Indian Banking Sector Growth and Challenges

Indian Banking System 201 0
A PROJECT REPORT ON COMPREHENSIVE STUDY OF INDIAN BANKING SYSTEM
SUBMITTED TO: MAHARISHI DAYANAND UNIVERSITY, ROHTAK IN THE FULFILMENT OF DEGREE OF MBA (SESSION 200 !2010"
UNDER THE GUIDENCE OF: MRS# BHA$ANA SHARMA (COLLEGE FACULTY"
SUBMITTED TO: SUBMITTED BY: THE CANTROLLER OF E%AM KAUSHIK M#D#U#, ROHTAK (FINAL"
1
BAJRANG MBA

REG#NO# 0&! VB!'&( D#A#V# INSTITUTE OF MANAGEMENT, FARIDABAD (HARYANA"
ACKNOWLEDGEMENT
I would take this opportunity to thank Mrs. Bhawana Sharma, Faculty, D.A.V. Institute of Mana ement! "ari#a$a# for being cooperative and helpful guide. A note of thanks is due to all those, too many to single out by names, which have helped in no small measure by cooperating during by providing their valuable time, inputs and assistance. Their support, guidance and motivation were very valuable and encouraging.
Ba%ran Kaushi&
'(E"ACE
The introduction and application of the concept of customer services entered in a welcoming way in India only after independence. The banking system in India has come a long way during the last two centuries. Its growth was faster and the coverage wider since 19 9. In 19 9a ma!or position of banking sector was entrusted to the public sector. This process continued and embraced few private banks in 19"#. The transfer of ownership of banks from the public to private was aimed at entrusting the banks with greater responsibilities for the economic development of India by taking banking services to the masses and taking special care of the weaker section of the society and the priority sector of the economy. Though the number of banks offices magnitude and the variety of their operations has grown considerably during the period of near about three decades, but it appears that the banking sector has entered into serious among customers. For overcoming this problem, banking industry should seek introspection and adopt refined management techni$ues. It has been endeavor of this study to analy%e the present state of various banks keeping in view the primary data has been collected regarding the present state of loan schemes in various banks by using a $uestionnaire.
DECLA(ATION
I undersigned Ba%ran Kaushi& The student of &'A (rd )em. hereby declare that the pro!ect work in my own work and has been carried out under the guidance of Mrs. Bhawana Sharma Faculty &ember of DAV Institute of Mana ement of )tudies in "ari#a$a# )*ar+ana,. This *eport has been submitted to M.D. -ni.ersit+ for +valuation.
,ate.lace-
Ba%ran Kaushi&
Ta$/e of 0ontents
S. No. 1. 6.
+/+01TI2+ )1&&+*3 I7T*8,10TI87 *+2I+9 8F :IT+*AT1*+ 8';+0TI2+) 8F T<+ )T1,3 )I=7IFI0A70+ 8F T<+ )T1,3 0870+.T1:I>ATI87
F801) 8F T<+ .*8':+&
Indian 'arti0u/ars
Banking System'a 201 es 0 #45#"

