ECONOMIC ANALYSIS The economic analysis aims at determining if the economic climate is conclusive and is capable of encouraging the

growth of business sector, especially the capital market. When the economy expands, most industry groups and companies are expected to benefit and grow. When the economy turns down, most sectors and companies face survival problems. Hence, to predict share prices, an investor has to spend time exploring the forces operating in overall economy. Exploring the global economy is essential in an international investment setting. The selection of country for investment has to focus itself to examination of a national economic scenario. It is important to predict the direction of the national economy because economic activity affects corporate profits, not necessarily through tax policies but also through foreign policies and administrative procedures. Tools for Economy Analysis The most used tools for performing economic analysis are: Gross Domestic Product (GDP) Monetary policy and Liquidity Inflation Interest rates and Fiscal Policy etc. Gross Domestic Product GDP is one measure of economic activity. This is the total amount of goods and services produced in a country in a year. It is calculated by adding the market values of all the final goods and services produced in a year. Inflation Inflation can be defined as a trend of rising prices caused by demand exceeding supply. Over time, even a small annual increase in prices of say 1 % will tend to influence the purchasing power of the nation. In others word, if prices rise steadily, after a number of years, consumers will be able to buy only fewer goods and services assuming income level does not change with inflation. Interest Rate Interest rate is the price of credit. It is the percentage fee received or paid by individual or organization when they lend and borrow money. In general, increases in interest rate, whether caused by inflation, government policy, rising risk premium, or other factors, will lead to reduced borrowing and economic slowdown. Fiscal Policy

The fiscal policy of the government involves the collection and spending of revenue. In particular, fiscal policy refers to the efforts by the government to stimulate the economic directly, through spending. .

Analysis of Indian Economy

The pace of Indias economic growth has dropped significantly in the last three years. While this may seem like a blip in GDP growth that had been averaging around 8 percent in the pre-crisis years, its stickiness at around 6 percent in the last three years has led many to believe that low GDP growth may be a new normal for India. According to the Annual Economic Survey of India presented by Finance Minister P. Chidambaram in February 2013, the Indian economy is expected to grow by 6.1 to 6.7 percent. The survey reports that the economic downturn is more or less over and that the Indian economy is looking up. It also predicts global economic recovery in 2013 and says that various government measures should help in improving the Indian economys outlook for 2013-14.

India GDP Growth Rate

India is the worlds tenth largest economy and the second most populous. The most important and the fastest growing sector of Indian economy are services. The Gross Domestic Product (GDP) in India expanded 1.30 percent in the fourth quarter of 2012 over the previous quarter. GDP Growth Rate in India is reported by the OECD. Historically, from 1996 until 2012, India GDP Growth Rate averaged 1.63 Percent reaching an all time high of 5.80 Percent in December

of 2003 and a record low of -1.70 Percent in March of 2009. In India, the growth rate in GDP measures the change in the seasonally adjusted value of the goods and services produced by the Indian economy during the quarter.

India Inflation Rate

The inflation rate in India was recorded at 4.70 percent in May of 2013. Inflation Rate in India is reported by the Ministry of Commerce and Industry. Historically, from 1969 until 2013, India Inflation Rate averaged 7.73 Percent reaching an all time high of 34.68 Percent in September of 1974 and a record low of -11.31 Percent in May of 1976. In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods. In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent). Food Articles from the Primary Articles Group account for 14.3 percent of the total weight. The most important components of the Manufactured Products Group are Chemicals and Chemical products (12 percent of the total weight); Basic Metals, Alloys and Metal Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and Transport, Equipment and Parts (5.2 percent).

India Interest Rate

The benchmark interest rate in India was last recorded at 7.25 percent. Interest Rate in India is reported by the Reserve Bank of India. Historically, from 2000 until 2013, India Interest Rate averaged 6.57 Percent reaching an all time high of 14.50 Percent in August of 2000 and a record low of 4.25 Percent in April of 2009. In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase rate.

INDUSTRY ANALYSIS
An industry analysis helps inform business managers about the viability of their current strategy and on where to focus a business among its competitors in an industry. The analysis examines factors such as competition and the external business environment, substitute products, management preferences, buyers and suppliers. Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. Major factors can include the power wielded by suppliers and buyers, the condition of competitors and the likelihood of new market entrants. Data needs for industry analysis Industry analysis requires a variety of quantitative and qualitative data. Though one single source for all the data needs might not found, industry associates, business publications and the department of economic analysis perform a comprehensive industry analysis. A suggestive list of data categories that are utilized for performing industry analysis is listed below. Product lines Product growth Complementary product Economics of scale Suppliers Labors Substitute products Product pattern (cyclical, seasonal) Cost structure

THE INDIAN BANKING SECTOR REVIEW

The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. It is no longer confined to only metropolitans in India; in fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. CURRENT SITUATION Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 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 67,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 78 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Over the last four years, Indias economy has been on a high growth trajectory, creating unprecedented opportunities for its banking sector.

Most banks have enjoyed high growth and their valuations have appreciated significantly during this period. Looking ahead, the most pertinent issue is how well the banking sector is positioned to cater to continued growth. A holistic assessment of the banking sector is possible only by looking at the roles and actions of banks, their core capabilities and their ability to meet systemic objectives, which include increasing shareholder value, fostering financial inclusion, contributing to GDP growth, efficiently managing intermediation cost, and effectively allocating capital and maintaining system stability.

