PORTER

Five Forces Buyer Power (Low) Priority Sector

Agriculture Small Scale Industries Others
Each accounts for 13% of Bank Credit Wide dispersion of the borrowers. Low Credit Standing

Wholesale Trade
Diffused base Low credit rating 3.8% of Bank Credit

Industry- Medium and Large firms.

35% of total Bank Credit Credit Surplus situation. Alternate avenues

Five Forces Supplier Power(Low) Financial Institution

2.9% of total liabilities

RBI
Supplier of funds only 2% of total liabilities

Public & Corporate Deposits

80% of total liabilities Base too fragmented

Power increasing due to

Integration of rural areas Improved Communication & Reach

Five Forces Threat of New Entrants(Low) Barriers to entry Government policies and regulations
Reach for economies of scale Product differentiation

10 Banks Deposit Concentration Ratio: 60.9 Friendlier Regulation promoting Competition

Five Forces Threat of Substitutes(High) Unorganized Market Capital Market Insurance NBFC

Financial Institutions like Mutual Funds Post office deposits External Commercial borrowings Rivalry(High) 82.2% Deposits with PSBs. Friendlier Regulation promoting Competition Slow Industrial Growth increasing rivalry to capture potentially good clients Increased Rivalry in Retail Banking
Brand Building Exercise Customer Service Coverage Undifferentiated Products Corporate Banking -all the banks wanting to get the maximum wallet share from the same companies.

Regulatory Framework
FDI Limit: The union budget 2003-04 has increased the permissible FDI limit in the private sector banking from current 49% to 74%, which will enable the foreign partner to further increase its stake and takeover full control of the bank. Also the amendment to remove the 10% cap on the voting rights of any person holding shares of a banking company will guide higher FDIs into private sector banks. Once the voting right condition is eased it would lead to consolidation in the industry with foreign banks looking at acquisitions in India, whereas Public sector banks are not allowed to acquire other banks, which will essentially mean that there wont be a level playing field. Ceiling on Interest Rate Cap: Reserve Bank of India reduced the ceiling of interest rate on NRE deposits. The new cap, applicable on all fresh deposits and those renewed after their present maturity period will be at 25 basis points above the Libor/SWAP rates for dollar of corresponding maturity. Merger of NBFCs: The regulation which gives green signal to the merger of NBFCs with banks provides the sector with an opportunity to acquire an NBFC thereby developing valuable synergies. NPA Recognition Norms: Among the other important regulations is the change in the norms for the classification of assets, whereby an asset would be identified as an

NPA within a period of 90 days of failing to make the interest payments. This has been in effect from March, 2004. This has eightened the need for strengthening credit monitoring and review processes. Containing NPAs and putting in place early warning signals on credit quality is vital to improve the asset quality across the spectrum of lending activities. The primary impact would be on the public sector banks that witnessed gains from their treasury operations during last fiscal. Banks with a huge unrealized gilt portfolio should be able to capitalize on the falling yields in order to sustain their topline growth.

Key Issues
Poor credit off take: Due to increasing foreign inflows and poor credit growth to the productive sectors of the economy, banks are facing the problem of excessive liquidity. To cope up with this banks have been continuously investing in government papers. Banks today, hold about 41% of their assets in government securities against the stipulated norm of 25%. The excess of 16% of investment reflects the state of poor credit off take. Narrow banking: The term narrow banking connotes reluctance of banks to lend. In an uncertain environment, banks find it easier to control their operations through direct measures like treasury management rather than resort to more conventional banking approaches. One of the risk of narrow banking is that it concentrates on treasury operations and neglects the productive of the economy. Thus the growth of the manufacturing sectors gets hampered due to poor credit off take. Basel II: By the year 2006, Indian banks are required to adhere to the international standard of capital adequacy norms under the new capital accord of Basel II. The RBI has already taken steps to implement two major components of the second pillar of Basel II i.e., risk based supervision and prompt corrective action (PCA). The PCA framework has already been put into operation on an experimental basis by the Reserve bank. A pilot- run of risk- based supervision has been introduced in October 2003. The implementation of Basel II norms will have two implications on the banking system. First is the ability of the banks to measure the risks they bear. Although banks are now having adequate risk management practices in place, the existing system may not be able to support the banks in meeting the stringent norms. This calls for additional investment in information technology and information sharing systems.