#9519
:I&ITATI87 8F T<+ )T1,3
(.
*+)+A*0< &+T<8,8:8=3 *+)+A*0< ,+)I=7 )A&.:I7=- ,+)I=7 A7, .*80+,1*+
6#56?
?.
I7,IA7 +0878&3 &A0*8 FA0T8*) AFF+0TI7= I7,IA7 'A7@I7=
6A5(1
)+0T8*
A.
I7,IA7 'A7@I7= I7,1)T*3 7++, F8* 'A7@) I7,IA7 'A7@I7= )+0T8* +/.+*I+70+
I7,IA7 FI7A70IA: )+*2I0+) )+0T8* SWOT
(65(4
)T*10T1*+ 8F T<+ I7,IA7 'A7@I7= )+0T8* 0*+,IT =*89T<
("5?1
4.
&I0*8 FA0T8*) AFF+0TI7= I7,IA7 'A7@I7= I7,1)T*3 :8A7 ,+&A7, *I)I7= F17,I7= 7875.+*F8*&I7= :8A7) T+0<78:8=3
6
?65?"
".
2A:1ATI87 T88:)-
?95A4
EXECUTIVE SUMMAR
E2EC-TIVE S-MMA(3
The Indian +conomy is driven by strong fundamentals with =,. growth at 9.1B for <1 F3#4 C strongest growth in any siD months since <1 F3#? and uptrend in Industrial 0ycle with Average IndeD of Industrial .roduction growth at 1#.6B being the strongest run in the past 11 years. 8n political front, the Indian =overnment has signed nuclear deal with America indicating IndiaEs importance in the global conteDt opening up many opportunities. Along with this, 0hinese .resident <u is eDpected to visit India. This will improve trade and other ties between two of the fastest growing economies. In 0apital &arket, )trong foreign inflows with .ortfolio flows of nearby 1), 9.6bn took ')+ )enseD to 1?,### F GA#B higherH compared to F3 #A5# . The Indian corporate raised 1), bn by issuing Initial public offer in India and abroad. <igh 0redit growth at (#B, it continued the trend of last A years where it has averaged around 6AB and lastly &IA activity which was at its peak with sectors beyond IT and .harma making global I domestic ac$uisitions.
The high growth sectors are .ower where power ministry and local private players
announce 9 ultra mega pro!ects G?,### &9 eachH provides visibility on power I infra front.
*etail 5 a .oint of inflection with ma!or Indian corporate announcing plans, entry of
world ma!ors like 9al5&art I foreign investment allowed in single brand retail and *eal +state with ma!or huge build5out plans and )pecial +conomic >one policy of government is ma!or driver of growth.
'anking in which 'anks are allowed to raise hybrid capital which opens new avenues for
funding credit growth. As such, the report focus on change factors in 'anking Industry as this industry is eDpected to have ma!or impact on Indian +conomy.
"
I#TR$%UCTI $#
1&
INT(OD-CTION
In India, given the relatively underdeveloped capital market and with little internal resources, firms and economic entities depend, largely, on financial intermediaries to meet their fund re$uirements. In terms of supply of credit, financial intermediaries can broadly be categori%ed as institutional and non5institutional. The ma!or institutional suppliers of credit in India are banks and non5bank financial institutions Gthat is, development financial institutions or ,FIsH, other financial institutions GFIsH, and non5banking finance companies G7'F0sH. The non5institutional or unorgani%ed sources of credit include indigenous bankers and money5lenders. Information about the unorgani%ed sector is limited and not readily available. An important feature of the credit market is its term structureGaH )hort5term credit GbH &edium5term credit GcH :ong5term credit. 9hile banks and 7'F0s predominantly cater for short5term needs, FIs provide mostly medium and long5term funds.
11
(EVIEW O" LITE(AT-(E

htt4566in#ia4ost.0om6arti0/e6te0h$i76189:6 IA Ban& ties u4 with SBI for mone+ transfers Sun#a+! 8;.<9.<88=! 115>;4m )GMT?=, NEW @E(SE3- Indus American 'ank has tied up with )tate 'ank of India to offer money transfer services to India for its clients. 1nder the new money transfer service, which will provide eDpanded services to Indus American 'ank customers can eDpect service at over 1?,### branch locations of )tate 'ank of India within India, and at over 1?,### additional *T=) participating banks. Funds remitted from Indus American 'ank would reach recipients typically within 6? hours. As the largest bank in India, )tate 'ank of India offers eDcellent eDchange rates which are now available to Indus American 'ank customers. India is one of the biggest destinations for foreign remittances. htt4566www.m+iris.0om6newsCentre6news'o4u4.4h4A fi/e(B<88=8;<>1C>8898D9E#irB<88=68;6<>Ese0IDB/i.enews
ICICI Ban& a//ots eFuit+ shares I0I0I 'ank allotted 14,"## e$uity shares of face value of *s 1# each on )ep. 1", 6##4 under the employees stock option sceme, 6### G+)8)H.I0I0I 'ank GI0I0I'A7@H was promoted in 199? by I0I0I, an Indian development financial institution. The two entities subse$uently merged to become the largest commercial bank in the private sector.
12

