sapm field assignment

8/3/2019 SAPM Field Assignment

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Indian Banking Industry

Course: - PostGraduate Program

Name of the Students: - Kaushal,Shivani, Manindra, Nisha

Name of the College: - SkylineBusiness School

Month & Year of submission: - November,2011


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FIELD ASSIGNMENT

ON

INDIAN BANKING INDUSTRY

Submitted to

Mrs. Anita Singhal

(A guest faculty of Skyline Business School)

In partial fulfillment of the requirements

For the award of the degree of

POST GRADUATE PROGRAM

(III semester)

Submitted by

Kaushal Kumar

Shivani JainManindra Kumar

Nisha Rani

SKYLINE BUSINESS SCHOOL

122 Institutional Area, Sector 44, Gurgaon -122003

October 2011


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Literature Review

AN INTRODUCTION TO INDIAN BANKING INDUSTRY:

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 domestic and foreign).

These banks have over 67,000 branches spread across the country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in1969 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 had 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 of scheduled commercial banks increased four-fold and the number of bank 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 compete 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 a25

percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted

for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of

foreign banks (numbering 42), regional rural banks and other scheduled commercial banks


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accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41percent,

3.14 percent and 12.85 percent respectively in credit during the year 2000.

Current Scenario

The industry is currently in a transition phase. On the one hand, the PSBs, which are the

mainstay of the Indian Banking system, are in the process of shedding their flab in terms

of excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental

equity, while on the other hand the private sector banks are consolidating themselves through

mergers and acquisitions.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking, and

mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various

other services and integrated them into the mainstream banking arena, while the PSBs are still

grappling with disgruntled employees in the aftermath of successful VRS schemes. Also,

following Indias commitment to the w to agreement in respect of the services sector, foreign

banks, including both new and the existing ones, have been permitted to open up to 12 branches

a year with effect from 1998-99 as against the earlier stipulation of 8 branches.

Meanwhile the economic and corporate sector slowdown has led to an increasing number of

banks focusing on the retail segment. Many of them are also entering the new vistas

of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor

are the best placed to enter into the insurance sector. Banks in India have been allowed to

provide fee-based insurance services without risk participation invest in an insurance company

for providing infrastructure and services support and set up of a separate joint-venture insurance

company with risk participation.

Major Developments:


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The Monetary Authority of Singapore (MAS) has provided qualified full banking (QFB

privileges to ICICI Bank for its branch operations in Singapore. Currently, only SBI had QFB

privileges in country.

The Indian operations of Standard Chartered reported a profit of above US$ 1 billion for the first

time. The bank posted a profit before tax (PAT) of US$ 1.06 billion in the calendar year 2009, as

compared to US$ 891 million in 2008.

Punjab National Bank (PNB) plans to expand its international operations by foraying into

Indonesia and South Africa. The bank is also planning to increase its share in the international

business operations to 7 per cent in the next three years.

The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months

ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months

ended December 2008.

Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4million on

21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, over

the corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net profit at

US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$128.05

million for the same quarter in the previous year.

CURRENT SCENARIO IN INDIAN BANKING:-

BUSINESS ENVIRONMENT

The Indian economy is on a growth path with the real GDP growth upwards of 9%. Industrial

and services sectors have accelerated growth while growth in agricultural sector has continued to


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remain moderate. Inflation remained an area of concern. There was however robust build up of

foreign exchange resources - close to $ 200 bn. Stockmarkets were buoyant while the Indian

Rupee continued to appreciate against US Dollar.

BANKING SCENARIO

The future of the banking sector appears quite promising though there are quite a few challenges

to contend with. The customer is more discerning and has a much wider access to technology

and knowledge. Hence the imperative need to roll out innovative customized products which will

be the key differentiator amongst banks. Time and distance have shrunk and the internet has

greatly facilitated global reach and therefore, evolution of delivery channels and interactive

services have been a boon to banking. The core banking solution platform is being increasingly

adopted by the banks to fully realize the opportunity thrown up by technology.

Unlike the previous year, credit growth of the system was not as profound but quite robust

nonetheless and resources though not really scarce, were a bit expensive. RBI initiated various

measures such as increase of reverse repo rate, higher CRR prescriptions etc. which were aimed

at moderating credit growth. To certain sector specific instruction have also been issued by RBI

to rein in expansion of Bank credit to such sectors. All this ushered in a period of increasing cost,

declining yields and consequently pressure on margins. Healthy rebalancing of the creditportfolio was the answer to this syndrome.