BANKING STRUCTURE IN INDIA The banking institutions in the organized sector, commercial banks are the oldest institutions, some them having their genesis in the nineteenth century. Initially they were set up in large numbers, mostly as corporate bodies with shareholding with private individuals. Today 27 banks constitute a strong Public Sector in Indian Commercial Banking. Commercial Banks operating in India fall under different sub categories on the basis of their ownership and control over management; Public Sector Banks Public Sector Banks emerged in India in three stages. First the conversion of the then existing Imperial Bank of India into State Bank of India in 1955, followed by the taking over of the seven associated banks as its subsidiary. Second the nationalization of 14 major commercial banks in 1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks. New Private Sector Banks The Narasimham Committee on financial sector reforms recommended the establishment of new banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in India in January 1993. These guidelines aim at ensuring that new banks are financially viable and technologically up to date from the start. They have to work in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public. Eight private sector banks have been established including banks sector by financially institutions like IDBI, ICICI, and UTI etc. Local Area Banks Such Banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 districts. At present, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh.

 Cooperative Banks Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit institutions. These have been made in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit throughout the country. Yet, there financial position is not sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis. The cooperative banks have been set up under various Cooperative Societies Acts enacted by State Governments.

KEY PLAYERS Andhra Bank Allahabad Bank Punjab National Bank UTI Bank Kotak Mahindra Bank Citibank HSBC Bank American Express Bank Stat Bank of India Vijaya Bank HDFC Bank ICICI Bank Centurion Bank of Punjab Standard Chartered Bank State Bank of Mysore ABN AMRO

ANALYSIS OF INDIAN BANKING INDUSTRY

The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. 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 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).

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.

OPPORTUNITIES AND CHALLENGES FOR PLAYERS The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, 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. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in India, competition from foreign banks will only intensify. Fourth, 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. TECHNOLOGY IN BANKING Technology will bring fundamental shift in the functioning of banks. It would not only help them bring improvements in their internal functioning but also enable them to provide better customer service. 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. Entry of ATMs has changed the profile of front offices in bank branches. Customers no longer need to visit branches for their day to day banking transactions like cash deposits, withdrawals, cheques collection, balance enquiry etc. E-banking and Internet banking have opened new avenues in convenience banking. Internet banking has also led to reduction in transaction costs for banks to about a tenth of branch banking. Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Banks, this would also enable development of appraisal and monitoring tools which would make credit management much more effective. The result would be a definite reduction in transaction costs, the benefits of which would be shared between banks and customers. While application of technology would help banks reduce their operating costs in the long run, the initial investments would be sizeable. IT spent by banking and financial services industry in USA is approximately 7% of the revenue as against around 1% by Indian Banks. With greater use of technology solutions, we expect IT spending of Indian banking system to go up significantly. One area where the banking system can reduce the investment costs in technology applications is by sharing of facilities. We are already seeing banks coming together to share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs coming together to share facilities in the area of payment and settlement, back office processing, data warehousing, etc. While dealing with technology, banks will have to deal with attendant operational risks. This would be a critical area the Bank management will have to deal with in future.

REGULATORY AND LEGAL ENVIRONMENT The advent of liberalization and globalization has seen a lot of changes in the focus of Reserve Bank of India as a regulator of the banking industry. De-regulation of interest rates and moving away from issuing operational prescriptions have been important changes. The focus has clearly shifted from micro monitoring to macro management. Supervisory role is also shifting more towards off-site surveillance rather than on-site inspections. The focus of inspection is also shifting from transaction-based exercise to risk-based supervision. In a totally de-regulated and globalised banking scenario, a strong regulatory framework would be needed. The role of regulator would be critical for: Ensuring soundness of the system by fixing benchmark standards for capital adequacy and prudential norms for key performance parameters. Adoption of best practices especially in areas like risk-management, provisioning, disclosures, credit delivery, etc. Adoption of good corporate governance practices. Creation of an institutional framework to protect the interest of depositors. Regulating the entry and exit of banks including cross-border institutions. Further, the expected integration of various intermediaries in the financial system would add a new dimension to the role of regulators. Also as the co-operative banks are expected to come under the direct regulatory control of RBI as against the dual control system in vogue, regulation and supervision of these institutions will get a new direction. In the emerging banking and financial environment there would be an increased need for self-regulation. This is all the more relevant in the context of the stated policy of RBI to move away from micro-management issues. Development of best practices in various areas of banks working would evolve through selfregulation rather than based on regulatory prescriptions. Role of Indian Banks Association would become more pronounced as a self regulatory body. Development of benchmarks on risk management, corporate governance, disclosures, accounting practices, valuation of assets, customer charter, Lenders Liability, etc. would be areas where IBA would be required to play a more proactive role. The Association would also be required to act as a lobbyist for getting necessary legislative enactments and changes in regulatory guidelines. HR practices and training needs of the banking personnel would assume greater importance in the coming days. Here again, common benchmarks could be evolved. Talking about shared services, creation of common database and conducting research on contemporary issues to assess anticipated changes in the business profile and market conditions would be areas where organizations like Indian Banks Association are expected to play a greater role.

FINANCIAL ANALYSIS