)hares of the company gained *s 4.4A, or 1.("B, to settle at *s A 9.9. The total volume of shares traded was 14(, AA at the ')+.GTuesdayH
*D"C Asset Mana ement to /aun0h #e$t fun# on Se4t <= Tue Se4 <>! <88= 1<5>84m IST &1&'AI G*eutersH 5 <,F0 Asset &anagement 0o :td said on Tuesday that it will launch a close5ended debt fund on )ept. 64. The fund, <,F0 F&. 1"& )eptember 6##4, will be open for subscription till 8ct. ". It will invest at least # percent of the assets in debt and money market instruments and the rest in government securities, the fund house said. *D"C to 0ut interest rates E0onomi0 Times! In#ia ? Sat Se4 <<! <88= 1<51D4m IST &ortgage lender <ousing ,evelopment Finance 0orp is likely to cut its interest rates neDt week, the +conomic Times reported on )aturday. JThe cost of wholesale funding has come down and we are taking a look at passing on the benefits to borrowers,J <,F0 0hairman ,eepak .arekh was $uoted as saying. The report also $uoted <,F0 &anaging ,irector @eki &istry as saying the company was looking at a half percentage point cut and that the new rates would be announced neDt week.
13
OBJECTIVES OF THE STUDY

TodayEs banking sector play a dominant role regarding investment decision. It basically
tells about how these funds are effectively and efficiently utili%ed in order to maDimi%e profits.
To study the growth and performance of banking company. To find out what are the policies that we have to be adopted to increase the goodwill of
the company.
To provide suggestions for better functioning of business. To know about the various loan schemes of these two banking companies i.e. I0I0I I
)'I.
14
SIGNI"ICANCE O" T*E ST-D3

To make a detailed study of various financial services provide by the different banks. To analy%e customers view point regarding their banks. To study effective and most popular bank among the customers regarding its services. To find out the rate of interest of banks and reaction of customers on it. To make analysis on the economic benefits provided by various banks. )uggest the investors whether to invest in shares of 'anking 0ompanies.
15
CONCE'T-ALIGATION
The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the *eserve 'ank of India G*'IH, &inistry 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 favourably with banking sectors in the region on metrics like growth, profitability and non5performing assets G7.AsH. A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. <owever, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. IndiaEs banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. 9hile the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel continued growth, which has harmed the long5term health of their economies. In this Kwhite paperL, we emphasi%e the need to act both decisively and $uickly to build an enabling, rather than a limiting, banking sector in India
16
"OC-S O" T*E '(OBLEM

The research report concentrates on macro and micro factors affecting 'anking Industry, +volution of 'anking Industry and its current status. 2arious regulatory and reform processes also affect banking industry. The report also throws a light on them. The report finally ends with valuation of ma!or players in banking Industry and the ma!or challenges faced by this industry.
1. Ban&in Cha//en es It is eDpected that the Indian banking and finance system will be globally competitive. For this the market players will have to be financially strong and operationally efficient. 0apital would be a key factor in building a successful institution. The banking and finance system will improve competitiveness through a process of consolidation, either through mergers and ac$uisitions through strategic alliances. Technology would be the key to the competitiveness of banking and finance system. Indian players will keep pace with global leaders in the use of banking technology. In such a scenario, on5line accessibility will be available to the customers from any part of the globeM NAnywhereE and NAnytimeE banking will be reali%ed truly and fully. In this conteDt, the research paper approached KIndian 'anking )ystemL as the shape of the banking sector will be the result of a strong interplay between the decisions taken by policy makers and actions of bank managements.
17
<. Ban&in E.o/ution E (e u/ator+ "ramewor& Financial )ector *eforms set in motion in 1991 have greatly changed the face of Indian 'anking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberali%ation and globali%ation have resulted in changes in the intermediation role of banks. The pace of transformation has been more significant in recent times with technology acting as a catalyst. 9hile the banking system has done fairly well in ad!usting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under 9T8. 'anks will have to gear up to meet stringent prudential capital ade$uacy norms under 'asel II. In addition to 9T8 and 'asel II, the Free Trade Agreements GFTAsH such as with )ingapore, may have an impact on the shape of the banking industry. 'anks will also have to cope with challenges posed by technological innovations in banking. 'anks need to prepare for the changes. In this conteDt the need for drawing up a *oad &ap to the future assumes relevance. The last decade has seen many positive developments in the Indian 'anking )ector. The policy makers, which comprise the *eserve 'ank of India G*'IH, &inistry 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 non5performing assets G7.AsH. A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. <owever, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank
1!