HIGHLIGHTS OF THE BANK'S PERFORMANCE

The year gone by was an exceptional year for the Bank in terms of most parameters. Net profit

surged by 60% from Rs. 701 Cr. to Rs. 1123 Cr. and the global business mix crossed the

milestone mark of Rs. 200,000 Cr. to touch Rs. 207,000 Cr. While deposits grew by 27.6% to

Rs. 119882 Cr., the share of low cost deposits hovered at 40% and your bank continues to be one

of the few banks with such a large share of low cost deposits. Credit expansion was a robust 30%

touching an aggregate level of Rs.86791 cr. The growth has been quite broad based

encompassing various segments such as agriculture, industry, SME and retail. Foreign branches


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accounted for a smart rise of 34% in advances.

Priority Sector not only constitutes the Bank's social commitment, but is recognized today as a

profitable business opportunity. With almost two third branches in rural and semi urban areas,

the bank has ably risen to the occasion. While agriculture clocked a growth of 25% and

constituted 18.5% of net bank credit, priority sector grew by almost 23% and accounted for

45.5% of net bank credit. The Bank could for the first time record net NPA below 1%. In fact on

the back of robust cash recoveries of Rs. 752 cr. and up gradation of Rs. 132 core, gross NPA

slid by Rs. 379 cr. to Rs. 2100 cr. Recoveries together with prudent provisioning saw Net NPA

falling sharply to Rs. 632 cr. from Rs. 970 cr. resulting in a healthy loan loss coverage ratio.

HDFC BANK

HDFC Bank Limited is a major Indian financial services company based in India, incorporated

in August 1994. The bank was promoted by the Housing Development Finance Corporation, a

premier housing finance company of India. HDFC Bank has 1,986 branches and over 5,471

ATMs, in 996 cities in India, and all branches of the bank are linked on an online real-time basis.

HDFC Bank deals with three key business segments Wholesale Banking Services, Retail

banking Services, Treasury. It has entered the banking consortia of over 50 corporate for

providing working capital finance, trade services, corporate finance, and merchant banking. It is

also providing sophisticated product structures in areas of foreign exchange and derivatives,

money markets and debt trading and equity research

Stock Performance

December 2010 698.60

Decrease = (4%) approx

November 2011 670.50

Recommendation for share trading


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It is the country's most premium bank in terms of valuations. Its strong financial and robust

business model justifies the valuation. It is the most consistent performer in the sector in terms of

profit growth and credit off take. Its margin has stayed above 4%, which is one of the highest in

the industry along with the lowest ratio of bad loans. So, despite a P/E multiple of 25, it is a safebet for long-term investors.

One of the strongest banks the scrip has given minimal returns to the investors in the last one

year as shown in the table given below.

Time Span Price Change%Change

Today 438.70 -6.10 -1.37

Week 461.95 -17.15 -3.71

Month 501.85 -57.05 -11.36

Three Months 459.63 -14.83 -3.22

Six Months 409.27 35.53 8.68

One Year 435.36 9.44 2.16

Our Recommendation:

The banking sector is likely to underperform in the short term. The scrip can go below Rs.400 giving an

excellent investment opportunity for long term investors.

Buyfor a target price of Rs.600 for a

holding period of 1 year.

Growth

Housing DevelopmentFinance Corporation

Profit & Loss account ------------------- in Rs. Cr. -------------------


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Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

