Indian Banking Industry: An analysis

1. INTRODUCTION 1.1Industry definition: The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. This section provides comprehensive and updated information, guidance and assistance in all areas of banking in India. Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. The commercial banking structure in India consists of: Scheduled Commercial Banks & Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base. The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business processmanagement (BPM) to increase returns on investment, improve customer relationship management (CRM) and employee productivity. For, these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar products. 1.2 Classification of the Industry Public Sector Banks: Almost 80% of the business are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines. Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalisation process. The RBI has also been granting licences to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance. Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organisation. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialised skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities. At a time when access to foreign currency funds was a constraint for the Indian companies, the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. Also with the presence of foreign banks, as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market. Now, it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence. 1.3 Industry Segments Commercial Banking Wholesale banking Investment Banking Internet banking

Mobile banking Rural banking Micro Finance Industrial Finance

a2. Market Dynamics 2.1 Market Overview The banking industry too has evolved rapidly over the last few years in India due to the availability of cheaper technology and falling communication costs. De-regulation, competition from non-financial players, new compliance requirements, and changing customer expectations has added complexity and challenges to banking systems and processes. Banks, however, face an uphill task in reaching out to the customers in remote locations such as villages. There is a lower level of literacy and access to Internet. Setting up branches involves higher cost and operating expenses, and lower return on investment. Given the 742-million rural population, the penetration of deposit accounts languishes at a deplorable 18 per cent. (Source: Extending Banking to the poor in India, Amit Singhal and Bikram Duggal, ICICI Bank). Qualitative growth : The growth of banking in the coming years is likely to be more qualitative than quantitative, according to the report. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03. On the liability side, there is likely to be large additions to capital base and reserves. As the reliance on borrowed funds increases, the pace of deposit growth may slow down. On the asset side, the pace of growth in both advances and investments is forecast to weaken. The high GDP growth in India is creating lots of job opportunities in urban and semi-urban India and it will go further into rural India increasing the potential for rural entrepreneurships and rural growth with higher per-capita income and savings opportunities. Investment in Indian market India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No companies, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies. Market potential: India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China. 1.2 Industry Segments: Public Sector Banks: Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines. Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance. Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organization. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialized skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities. At a time when access to foreign currency funds was a constraint for the Indian companies, the presence of foreign banks in India

enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. Also with the presence of foreign banks, as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market. Now, it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence. 2.2 Trend Analysis Financial And Banking Sector Reforms The last decade witnessed the maturity of India's financial markets. Since 1991, every governments of India took major steps in reforming the financial sector of the country. The important achievements in the following fields is discussed under separate heads: Financial markets Regulators Non-banking finance companies The capital market Mutual funds Overall approach to reforms Deregulation of banking system Consolidation imperative Financial Markets In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. With the openings in the insurance sector for these institutions, they started making debt in the market. Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation. Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independant. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators. Development finance institutions FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds. Convertibility clause no longer obligatory for assistance to corporates sanctioned by term-lending institutions. Capital adequacy norms extended to financial institutions. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started. Non-banking finance companies: In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores. Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI). Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialisation of debt instruments in order to encourage paperless trading. Mutual funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service. The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential. Overall approach to reforms The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate

benchmark, an active corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. Deregulation of banking system Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. New private sector banks allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears. Bank lending norms liberalised and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit information bureau being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced. Consolidation imperative Another aspect of the financial sector reforms in India is the consolidation of existing institutions which is especially applicable to the commercial banks. In India the banks are in huge quantity. First, there is no need for 27 PSBs with branches all over India. A number of them can be merged. The merger of Punjab National Bank and New Bank of India was a difficult one, but the situation is different now. No one expected so many employees to take voluntary retirement from PSBs, which at one time were much sought after jobs. Private sector banks will be self consolidated while co-operative and rural banks will be encouraged for consolidation, and anyway play only a niche role. We finally come to convergence in the financial sector, the new buzzword internationally. Hi-tech and the need to meet increasing consumer needs is encouraging convergence, even though it has not always been a success till date. In India organisations such as IDBI, ICICI, HDFC and SBI are already trying to offer various services to the customer under one umbrella. This phenomenon is expected to grow rapidly in the coming years. Where mergers may not be possible, alliances between organisations may be effective. Various forms of bancassurance are being introduced, with the RBI having already come out with detailed guidelines for entry of banks into insurance. 2.3 Key Drivers of sustainability in the banking industry Lender's liability Lender's liability is associated with the financial risks banks face when granting or extending loans. Banks and other lenders rely on financial statements of companies when deciding whether to grant or extend credit. Under current reporting requirements, potential environmental liabilities can easily remain undiscovered unless a lender develops its own procedure to assess the environmental risks. Therefore, some banks can end up spending the money on cleanups of sites contaminated through their clients' activities. Borrower's ability to meet financial obligations The borrower's obligation to clean up contaminated sites might impair his or her ability to repay a loan. The contamination might also reduce the value of the collateral. Prudent lenders are following the environmental trends and changes in regulatory framework to assess the possible implications of these changes on their clients' overall financial position. Growing environmental concerns The last few decades have been marked by numerous changes in the regulatory framework relating to environmental protection. Recent scientific discoveries of environmental and health risks associated with pollution have contributed to an increase in public demand for environmental quality. These growing concerns have contributed to a major shift in public perception of corporate roles in society. Influenced by these trends, some banks have begun looking closely into their own environmental and social performance. In many cases this effort has resulted in adoption of energy and resource efficiency programs within the institutions themselves. Business opportunities The traditional approach of the banking sector to sustainability is often regarded as reactive and defensive. However, several international banks have recently adopted innovative, proactive strategies to capture the opportunities associated with sustainability. They have developed new products such as ethical funds or loans specifically designed for environmental businesses to capture new market opportunities associated with sustainability. Risk and reward The ability to gauge the risks and take appropriate position will be the key to successful banking in the emerging scenario. Risk-takers will survive, effective risk mangers will prosper and risk-averse are likely to perish, the report asserts. In this context, the report makes a very pertinent recommendation that risk management has to trickle down from the corporate office to branches. As audit and supervision shifts to a risk-based approach rather than transaction oriented, the risk awareness levels of line functionaries also will have to increase.