penetration is far lower than in other markets. IndiaEs banking industry must strengthen itself significantly, if it has to support the modern and vibrant economy which India aspires to be, while the onus for this change lies mainly with bank managements, and enabling policy and regulatory framework will also be critical to their success.
9. Interna/ *in#ran0es to Ban&in In#ustr+ The research focuses on emphasi%ing the need of decisively and $uickly to build and enabling, rather than a limiting, banking sector in India. The ma!or challenges ahead for bank management are as follows First, cost management, a key to sustainability of bank profits as well as their long5term
viability.
)econd, recovery management, which is a key to the stability of the banking sector. Third, technological intensity of banking, an area where India happens to be a world leader in
information technology, but its usage by our banking system is somewhat muted. It is wise for Indian banks to eDploit this globally state5of5art eDpertise, domestically available, to their fullest advantage.
Fourth, risk management, 'anks can, on their part, formulate Nearly warning indicatorsE
suited to their own re$uirements, business profile and risk appetite in order to better monitor and manage risks. Fifth, governance because the $uality of corporate governance in the banks becomes critical as competition intensifies, banks strive to retain their client base, and regulators move out of controls and micro5regulation.
1"
LIMITATION O" T*E ST-D3

The scope of the study will be restricted to selected 'anks. &any of the respondents did not think hard enough while choosing the specific point. This could have led to a biased view and thus affected the analysis. There may be other events during the 0lean and 9indow .eriod which may distort the results.
2&
21
RESEARC' MET'$%$($ )
(ESEA(C* MET*ODOLOG3
'ro$/em Definition5
22

To determine and analy%e the hidden potential in 'anking sector in India so as to suggest the investors whether to invest in shares of 'anking 0ompanies.
O$%e0ti.e5 ,iscover insights into and develop an understanding of the various &acro and &icro +conomic Factors that have bearing on the functioning of the 'anking sector. +valuate the performance of some of the banks based on the past data and forecast the future prospects.
Va/uationThe pro!ect involves valuation of ma!or Indian 'anks including I0I0I 'ank, )'I and <,F0 'ank. The methodology followed is Target .ricing, which includes estimating growth rate by regression on historical sales to forecast neDt year sales, earning and .rofit and :oss account. Then +.) is calculated which is multiplied to <istorical .O+ to forecast intrinsic value of share.
(esu/t5 All shares are undervalued and eDpected to give positive risk ad!usted returns to investors. )ince the intrinsic value is more than current market price for all the companies, the share can be recommended to conservative investors.
(ESEA(C* DESIGN
23

+Dploratory *esearch ,esign because the problem re$uired an in5depth study of all the related variables. 'ast information an# fore0asts5 0ollected the past information in the form of details of the various accounting statements GIncome )tatement, 'alance )heet etc.H, including the sales for the past 1# years G199456## H. Forecasts are done in relation to the future performance in terms of sales for <,F0 'ank, I0I0I 'ank, and )'I. 8ther forecasts include the +.) calculation and comparison of forecasted Future Target .rice with the 0urrent &arket .rice. 8nce the information was collected, the neDt step was to search for resources and constraints with respect to the area of research.
(esour0es an# Constraints5 (esour0es5 2arious .ublications like AT @earney *eport, 6##A FI00I )urvey on status of Indian 'anking Industry C .rogress and Agenda Ahead
Indian 'anks Association, 2arious 3ears, Performance Highlights of Banks G&umbaiH.
*eserve 'ank of India, 6##A, KAnnual .olicy )tatement for the year 6##A5# L G&umbaiH. 0ompany *eports
24