12 mths 12 mths 12 mths 12 mths 12 mths

Income

Sales Turnover 12,852.93 11,338.28 10,994.79 8,176.35 5,875.50

Excise Duty 0.00 0.00 0.00 0.00 0.00

Net Sales 12,852.93 11,338.28 10,994.79 8,176.35 5,875.50

Other Income -15.51 14.84 237.34 687.76 19.36

Stock Adjustments 0.00 0.00 0.00 0.00 0.00

Total Income 12,837.42 11,353.12 11,232.13 8,864.11 5,894.86

Expenditure

Raw Materials 0.00 0.00 0.00 0.00 0.00

Power & Fuel Cost 0.00 0.00 0.00 0.00 0.00

Employee Cost 175.53 146.65 138.61 117.80 91.27

Other Manufacturing Expenses 0.00 0.00 0.00 0.00 0.00

Selling and Admin Expenses 143.61 91.26 96.75 113.37 91.54

Miscellaneous Expenses 89.60 117.76 89.55 57.70 52.96

Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00

Total Expenses 408.74 355.67 324.91 288.87 235.77

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

12 mths 12 mths 12 mths 12 mths 12 mths

Operating Profit 12,444.19 10,982.61 10,669.88 7,887.48 5,639.73

PBDIT 12,428.68 10,997.45 10,907.22 8,575.24 5,659.09

Interest 7,541.87 7,062.60 7,670.72 5,184.53 3,673.28

PBDT 4,886.81 3,934.85 3,236.50 3,390.71 1,985.81

Depreciation 19.20 18.20 17.46 16.60 17.46

Other Written Off 0.00 0.00 0.00 0.00 0.00

Profit Before Tax 4,867.61 3,916.65 3,219.04 3,374.11 1,968.35

Extra-ordinary items -16.12 14.79 13.55 0.00 0.00

PBT (Post Extra-ord Items) 4,851.49 3,931.44 3,232.59 3,374.11 1,968.35

Tax 1,332.65 1,090.15 936.50 937.86 397.97

Reported Net Profit 3,534.96 2,826.49 2,282.54 2,436.25 1,570.38

Total Value Addition 408.74 355.68 324.91 288.87 235.77

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 1,320.20 1,033.60 853.36 710.09 556.61

Corporate Dividend Tax 215.24 171.67 140.69 120.68 94.60

Per share data (annualized)

Shares in issue (lakhs) 14,668.87 2,871.10 2,844.54 2,840.38 2,530.07

Earnings Per Share (Rs) 24.10 98.45 80.24 85.77 62.07

Equity Dividend (%) 450.00 360.00 300.00 250.00 220.00


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Book Value (Rs) 118.05 529.33 461.85 420.62 219.42

(Rs crore)

Ratios

Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07

Per share ratios

Adjusted EPS (Rs) 84.42 64.33 52.68 44.85 35.77

Adjusted cash EPS (Rs) 95.11 72.95 61.14 52.51 50.20

Reported EPS (Rs) 84.40 64.42 52.77 44.87 35.74

Reported cash EPS (Rs) 95.09 73.03 61.24 52.53 50.16

Dividend per share 16.50 12.00 10.00 8.50 7.00

Operating profit per share (Rs) 160.36 106.25 92.36 107.32 86.19

Book value (excl rev res) per share (Rs) 545.53 470.19 344.44 324.38 201.42

Book value (incl rev res) per share (Rs.) 545.53 470.19 344.44 324.38 201.42

Net operating income per share (Rs) 524.34 436.03 464.77 348.57 259.98

Free reserves per share (Rs) 419.10 363.55 252.37 269.89 155.69

Profitability ratios

Operating margin (%) 30.58 24.36 19.87 30.78 33.15

Gross profit margin (%) 28.54 22.39 18.05 28.58 30.50

Net profit margin (%) 16.09 14.76 11.35 12.82 13.57

Adjusted cash margin (%) 18.13 16.71 13.15 15.01 19.07

Adjusted return on net worth (%) 15.47 13.68 15.29 13.82 17.75

Reported return on net worth (%) 15.47 13.70 15.32 13.83 17.74

Return on long term funds (%) 59.91 56.08 83.31 62.34 74.91

Leverage ratios

Long term debt / Equity - - - - -

Total debt/equity 8.22 7.78 9.75 8.76 10.62

Owners fund as % of total source 10.84 11.39 9.30 10.24 8.60

Fixed assets turnover ratio 4.65 4.24 5.00 5.18 4.33

Liquidity ratios

Current ratio 0.50 0.28 0.27 0.26 0.26

Current ratio (inc. st loans) 0.06 0.03 0.03 0.03 0.04

Quick ratio 6.89 7.14 5.23 4.89 4.07


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Good place to work

Weakness

Loan book

Rising NPA

Opportunities

Greater liberalization in foreign ownership via FDI in Indian Private sector banks

Could extend to overseas broadly

Threats

The bank has started facing competition from players like PNB, SBI, ICICI, etc. in the

finance market. This could reduce the margins in future.

Declining trend in the aggregate deposited growth with the scheduled commercial banks.

Lack of infrastructure in rural areas could constrain investment.