The report also talks of the need for banks to deal with issues relating to `reputational risk' to maintain a high degree of public confidence for raising capital and other resources. 2.4 Issues and Implications Consolidation On the growing influence of globalisation on the Indian banking industry, the report is of the opinion that the financial sector would be opened up for greater international competition under WTO. Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the country. They are expected to bring with them capital, technology, and management skills which would increase the competitive spirit in the system leading to greater efficiency. Government policy to allow greater FDI in banking and the move to amend Banking regulations Act to remove the existing 10 per cent cap on voting rights of shareholders are pointer to these developments, says the report. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and the various Free Trade Agreements that India is entering into with other countries, such as Singapore, will also impact on globalisation of Indian banking. However, according to the report, the flow need not be one way. Some of the Indian banks may also emerge global players. As globalisation opens up opportunities for Indian corporate entities to expand their business overseas, banks in India wanting to increase their international presence could naturally be expected to follow these corporate entities and other trade flows out of India. Alongside, the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. In the past mergers were initiated by regulators to protect the interest of depositors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to gain momentum in the coming years, says the report. Mergers between public sector banks or public sector banks and private banks could be the next logical development, the report adds. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards, insurance etc. Branch Authorisation Policy As you are aware, the RBI announced a new Branch Authorisation Policy in September 2005 under which certain changes were brought about in the authorisation process adopted by the RBI for the bank branches in the country. As against the earlier system, where the banks approached the RBI, piece meal, through out the year for branch authorisation, the revised system provides for a holistic and streamlined approach for the purpose, by granting a bank-wise, annual aggregated authorisation, in consultation and interaction with each applicant bank. The objective is to ensure that the banks take an integrated view of their branch- network needs, including branch relocations, mergers, conversions and closures as well as setting up of the ATMs, over a one-year time horizon, in tune with their own business strategy, and then approach the RBI for consolidated annual authorisations accordingly. There seems to be some misunderstanding in some quarters that, under the new policy, the banks have to wait for the annual authorisation exercise and are constrained in approaching the RBI for any emergent authorisation in between. Since the branch expansion planning of the banks is expected to be a well thought out, Board-approved annual process, normally, there should be no need for any emergent or urgent authorisation being required by the banks, in the interim. However, I would like to emphasise that the new policy does not preclude the possibility of any urgent proposals for opening bank branches being considered by the RBI even outside the annual plan, specially in the rural / under-banked areas, anytime during the year. This flexibility has been clearly articulated in our policy guidelines as contained in the Master Circular of July 2007 but somehow, it seems to have got overlooked. There also seems to be a feeling among some banks that under the new authorisation policy, the process adopted is more cumbersome and, as a result, there have been delays in issuing authorisations. Since the banks are required to approach the RBI only after obtaining the approval of their respective Boards for their annual branch expansion plan, it is possible that the preparatory time required for filing their annual plan with the RBI might be a little longer. The processing time at the end of the RBI, however, has been generally in the range of one to two months which I consider to be reasonable, given the element of consultation with the banks built into the process. However, the actual number of authorisations issued by the RBI under the new policy has been much higher than before. For instance, as against the a total of 881, 1125 and 1259 authorisations given by the RBI under the old policy regime during 2003-04, 2004-05 and 2005-06, respectively, the number of authorisations issued under the new policy during 2006-07 was 2028. Thus, as against the general perception that the new policy has been more restrictive in granting authorisations, the fact is that there has been a sharp increase of about 61 per cent in the total number of authorisations granted last year. 3.PEST Analysis 3.1 Political Analysis Regulation