Constraints5
:ack of time availability with the people involved in any manner with the research especially when decisions were to be made $uickly. ,ifficulty in application of )tatistical Tools. ,ifficulty in making accurate forecasts because of presence of +conomic impediments like inflation, *'I policies etc.
25
SAM'LING5 DESIGN AND '(OCED-(E5

Sam4/in Te0hniFue5 HCon.enien0e Sam4/in I as a part of 7on5.robability sampling by taking the three banks as the ma!or performers in the Indian 'anking )ector and highlighters of sectorEs overall performance. Sam4/e Si7e5 )ample )i%e was restricted to (, including I0I0I 'ank, <,F0 'ank and )tate 'ank of India. EJe0utin the Sam4/in 'ro0ess5 Through making a comparison among the various key figures of sales, profits and accounting ratios deduced from accounting statements.
Metho# of Data Co//e0tion5 )econdary ,ata is collected to carry out the study. To review the literature available regarding the sub!ectM various !ournals, maga%ines, related research papers and Internet would be used
26
I#%IA# EC$#$M
27
INDIAN ECONOM3?MAC(O "ACTO(S A""ECTING INDIAN BANKING

&a!or 0hanges in F3 6## 5#4
*obust economic growth in F3#4. =,. is increased by over "B in F3#4M Agriculture,
industry and services to grow at 1.4B, 1#.AB and 1#.4B respectively

*abi season eDperiences normal monsoon II. GIndeD of Industrial .roductionH growth dips in 8ctober 6## . The poor performance
of the manufacturing sector, which forms "#B of the II. indeD lead to a blip in its robust growth trend for the past 9 months. 'oth mining and electricity grew faster than last year at ?B and 9.4B 2s C #.1B and 4.4B respectively
9.I G9holesale .rice IndeDH rose to A.?(B for the week ending ,ecember 1 M higher
inflation in primary commodities remains. The inflation in the coming weeks may remain high due to lower base effect.
0** G0ash *eserve *atioH hike of A# bps to absorb *s.1(Abn from the system. The 0**
rate hike of A#bps came as a surprise but it reflects that *'IEs intention of controlling credit off5take and li$uidity management by raising repo and reverse repo rate could not achieve the desired results due to which *'I used 0** rate hike C a new instrument to control li$uidity +Dports growth back on track in 7ovember 6## . 8n the basis of the 'o., in <1F3# eDports grew at 6(B, imports at 6A.(B resulting in the trade balance of 1)P(Abn. 7et invisibles grew by 14. B to 1)P6(.Abn and capital inflows Gin the form of F,I, 7*I deposits and +0'H at 1)P6#.(bn Ga yoy growth of ?9BH brought the balance of payment to 1)P". bn, Ga yoy growth of ((BH. *upee appreciates further against dollar and yen but continues to depreciate against +uro and pound on an 3T, basis as on ,ecember 6## . In real terms, from April 6## to 8ctober 6## , the rupee appreciated by 1."B vis5Q5vis a basket of siD currencies.
2!
The In#ian E0onom+ has seen ma%or Ma0ro 0han es in5
1. Gross Domesti0 'ro#u0t5 The Indian +conomy is driven by the strong fundamentals and uptrend in industrial cycle. The Indian economy maintained a strong growth momentum for the third successive year in 6##A5# with real =,. growth accelerating to ".?B 6##A5# . The services sector recorded double digit growth to contribute nearly three5fourths of incremental =,.. A consistent increase in domestic investment rate from 6(.#B of =,. in 6##15#6 to (#.1B in 6##?5#A supported a high credit growth witnessed during the past few years. The manufacturing sector C the key growth driver for banking credit, clocked a healthy growth of 9.#B during F3# .
)ource- www.rbi.org.in In F3 # 5#4, services sector account for ma!or AAB of India =,. followed by 6AB in Industrial sector and 6#B in agriculture sector. F3#4 2s R6F3# , the growth rate in =,. components are as follows-
2"