USP OF HDFC

Doorstep banking - Disbursement and loan recovery at the doorsteps of the

beneficiary

With technology, BCs and Hub & spoke model, we cover large number of

clientele with less number of branches

Scaling up within a short span of time

Timely & hassle free credit disbursement

Transparency

BUSINESSSTRATEGY OF HDFC

Increase market share in India's banking and financial service industry.

Leverage our technology platform and open scalable systems to deliver more

products

Maintain current high standards for asset quality.

Develop innovative products and services to attract the targeted customers.


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Focus on high earnings growth with low volatility.

Future growth

Private sector HDFC Bank aims to rid the growth opportunities thrown up by the increasing

affluence of BHARAT (rural India) and expects to grow higher than industry over the next

few years. The bank will also focus on organic growth, having completed the acquisition of

CBoP a couple of years ago which has given it a strong footprint pan-India. There is a

tremendous opportunity in rural India and with the countrys GDP poised to grow at 8% plus the

next few years. HDFC Bank is well-positioned to tap this opportunity for its rapid growth.

BHARAT is growing rapidly there are agriculture reforms taking place, supply chains are

being developed and improved, per capita income is increasing and ancillary units are growingaround manufacturing. All this makes HDFC Bank optimistic about its, and the countrys

financial sectors growth going forward.


SWOT analysis of Banking Industry

STRENGTH

Indian banks have compared favourably on growth, asset quality and profitability with other

regional banks over the last few years. The banking index has grown at a compounded annual

rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market

index for the same period.

Policy makers have made some notable changes in policy and regulation to help strengthen

the sector. These changes include strengthening prudential norms, enhancing the payments


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system and integrating regulations between commercial and co-operative banks.

Bank lending has been a significant driver of GDP growth and employment.

Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking

system has reached even to the remote corners of the country.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalisation of 14 major private banks of India.

In terms of quality of assets and capital adequacy, Indian banks are considered to have clean,

strong and transparent balance sheets relative to other banks in comparable economies in its

region.

India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the

Government of India holding a stake)after merger of New Bank of India in Punjab National Bank

in 1993, 29 private banks (these do not have government stake; they may be publicly listed and

traded on stock exchanges) and 31 foreign banks. They have a combined network of over

53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the

public sector banks hold over 75 percent of total assets of the banking industry, with the private

and foreign banks holding 18.2% and 6.5% respectively.

Foreign banks will have the opportunity to own up to 74 per cent of Indian private

sector banks and 20 per cent of government owned banks.

WEAKNESS

PSBs need to fundamentally strengthen institutional skill levels especially in sales

and marketing, service operations, risk management and the overall organisational performance

ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels.

The cost of intermediation remains high and bank penetration is limited to only a few customer

segments and geographies.


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Structural weaknesses such as a fragmented industry structure, restrictions on

capital availability and deployment, lack of institutional support infrastructure, restrictive

labour laws, weak corporate governance and ineffective regulations beyond

Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU

banks below 51% thus choking the headroom available to these banks for raining equity capital.

Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from

the North Block in terms of approving merger of PSU banks may hamper their growth prospects

in the medium term.

OPPORTUNITY

The market is seeing discontinuous growth driven by new products and services that include

opportunities in credit cards, consumer finance and wealth management on the retail side, and

in fee-based income and investment banking on the wholesale banking side. These require new

skills in sales & marketing, credit and operations.

Banks will no longer enjoy windfall treasury gains that the decade-long secular decline

in interest rates provided. This will expose the weaker banks.

With increased interest in India, competition from foreign banks will only intensify.

Given the demographic shifts resulting from changes in age profile and household income,

consumers will increasingly demand enhanced institutional capabilities and service levels from

banks.

New private banks could reach the next level of their growth in the Indian banking sector by

continuing to innovate and develop differentiated business models to profitably serve segments

like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means

to grow and reaching the next level of performance in their service platforms. Attracting,

developing and retaining more leadership capacity


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Foreign banks committed to making a play in India will need to adopt alternative approaches

to win the race for the customer and build a value-creating customer franchise in advance of

regulations potentially opening up post 2009. At the same time, they should stay in the game for

potential acquisition opportunities as and when they appear in the near term. Maintaining a

fundamentally long-term value-creation mindset.

reach in rural India for the private sector and foreign banks.

With the growth in the Indian economy expected to be strong for quite some time especially in

its services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong.

the Reserve Bank of India (RBI) has approved a proposal from the government to amend

the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.