The expected integration of various intermediaries in the financial system would require a strong regulatory framework, the report states. It would also require a number of legislative changes to enable the banking system to remain contemporary and competitive. Underscoring that there would be an increased need for self-regulation, the report states that development of best practices could evolve better through self-regulation rather than based on regulatory prescriptions. For instance, to enlist the confidence of the global investors and international market players, the banks will have to adopt the best global practices of financial accounting and reporting. It is expected that banks would migrate to global accounting standards smoothly, although it would mean greater disclosure and tighter norms, the report adds. Notwithstanding the limited time ahead, the expectations, suggestions and recommendations of the Banking Industry Vision report are well within the realm of realisation in part or whole. The first phase of banking reforms was born out of panic. The second phase can be implemented from a position of strength and confidence in a compressed timeframe. 3.2 Economic Analysis3.2 Economic Analysis Growing economy THE INDIAN economy has shown tremendous growth over the past decade. This statement may seem odd to the economists who keep comparing the growth rates to that of China or the East Asian Tigers. These countries have definitely shown good economic growth, but India's is nothing to be scoffed at. This assertion is not being made by comparing the GDP growth, FDI inflow, changes in per capita income and other economic criteria, but by looking at the increase in the availability of goods and services. A while ago, visiting foreign countries, one used to wonder when would India catch up? People walking around with mobile phones, shopping malls overflowing with goods, and even dozens of branded water. Coming from India, where water had to be boiled and filtered before consumption, these countries seemed like paradise. Now, a decade later, India seems to have caught up with some of these things at least. Take the cell phones and pagers. Hong Kong went through the pager phase for two or three years before going cell. In India, pagers did not take off, while cell phones clicked. The accelerated telecommunications revolution has made cell phone easily affordable. India is no longer the backwaters of for hi-tech products. An economist may argue that availability of cell phones and branded water does not indicate a developed economy. But even they have to agree that India seems to have changed from a country of shortages to one of plenty. And along with plentiful supplies, there is also variety. In the early 1990s, there were three varieties of car models/makers Ambassador, Fiat and Maruti 800. Today there are apparently some 500 models from more than 10 manufacturers. Developmental economists may argue that plentiful supply of goods and services does not mean that India has become prosperous and that India has a long way to catch up with the developed economies. But one has to agree that the India has made much progress over the past decade. Western economies have grown partly because of consumption economics. Those economies produced large number of goods, employing more and more people to produce these goods. These employees in turn consumed the goods, creating a virtuous cycle. Maybe India is following this path. All the good are available in plenty. Now the living standards of people have to be improved so that they start consuming these goods. Maybe, that is why the new Finance Minister wants to put more money in the housewives' hand. 3.3 Social Analysis All these developments need not mean banks will give the go-by to social banking. Rather than being seen as directed lending such lending would be business driven, the report predicts. Rural market comprises 74 per cent of the population, 41 per cent of the middle-class, and 58 per cent of disposable income. Consumer growth is taking place at a fast pace in 17,000-odd villages with a population of more than 5,000. Of these, more than 50 per cent are concentrated in just seven states. Small-scale industries would remain important for banks. However, instead of the narrow definition of SSI based on the investment in fixed assets, the focus may shift to small and medium enterprises (SMEs) as a group. Changes could be expected in the delivery channel for small borrowers, agriculturists and unorganised sectors also. 3.4 Technological Analysis Technological developments would render flow of information and data faster leading to faster appraisal and decision-making. This would enable banks to make credit management more effective, besides leading to an appreciable reduction in transaction cost. To reduce investment costs in technology, banks are likely to resort more and more to sharing facilities such as ATM networks, the report says. Banks and financial institutions will join together to share facilities in the areas of payment and settlement, back-office processing, date warehousing, and so on. The advent of new technologies could see the emergence of new players doing financial intermediation. For example, according to the report, we could see utility service providers offering, say, bill payment services or supermarkets or retailers doing basic lending operations. The conventional definition of banking might undergo changes. Mobile banking Banking on Wireless

Get realtime banking information on your handset. Just register your mobile number with us , Choose alerts and set limits that you require and relax. You will receive automated alerts on the transactions in your account instantly, anywhere in the world. What is more, it is flexible and can be personalised to your needs. In addition you can also "PULL" account information at your convenience ! Register now and get into the world of conveneience through the unique Mobile Alert service of Federal Bank which is comprehensive and flexible. Mobile Banking services enables a customer to get information whenever he wants by sending an SMS in the specified format. Also he will get Mobile Alerts for transaction happening in his account. He can restrict the Alerts to desired transactions only. The service is available to customers all over the world. Please register mobile phone number with your branch to avail of this service. When registration is done for Mobile Banking, preset Alerts will be enabled automatically to the customer. For availing Mobile Banking facilities, the customer has to indicate a four-digit access code number, which will act as a password to ensure privacy and security. The Mobile Banking facility is available to SB, SBNRE, SBONR, CA and ODCC customers Facilities Available View Account Balance Mini Statement Change four-digit access code / PIN. Mobile Phone Number change Discontinue / Re enable alerts Options for changing the amount for sending the alerts. Account Statement Request Cheque Book Request Help about the available options . 5.1 Competitive Positioning To avoid complication in the analysis, I am considering the following banks for the study from hereon. Centurion Bank of Punjab ICICI Barclays SBI HDFC ICICI a. Market share: ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$ 96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation* b. The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 17 countries. Says Morparia, "The convenience proposition together with the geographical reach has paid off. We rolled out ATMs far ahead of the others and were able to cross-sell our products." Share of the walle Mar-05 HDFC Bank ICICI Bank Branches 467 565 ATMs 1,147 2,000 Cities 211 371 Retail assets (Rs crore) 18,000 56,000 Deposits (Rs crore) 38,000 99,800 Car loans (Rs crore) 2,500 11,500 Credit cards (Mn) 1.3 3 Retail customers (Mn) 6.4 13.7 Cost of deposits (%) 3.2 4.5 Net interest margin (%) 3.2 2.4 Net NPLs (%) 0.2 2 Even in the number of customers ICICI Bank leads by a distance (See table: Share of the wallet). Nearly 14 million customers bank with ICICI Bank, while the number for HDFC Bank is less than half (6.4 million). HDFC HDFC Bank was incorporated in August 1994, and, currently has an nationwide network of 746 Branches and 1647 ATM's in 329 Indian towns and cities. The Bank earned total income of Rs.3,405.8 crores for the quarter ended December 31, 2007, a growth of 64.4% over the corresponding quarter ended December 31, 2006. Net revenues (net interest income plus other income) for