Agriculture- 1.4B Industry- 1#.AB )ervice- 1#.4 <. "DI Confi#en0e In#eJ5 *elaDation of foreign direct investment rules has eDpanded the mountain of capital in every sector of Indian economy. The government is making efforts in liberali%ing the guidelines and norms for investment through F,I, making them more 7*I friendly. &ainly due to efforts taken by Indian =overnment, Indian rank 6nd among all countries in the world on F,I 0onfidence IndeD.
)ource- AT @earney *eport, 6##A
)# Inf/ation5
Inflation remained largely benevolent due to investment driven nature of growth and subsidi%ed nature of oil prices as pass5on of international crude price rise remained incomplete in India. 9.I Inflation has risen to A.?AB for the week ended 7ovember 1", 6## after remaining in the range of ?.#5A.#B earlier. *'I has repeatedly cautioned that maintaining inflation in the target range may call for substantial monetary tightening should crude prices persist at high level. The money supply has grown by 1".4B yoy till 7ovember
3&

1#, 6## during the current fiscal, which poses a significant threat to *'IEs efforts of containing inflation in the desired range of A.#5A.AB.
&# Gross "is0a/ Defi0it5
The gross fiscal deficit G=F,H to =,. ratio for 6##A5# was at ?.1 per cent as against the budget estimate of ?.( per cent. Fiscal and revenue deficit for April57ovember 6## widened to 46."B of '+ and 99.4B of '+ 2s 4?.4B of '+ and 91.AB of '+ respectively in April5 7ovember 6##A. The current levels are much higher than the last monthEs fiscal deficit of A". B of '+ and revenue deficit of49.?B of '+. The improvement in the =F, was facilitated by a decline in capital outlay and the availability of disinvestment proceeds. The revenue deficit, though lower in absolute terms, remained at budgeted level of 6.4 per cent of =,. in 6##A5# .
)ource- *'I, &inistry of commerce and Industry
31
*# Interest (ate5
The yield on dated government securities G=5)ecH has been moving up since the beginning of F3#A. The yield on 1# year paper began during R1 to close the $uarter at ".16B. ,uring ;uly # , it continue to move up to ".?6B but reacted sharply thereafter to once again come down to 4.?B at present as the market participants believed that 1) Fed and other central banks worldwide would not only pause rate hikes but soon get into rate the current fiscal at 4.A#B but moved up $uite sharply cut mode.
)ource- *'I *eal interest rate indicated by spread between inflation and 1# year benchmark yield has trended in the range of 65?B. The real interest rate in developed economies is normally in the range of 65
32

(B. <owever, the marginal productivity of capital being much higher in the developing economy like India. ,ue to this, real interest should be higher than those prevailing in more matured economies.
(# (isin Oi/ 4ri0es an# EJ0han e (ate5
9orld over, the central bankers led by 1) Federal *eserves embarked on withdrawal of monetary accommodation through a series of rate hikes as the rising oil and asset prices threatened the global economies with inflationary pressures. The 1) Fed, which embarked on an aggressive rate hike campaign through 14 consecutive rate hikes of the magnitude of 6A bps, several economies including +uro5%one and ;apan hiked their key policy rates. In response to the same, *'I has hiked the key policy *epo and *everse *epo rates five times over the past two years. This has led to a significant hardening of interest rates over the past ?5A $uarters, which has adversely impacted the cost of funds for banks.
'# Ca4ita/ Mar&et5
Financial markets in India and globally have seen little volatility over the last few 3ears. There have been only two spikes in India C in April 6##? when the 1.A government came to power and in &ay 6## . In India, stock markets will be the most impacted by negative news flows as other areas where shocks can be absorbed such as the currency, interest rate and corporate bond markets are not free or well developed. The 0apital &arket has seen balance sheet value being unlocked through moneti%ation of embedded assets, demergers, I.8s, etc. Indian companies continue to build value in the balance sheet as newer opportunities emerge through smart capeD, inorganic growth and eDtracting value thru the revenue statement.
33
I#%IA# BA#*I#) I#%USTR