Liberalisation of ECB norms: The government also liberalised the ECB norms to permit

financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks

and financial institutions, which were earlier not permitted to raise such funds, explore this route

for raising cheaper funds in the overseas markets.

Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed

them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the

new instruments find takers, it would help PSU banks, left with little headroom for raising equity.

Significantly, FII and NRI investment limits in these securities have been fixed at 49%,

compared to 20% foreign equity holding allowed in PSU banks.

THREATS

Threat of stability of the system: failure of some weak banks has often threatened the stability

of the system.

Rise in inflation figures which would lead to increase in interest rates.


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Increase in the number of foreign players would pose a threat to the PSB as well as

the private players.

Strategies

Indian Banking Sector: Key Statistics

According to the Reserve Bank of India (RBI)'s 'Quarterly Statistics on Deposits and

Credit of Scheduled Commercial Banks', March 2011, Nationalised Banks, as a group,

accounted for 53.0 per cent of the aggregate deposits, while State Bank of India (SBI)

and its associates accounted for 21.6 per cent. The share of New private sector banks, Old

private sector banks, Foreign banks and Regional Rural banks in aggregate deposits was

13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of 52.8

per cent in the total bank credit, with SBI and its associates at 22.1 per cent and New

Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks and

Regional Rural banks held relatively lower shares in the total bank credit with 4.9 per

cent, 4.6 per cent and 2.4 per cent respectively.

The report also found that scheduled commercial bank offices (with deposits of INR 10

crore or more) accounted for 69.1 per cent of the bank offices, 97.3 per cent in terms of

aggregate deposits and 95.6 per cent in total bank credit.

Another statement from RBI has revealed that bank credit enhanced by 3.9 per cent in the

April-September 2011 period while bank deposits grew by 6.3 per cent. Bank advances

rose 19.5 per cent, while bank deposits rose 17.38 per cent as on September 23, 2011 (on

year-on-year basis). RBI expects a credit growth of 19 per cent, and deposit growth of 17

per cent for financial year 2011-12.

Due to an increase of US$ 763 million in the foreign currency assets to US$ 276.462

billion, India's foreign exchange reserves swelled by US$ 749 million to US$ 312.231

billion in the week ended October 7, 2011, according to RBI's Weekly Statistical

Supplement.
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The Indian banking industry is also well capitalized and capital ratios are above the global

average. The average tier-1 capital adequacy ratio of the Indian banking industry is above 10%,

when compared to the Basel III norm of 8.5% including the contingency buffer. The average

total capital of banks in India stood at 14.5% as of March 31, 2010, compared to the Basel II

requirement of 10.5%

Comparison of HDFC Bank with others

Name Last Price Market Cap. Net interest

Income

Net profit

HDFC Bank 471.40 110,167.83 19,928.21 3926.39

ICICI Bank 821.00 94,607.93 25,974.05 5,151.38

Axis Bank 1,049.50 43,283.77 15,154.81 3,388.49

Kotak Mahindra 502.35 37,105.96 4,303.56 818.18

IndusInd Bank 261.55 12,202.94 3,589.36 577.32

YES BANK 293.65 10,308.46 4,041.74 727.13

Federal Bank 390.70 6,682.83 4,052.03 587.08

ING Vysya Bank 320.10 4,795.15 2,694.06 318.65

Karur Vysya 378.45 4,056.24 2,217.69 415.59

Problem of Indian Banking Industry

Are Indian Banks Prepared for Basel III? = The first issue that comes to mind, particularly in the

background of the recent global regulatory developments is: Are Indian banks prepared for Basel III? The

building blocks of Basel III are by now quite well known: higher and better quality capital; an

internationally harmonized leverage ratio to constrain excessive risk taking; capital buffers which would

be built up in good times so that they can be drawn down in times of stress; minimum global liquidity

standards; and stronger standards for supervision, public disclosure and risk management.

Should Indian Banks Aim to Become Global? = The second issue I want to address is one that comes

up frequently - that Indian banks should aim to become global. Most people who put forward this view

have not thought through the costs and benefits analytically; they only see this as an aspiration consistent

with Indias growing international profile.
http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/icicibank/ICI02http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/axisbank/AB16http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/kotakmahindrabank/KMBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/indusindbank/IIBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/yesbank/YBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/federalbank/FBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/ingvysyabank/INGhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/karurvysyabank/KVBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/icicibank/ICI02http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/axisbank/AB16http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/kotakmahindrabank/KMBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/indusindbank/IIBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/yesbank/YBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/federalbank/FBhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/ingvysyabank/INGhttp://www.moneycontrol.com/india/stockpricequote/banksprivatesector/karurvysyabank/KVB


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Should We Mandate Foreign Banks to Come in Only as Subsidiaries? = The next issue I want to

address is whether we should mandate foreign banks to come in only as subsidiaries.