the quarter ended December 31, 2007 were Rs.2,116.5 crores, an increase of 70.5% over the corresponding quarter of the previous year. CBOP Centurion Bank of Punjab has a nationwide reach through its network of 393 branches/ECs, 452 ATMs 180 Locations. The bank aims to serve all the banking and financial needs of its customers through multiple delivery channels, each of which is supported by state-of-the-art technology architecture. Centurion Bank of Punjabs Net Profit for the quarter ended December 31, 2007 up 44% to Rs.483 million; Operating profit for the quarter up 108% Net Advances increase by 60%; Deposits increase by 65% SBI The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide Indias growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 8500 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. Barclays is spreading its reach across India and now has 4 offices in the country. We have our head office in the financial hub of Mumbai in Western India. We recently strengthened our presence in Northern India with a branch in Delhi, Indias capital, which is also one of the subcontinents key business centres. Additionally, Barclays has a branch in Kanchipuram, which is near Chennai, and another at Nelamangala near Bangalore, both of which cover important nodes in Southern India. Barclays eyes double-digit market-share in India Barclays, which recently infused $70-million in Indian retail operations, is targeting a double-digit market-share in the segment, according to Samir Bhatia, Managing Director. 5.2 Competition Strategies ICICI SIZE, range and low-cost resources have been recurring themes in ICICI's strategy over the last few years. HDFC The cornerstone of HDFC business strategy has been its retail focus, first on the liability side in terms of deposits and now in assets.All banks focus on retail liabilities, but none did it to the extent that HDFC did. "Our focus has always been low-cost retail deposits. Corporate deposits tend to be very volatile and command a higher cost, hence our reticence toward it," says Paresh Sukhtankar, head of credit and market risk. Besides cost, this approach also reduced the volatility and price sensitivity in deposits, since corporate deposits typically tend to be parked at the short end and flowed out easily with changes in interest rates. Barclays Barclays market strategy to tap bottom of pyramid Barclays sees a huge potential in the mass segment. In fact, it plans to launch a banking product aimed at the unbanked and under-banked segment in the country. Unlike other foreign banks in India, which started their journey in the market top-down by tapping high net-worth clients, Barclays, somewhat of a late entrant, is seeking its fortunes from the ground up, at the bottom of the pyramid. SBI CBOP strategic alliance with HDFC Future of Banking in India Changing Imperatives Uploaded by tanujadunga (76) on Nov 28, 2006 ________________________________________ EXECUTIVE SUMMARY A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system has witnessed a series of reforms in the past, like deregulation of interest rates, dilution of government stake in PSBs, and increased participation of private sector banks. It has also undergone rapid changes, reflecting a number of underlying developments. This trend has created new competitive threats as well as new opportunities. This paper aims to foresee major future banking trends, based on these past and current movements in the market. Given the competitive market, banking will (and to a great extent already has) become a process of choice and convenience. The future of banking would be in terms of integration. This is already becoming a reality with new-age banks such as YES Bank, and others too adopting a single-PIN. Geography will no longer be an inhibitor. Technology