34
INDIAN BANKING IND-ST(3

In India, given the relatively underdeveloped capital market and with little internal resources, firms and economic entities depend, largely, on financial intermediaries to meet their fund re$uirements. In terms of supply of credit, financial intermediaries can broadly be categori%ed as institutional and non5institutional. The ma!or institutional suppliers of credit in India are banks and non5bank financial institutions Gthat is, development financial institutions or ,FIsH, other financial institutions GFIsH, and non5banking finance companies G7'F0sH. The non5institutional or unorgani%ed sources of credit include indigenous bankers and money5lenders. Information about the unorgani%ed sector is limited and not readily available. An important feature of the credit market is its term structureGaH )hort5term credit GbH &edium5term credit GcH :ong5term credit. 9hile banks and 7'F0s predominantly cater for short5term needs, FIs provide mostly medium and long5term funds.
Nee# for Ban&s
*ole of 'ank
35
0hannel household savings
*isk Transformation
)ervice .rovider
In#ian Ban&in Se0tor EJ4erien0e

India inherited a weak financial system after Independence in 19?4. At end519?4, there were 6A commercial banks in India, with an asset base of *s. 11.A1 billion. 0ommercial banks mobili%ed household savings through demand and term deposits, and disbursed credit primarily to large corporations. Following Independence, the development of rural India was given the highest priority. The commercial banks of the country including the I'I had till then confined their operations to the urban sector and were not e$uipped to respond to the emergent needs of economic regeneration of the rural areas. In order to serve the economy in general and the rural sector in particular, the All India *ural 0redit )urvey 0ommittee recommended the creation of a state5partnered and state5sponsored bank by taking over the I'I, and integrating with it, the former state5owned or state5associate banks. Accordingly, an act was passed in .arliament in &ay 19AA, and the )tate 'ank of India G)'IH was constituted on ;uly 1, 19AA. &ore than a $uarter of the resources of the Indian banking system thus passed under the direct control of the )tate. )ubse$uently in 19A9, the )tate 'ank of India G)ubsidiary 'ankH Act was passed G)'I ActH, enabling the )'I to take over " former )tate5associate banks as its subsidiaries Glater named AssociatesH. The =oI also felt the need to bring about wider diffusion of banking facilities and to change the uneven distribution of bank lending. The proportion of credit going to industry and trade increased from a high "(B in 19A1 to 9#B in 19 ". This increase was at the eDpense of some crucial segment of the economy like agriculture and the small5scale industrial sector. 'ank failures and mergers resulted in a decline in number of banks from ?" Gincluding 94 scheduled
36

commercial banks or )0's and AA1 non5)0'sH in 19?4 to "9 in 19 9 Gcomprising 4( )0's and 1 non5)0'sH. The lop5sided pattern of credit disbursal, and perhaps the spate of bank failures during the siDties, forced the government to resort to nationali%ation of banks. In ;uly 19 9, the =oI nationali%ed 1? scheduled commercial banks G)0'sH, each having minimum aggregate deposits of *s. A## million. )tate5control was considered as a necessary catalyst for economic growth and ensuring an even distribution of banking facilities. )ubse$uently, in 19"#, the =oI nationalised another banks6, each having deposits of *s. 6,### million and above.
The nationali%ation of banks was the culmination of pressures to use the banks as public instruments of development. The =oI imposed Ssocial controlE on banks. <owever, by the 19"#s, it was generally perceived that the operational efficiency of banks was declining. 'anks were characteri%ed by low profitability, high and growing non5performing assets G7.AsH, and low capital base. Average returns on assets were only around #.1AB in the second half of the 19"#s, and capital aggregated an estimated 1.AB of assets. .oor internal controls and the lack of proper disclosure norms led to many problems being kept under cover. The $uality of customer service did not keep pace with the increasing eDpectations. In 1991, a fresh era in Indian banking began, with the introduction of banking sector reforms as part of the overall economic liberali%ation in India.
37
INDIAN "INANCIAL SE(VICES SECTO( SWOT ANAL3SIS

Stren ths5
.roven asset $uality resilience in past downturns .roven management teams, track record )table industry dynamics 9ell5established regulatory framework )tableOlow 7.: formation rates
Wea&nesses5
0ontinued crowding out effect from govt budget deficit, combined with accelerating private sector credit demands 8wnership restrictions 0onstraints on state5owned banksT micro reforms, including <*, staff cut, branch cut constraints
3!