Second is the challenge of meeting the adequacy norms by providing more capital towards reserves identified risks and then earn income to service the additional capital requirement. If the banks are not able to meet the reserve criteria, then the ability of the banks to lend further will be limited. This can have a negative impact on their income. Real time gross settlement: RBI will implement the Real time gross settlement (RTGS) from June 2004. Under the new online payment system banks and customers will be receiving funds with certainty, enabling them to use funds immediately. There would be a single account for inward and outward payments, which would mean easy monitoring, tracking and reconciliation of transactions.

Growth drivers
Retail banking: With the net interest margin falling in the case of corporate customers, the retail customers is what is providing the bottom line growth to the banks. Most of the banks have started to shift their focus towards retail. Fee based income: In the scenario of poor credit off take, banks are now focusing on fee based income to improve their profitability and ROA. Now the banks apart from the traditional banking activities are resorting to new avenues of income generation such as bancassurance, elling of third party products and advisory services Cost reductions: The banks to remain more competitive in the present competitive scenario are resorting to cost reduction to boost their bottomline. Reduced costs basically translate to higher profit margins Differentiation: The customer is interested in how he/she can benefit from the bank and its products. That's why it becomes necessary for a bank to differentiate its products from the others. Risk Management With the margins diminishing and the competition increasing , risk management has become a major driver for this industry.

Competitive Strategy
KEY DIMENSIONS Size of deposit

Technology Capital Adequacy Ratio NPA Operating Profit Staff Productivity Geographic Spread Service Quality Fee based Income Implicit cost of funds

Key Trends
Consolidation: The case for Consolidation through strategic alliances / partnerships seems to be strong in Indian Banking context. Strategic alliances and collaborative approach, as an alternative to mergers and acquisitions, would lead to reduction in transaction costs through outsourcing, achieving better segmentation in the market, leverage synergies in operations and avoid problems related to cultural integration. Rapid expansion in foreign markets without sufficient knowledge of local economic conditions could increase vulnerability of individual banks. Consolidation would take place not only in the structure of the banks, but also in the case of services. For instance, some banks would like to shed their non-core business portfolios to others. This could see the emergence of niche players in different functional areas and business segments sharing of their infrastructure including ATM Network, etc. Co-opetition: Banks will take on competition in the front end and seek co-operation in the back end, as in the case of networking of ATMs. This type of coopetition will become the order of the day as Banks seek to enlarge their customer base and at the same time to realize cost reduction and greater efficiency. Diversification: Due to increasing competition on account of globalization and liberalization and falling interest rates the NIM of banks is expected to fall further in future by 1-1.5% points. Thus banks will have to look at alternate sources of revenue whereby the compression in margins can be offset by fee-income revenue. Tie-ups: There will be more and more of tie-ups between banks, corporate clients and their retail outlets to share a common platform to shore up revenue through increased volumes. Deregulation:

Worldwide, deregulation and market liberalization are impacting the traditional structure of the financial services industry. Outsourcing: The competitive pressure will lead to more of introspection of part of banks to reduce costs. An analytical view of various processes and practices as these exist today will be made and appropriate changes adopted to cut costs and delays. This will lead to utsourcing and adoption of BPOs becoming more and more relevant, especially in the context of increasing volumes of retail business. This will also expose the banks to problems faced by these providers. Therefore it will become imperative for Banks to outsource only those functions that are not strategic to banks business. For instance, in the wake of implementation of 90 days delinquency norms for classification of assets, some banks may think of engaging external agencies for recovery of their dues and in NPA management. Alternate Delivery Channels The banks are shifting their focus from the conventional channels to the alternate delivery channels. The alternate channels include ATMs, Mobile banking, tele banking and internet banking besides the conventional branch banking. These channels are cost effective and enable the banks to increase their reach and penetration.

Technology
Technology will break all boundaries and encourage cross border banking business. Banks would have to undertake extensive Business Process Re-Engineering and tackle issues like a) How best to deliver products and services to customers b) Designing an appropriate organizational model to fully capture the benefits of technology and business process changes brought about. c) How to exploit technology for deriving economies of scale and how to create cost efficiencies, and d) How to create a customer- centric operation model. Some of the key points to ponder in this regard are: IT spent by banking and financial services industry in USA is approximately 7% of the revenue as against around 1% by Indian Banks. Usage of alternate delivery channels has increased Technology solutions have made flow of information much faster, more accurate and enable quicker analysis of data received. This in turn has led to faster and more efficient decision making process. For the Banks, this would enable development of appraisal and monitoring tools which would make credit management much more effective.

 One area where the banking system can reduce the investment costs in technology applications is by sharing of facilities. The way banks are coming together to share ATM Networks.