will prove to be the differentiator in the short-term but the dynamic environment will soon lead to its saturation and what will ultimately be the key to success will be a better relationship management. OVERVIEW If one were to say that the future of banking in India is bright, it would be a gross understatement. With the growing competition and convergence of services, the customers (you and I) stand only to benefit more to say the least. At the same time, emergence of a multitude of complex financial instruments is foreseen in the near future (the trend is visible in the current scenario too) which is bound to confuse the customer more than ever unless she spends hours (maybe days) to understand the same. Hence, I see a growing trend towards the importance of relationship managers. The success (or failure) of any bank would depend not only on tapping the untapped customer base (from other departments of the same bank, customers of related similar institutions or those of the competitors) but also on the effectiveness in retaining the existing base. India has witness to a sea change in the way banking is done in the past more than two decades. Since 1991, the Reserve Bank of India (RBI) took steps to reform the Indian banking system at a measured pace so that growth could be achieved without exposure to any macro-environment and systemic risks. Some of these initiatives were deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), guidelines being issued for risk management, asset classification, and provisioning. Technology has made tremendous impact in banking. Anywhere banking and Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. In the wake of greater financial deregulation and global financial integration, the biggest challenge before the regulators is of avoiding instability in the financial system. Meaning of NPAs An asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by banks to a borrower becomes nonperforming, then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is a result of an environment that prevents it from performing up to expected levels. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards. Magnitude of NPAs Inn India, the NPAs that are considered to be at higher levels than those in other countries have of late, attracted the attention of public. The Indian banking system had acquired a large quantum of NPAs, which can be termed as legacy NPAs. NPAs seem to be growing in public sector banks over the years. Macro Perspective Behind NPAs A lot of practical problems have been found in Indian banks, especially in public sector banks. For Example, the government of India had given a massive wavier of Rs. 15,000 Crs. under the Prime Minister ship of Mr. V.P. Singh, for rural debt during 1989-90. This was not a unique incident in India and left a negative impression on the payer of the loan. Poverty elevation programs like IRDP, RREP, SUME, SEPUP, JRY, PMRY etc., failed on various grounds in meeting their objectives. The huge amount of loan granted under these schemes were totally unrecoverable by banks due to political manipulation, misuse of funds and non-reliability of target audience of these sections. Loans given by banks are their assets and as the repayment of several of the loans were poor, the quality of these assets were steadily deteriorating. Credit allocation became 'Lon Melas', loan proposal evaluations were slack and as a result repayment were very poor. There are several reasons for an account becoming NPA. * Internal factors * External factors Internal factors: 1. Funds borrowed for a particular purpose but not use for the said purpose. 2. Project not completed in time. 3. Poor recovery of receivables. 4. Excess capacities created on non-economic costs. 5. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. 6. Business failures. 7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. 8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc.,

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc., External factors: 1. Sluggish legal system Long legal tangles Changes that had taken place in labour laws Lack of sincere effort. 2. Scarcity of raw material, power and other resources. 3. Industrial recession. 4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. 5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. 6. Government policies like excise duty changes, Import duty changes etc.,

In the last Industry Shastra, we discussed the structure and business model of the Indian banking industry. Today, in the 2nd part of the same article, we will talk about its future prospects, along with growth drivers and key concerns. Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high-performing sector

According to an IBA-FICCI-BCG report titled Being five star in productivity road map for excellence in Indian banking, Indias gross domestic product (GDP) growth will make the Indian banking industry the third largest in the world by 2025. According to the report, the domestic banking industry is set for an exponential growth in coming years with its assets size poised to touch USD 28,500 billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010). So, before going in its future, lets have a glance at its historical performance.

If we look at 5 years historical performance of different types of players in the banking industry, public sector bank has grown its deposits, advances and business per employee by the highest rate 21.7%, 23% and 21.1% respectively. As far as net interest income is concerned, private banks are ahead in the race by reporting 24.2% growth, followed by pubic banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per employee and profit per employee has been the highest for public sector banks, in absolute terms, foreign banks have the highest business per employee as well as profit per employee.

