugeadministrative expenditure. They lagged behind theinternational standards in introducing computers,communication technologies and product innovationsand the quality of consumer service was unsatisfactory.Then private sector was permitted in to banking andmany players entered the field.At the beginning of banking sector reforms it wasfelt that PSBs shall not be able to withstand thecompetitive pressure from private sector banks(PVTBs). However, the entry of PVTBs has not onlygiven the consumers better banking services, it hasalso forced PSBs to go for a makeover.Many important insights can be gained from comparingthe performance of PSBs vis-a-vis the PVTBs.REVIEW OF LITERATUREAll firms, and particularly banks - due to their specialnature- can be compared with other firms on anumber of parameters. The central banks acrossthe world have been endeavoring to create a robustmonitoring and appraisal system for banks. In India,the approach to onsite inspection of banks inaccordance with the recommendations of thePadmanabhan Working Group (1995) has beenadopted from the cycle of inspection commencing* Research Scholar, Dr. R. M. L. Awadh University, Faizabad.** Head, Department of Business Management and Entrepreneurship, Dr. R. M. L. Awadh University, Faizabad.The Journal of Indian Institute of Banking & Finance October - December 2011 43