Why Do We Need to Rewrite Laws Governing the Banking Sector? = The current statutory

arrangement we have is a baffling plethora of laws governing different segments of the banking industry.

The nationalized banks are governed by the Banking Companies (Acquisition and Transfer of

Undertaking) Acts of 1970 and 1980. State Bank of India and its subsidiaries are governed by their

respective statutes. Private sector banks come under the purview of the Companies Act, 1956 and the

Banking Regulation Act, 1949. Foreign banks which have registered their documents with the registrar

under Section 592 of the Companies Act are also banking companies under the Banking Regulation Act.

Certain provisions of the Banking Regulation Act have been made applicable to public sector banks.

Similarly, some provisions of the RBI Act too are applicable to nationalized banks, SBI and its

subsidiaries, private sector banks and foreign banks.

Where Do Indian Banks Stand on Efficiency Parameters? = The growth acceleration that we saw in

India during 2003-08 is attributable to a number of factors, both tangible and intangible. One of the less

acknowledged factors that drove this growth was the contribution of the financial sector by way of larger

and better quality of financial intermediation. Just one statistic will evidence this - bank credit as a

proportion of GDP rose from 29 per cent as at end March 2000 to 55 per cent by end March 2010.

Future of Indian Banking Industry

The interplay between policy and regulatory interventions and management strategies will

determine the performance of Indian banking over the next few years. Legislative actions will

shape the regulatory stance through six key elements: industry structure and sector consolidation;

freedom to deploy capital; regulatory coverage; corporate governance; labor reforms and human

capital development; and support for creating industry utilities and service bureaus. Management

success will be determined on three fronts: fundamentally upgrading organizational capability to

stay in tune with the changing market; adopting value-creating M&A as an avenue for growth;

and continually innovating to develop new business models to access untapped opportunities.


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Through these scenarios, we can paint a picture of the events and outcomes that will be the

consequence of the actions of policy makers and bank managements. These actions will have

dramatically different outcomes; the costs of inaction or insufficient action will be high.

Specifically, at one extreme, the sector could account for over 7.7 per cent of GDP with over Rs..

7,500 billion in market cap, while at the other it could account for just 3.3 per cent of GDP with

a market cap of Rs. 2,400 billion. Banking sector intermediation, as measured by total loans as a

percentage of GDP, could grow marginally from its current levels of ~30 per cent to ~45 per cent

or grow significantly to over 100 per cent of GDP. In all of this, the sector could generate

employment to the tune of 1.5 million compared to 0.9 million. Today availability of capital

would be a key factor the banking sector will require as much as Rs. 600 billion (US$ 14

billion) in capital to fund growth in advances, non-performing loan (NPL) write offs and

investments in IT and human capital up gradation to reach the high-performing scenario. Three

scenarios can be defined to characterize these outcomes:

HIGH PERFORMANCE

In this scenario, policy makers intervene only to the extent required to ensure system stability

and protection of consumer interests, leaving managements free to drive far reaching changes.

Changes in regulations and bank capabilities reduce intermediation costs leading to increased

growth, innovation and productivity. Banking becomes an even greater driver of GDP growth

and employment and large sections of the population gain access to quality banking products.

Management is able to overhaul bank organizational structures, focus on industry consolidation

and transform the banks into industry shapers.

In this scenario we witness consolidation within public sector banks (PSBs) and within private

sector banks. Foreign banks begin to be active in M&A, buying out some old private and newer

private banks. Some M&A activity also begins to take place between private and public sector

banks. As a result, foreign and new private banks grow at rates of 50 per cent, while PSBs

improve their growth rate to 15 per cent. The share of the private sector banks (including through

mergers with PSBs) increases to 35 per cent and that of foreign banks increases to 20 per cent of

total sector assets. The share of banking sector value adds in GDP increases to over 7.7 per cent,

from current levels of 2.5 per cent. Funding this dramatic growth will require as much as Rs. 600

billion in capital over the next few years.


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