In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets as compared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend, private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of public sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very high for private and foreign bank as compared to public banks. In conclusion, we could say that the current position of ROA, Net NPA and CAR of different kinds of players in the industry indicates that going ahead, public banks will have to face relatively more problems as compared to private and foreign banks. After looking at industry performance, lets see how the different players in the Banking Industry have performed in the last five years

The table above indicates that overall the top private banks have grown faster than that of public banks. Axis Bank, one of the new private sector bank, has shown the highest growth in all parameters i.e. net interest income, deposits, advances, total assets and book value. Among public sector banks, Bank of Baroda has been the outperformer in the last five years.

Kotak Mahindra Bank has reported the highest 5-year average net interest margin and currently, it also has the highest CAR whereas HDFC Bank has the highest CASA, the lowest net NPA to net

advances ratio and the highest five-year-average ROA. On the other hand, Indias largest bank, SBI reported the lowest five-year-average ROA. Currently, it has the highest net NPA to net advances ratio and the lowest CAR. Looking at all of the above, it is expected that Private Banks are better placed to garner growth in the Indian Banking Industry. High growth of Indian Economy: The growth of the banking industry is closely linked with the growth of the overall economy. India is one of the fastest growing economies in the world and is set to remain on that path for many years to come. This will be backed by the stellar growth in infrastructure, industry, services and agriculture. This is expected to boost the corporate credit growth in the economy and provide opportunities to banks to lend to fulfil these requirements in the future. Rising per capita income: The rising per capita income will drive the growth of retail credit. Indians have a conservative outlook towards credit except for housing and other necessities. However, with an increase in disposable income and increased exposure to a range of products, consumers have shown a higher willingness to take credit, particularly, young customers. A study of the customer profiles of different types of banks, reveals that foreign and private banks share of younger customers is over 60% whereas public banks have only 32% customers under the age of 40. Private Banks also have a much higher share of the more profitable mass affluent segment. New channel Mobile banking is expected to become the second largest channel for banking after ATMs: New channels used to offer banking services will drive the growth of banking industry exponentially in the future by increasing productivity and acquiring new customers. During the last decade, banking through ATMs and internet has shown a tremendous growth, which is still in the growth phase. After ATMs, mobile banking is expected to give another push to this industry growth in a big way, with the help of new 3G and smart phone technology (mobile usage has grown tremendously over the years). This can be looked at as branchless banking and so will also reduce costs as there is no need for physical infrastructure and human resources. This will help in acquiring new customers, mainly who live in rural areas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG report predicts that mobile banking would become the second largest channel of banking after ATMs. Financial Inclusion Program: Currently, in India, 41% of the adult population dont have bank accounts, which indicates a large untapped market for banking players. Under the Financial Inclusion Program, RBI is trying to tap this untapped market and the growth potential in rural markets by volume growth for banks. Financial inclusion is the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. The RBI has also taken many initiatives such as Financial Literacy Program, promoting effective use of development communication and using Information and Communication Technology (ICT) to spread general banking concepts to people in the under-banked areas. All these initiatives of promoting rural banking are taken with the help of mobile banking, self help groups, microfinance institutions, etc. Financial Inclusion, on the one side, helps corporate in fulfilling their social responsibilities and on the other side it is fueling growth in other industries and so as a whole economy.

More stringent capital requirements to achieve as per Basel III: Recently, the RBI released draft guidelines for implementing Basel III. As per the proposal, banks will have to augment the minimum core capital after a stringent deduction. The two new requirements capital conservative buffer(an extra buffer of 2.5% to reduce risk) and a counter cyclical buffer (an extra capital buffer if possible during good times) have also been introduced for banks. As the name indicates that the capital conservative buffer can be dipped during stressed period to meet the minimum regulatory requirement on core capital. In this scenario, the bank would not be supposed to use its earnings to make discretionary payouts such as dividends, shares buyback, etc. The counter cyclical buffer, achieved through a pro-cyclical build up of the buffer in good times, is expected to protect the banking industry from system-wide risks arising out of excessive aggregate credit growth.

The above table reveals that even under current Basel Norm II, Indian banks follow more stringent capital adequacy requirements than their international counterparts. For Indian Banks, the minimum common equity requirement is 3.6%, minimum tier I capital requirement is 6% and minimum total capital adequacy requirement is 9% as against 2%, 4% and 8% respectively recommended in the Basel II Norm. Due to this the capital adequacy position of Indian banks is at comfortable level. So, going ahead, they should not face much problem in meeting the new norms requirements. But as we saw earlier, private sector banks and foreign banks have considerable high capital adequacy ratio, hence are not expected to face any problem. But, public sector banks are lagging behind. So, the Government will have to infuse capital in public banks to meet Basel III requirements. With the higher minimum core Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is expected to come down. Increasing non-performing and restructured assets: Due to a slowdown in economic activity in past couple of years and aggressive lending by banks many loans have turned non-performing. Restructuring of assets means loans whose duration has been increased or the interest rate has been decreased. This happens due to inability of the loan taking company/individual to pay off the debt. Both of these have impacted the profitability of banks as they are required to have a higher provisioning amount which directly eats into the profitability. The key challenge going forward for banks is to increase loans and effectively manage NPAs while maintaining profitability. Intensifying competition: Due to homogenous kind of services offered by banks, large number of players in the banking industry and other players such as NBFCs, competition is already high. Recently, the RBI released the new Banking License Guidelines for NBFCs. So, the number of players in the Indian banking industry is going to increase in the coming years. This will intensify the competition in the industry, which will decrease the market share of existing banks. Managing Human Resources and Development: Banks have to incur a substantial employee training cost as the attrition rate is very high. Hence, banks find it difficult manage the human resources and development initiatives. Currently, there are many challenges before Indian Banks such as improving capital adequacy requirement, managing non-performing assets, enhancing branch sales & services, improving organisation design; using innovative technology through new channels and working on lean operations. Apart from this, frequent changes in policy rates to maintain economic stability, various

regulatory requirements, etc. are additional key concerns. Despite these concerns, we expect that the Indian banking industry will grow through leaps and bounds looking at the huge growth potential of Indian economy. High population base of India, mobile banking offering banking operations through mobile phones, financial inclusion, rising disposable income, etc. will drive the growth Indian banking industry in the long-term. The Indian economy will require additional banks and expansion of existing banks to meet its credit needs. Given below is the MoneyWorks4me assessment for few banks: At MoneyWorks4me we have assigned colour codes to the 10 YEAR X-RAY and Future Prospects of the companies, as Green (Very Good), Orange (Somewhat Good) and Red (Not Good). *The 10 YEAR X-RAY facilitates analysis of the financial performance of the bank considering the seven most important parameters. A 10 Year period will normally encompass an entire business cycle. Analyzing the performance over this time frame is essential to understand how a company has fared during the good as well as bad times. The seven most important parameters that one needs to look at are Net Interest Income Growth Rate, Total Income Growth Rate, EPS Growth Rate, Book Value per Share (BVPS) Growth Rate, Return on Assets (ROA), Net NPA to Net Advances Ratio and Capital Adequacy Ratio.

While investing, one must always invest in the stocks of a company that operates in an industry with bright long-term prospects. Further, the companys 10 YEAR X-RAY and future prospects should also be Green. The table given above gives you a list of few companies from the Banking Industry that you could consider investing in. But, you need to invest in these stocks at the right price (i.e. when the market offers an attractive discount). To find out the right price to invest in these companies, become a member of MoneyWorks4me.com. Disclaimer: This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations or

needs of an individual client or a corporate/s or any entity/ies. The person should use his/her own judgment while taking investment decisions