O44ortunities5
Improving secular =,. growth prospects +stablishment of special economic %ones likely to promote further industriali%ation 3ears, if not decades, of catch5up economicsU low per capita income, educated workforce *apid financial deepening, i.e. loan growth as multiple of nominal =,. growth *ising consumer spending, consumer credit business *ising corporate capeD, investments &IA optionality
Threats5
J*unning on emptyJ in terms of li$uidity Tightening in global li$uidity may trickle down to India .otentially hawkish *'I stance on inflationOmonetary policy .otential rise in long bond V yields, &T& risk for banks .otential for valuation pullback, should earnings delivery disappoint eDpectations
3"
STRUCTURE $+
4&
,anking
ST(-CT-(E O" T*E BANKING SECTO(
The banking sector in India functions under the umbrella of the *'IUthe regulatory, central bank. The *eserve 'ank of India Act was passed in 19(? and the *'I was constituted in 19(A as the apeD bank. The 'anking *egulations Act was passed in 19?9. This Act brought the *'I under government control. 1nder the Act, the *'I received wide5ranging powers in regards to establishment of new banks, mergers and amalgamations of banks, opening and closing of branches of banks, maintaining certain standards of banking business, inspection of banks, etc. The Act also vested licensing powers and the authority to conduct inspections with the *'I. 'anks in India can broadly be classified as regional rural banks or **'s, scheduled commercial banks or )0's, and co5operative banks. The scope of the report includes the )0's only(. The )0's for the purpose of this comment can be classified into the following three categories .ublic sector banks or .)'s G)'I I its associates, and nationali%ed banksHM .rivate sector banks Gold and newHM and Foreign banks
41

No. of Banks in India for FY 05-06
69 6# (#
"
)'I I Associa tes
7a tiona lised 'anks

0ategory of 'anks
.riva te 'a nks
Foreign 'a nks
)ource- I'A
Asset Size of Banks for FY 05-06 ('000 crores)

1(64
A A 19" 6#1
)'I I Associa tes
7ationa lised 'a nks

0ategory of 'anks
.riva te 'a nks
Foreign 'anks
)ource - I'A In terms of asset si%e, among Foreign banks C 0itibank, <)'0 and )tandard 0hartered bank are leaders with asset base of *s.?A?(4 cr, *s.(4?4( cr and *s.?"?16 cr. *esp. in F3 #A5# . Among private sector banks, I0I0I 'ank is the leader with asset base of *s.6A1("9 cr followed by <,F0 'ank of si%e *s.4(A# cr and 1TI 'ank of si%e *s.?94(1 cr. In terms of asset si%e, public sector banks have highest base compared to private and foreign banks. )'I I Associated
42

have asset base of *s. 91"46 cr while other banks such as '8', '8I, 0anara 'ank and .7' 'ank have each more than *s.1##### cr.
Cre#it Growth
The bank lending has eDpanded in a number of emerging market economies, especially in Asia and :atin America, in recent years. 'ank credit to the private sector, in real terms, was rising at a rate between 1# and ?# per cent in a number of countries by 6##A G'I), 6## H. )everal factors have contributed to the significant rise in bank lending in emerging economies such as strong growth, eDcess li$uidity in banking systems reflecting easier global and domestic monetary conditions, and substantial bank restructuring. The recent surge in bank lending has been associated with important changes on the asset side of banks balance sheet. First, credit to the business sector 5 historically the most important component of banks assets C has been weak, while the share of the household sector has increased sharply in several countries. )econd, banks investments in =overnment securities increased sharply until 6##?5#A. As a result, commercial banks continue to hold a very large part of their domestic assets in the form of =overnment securities 5 a process that seems to have begun in the mid5199#s
43
44
MICR$ -ACT$RS
MIC(O "ACTO(S A""ECTING INDIAN BANKING IND-ST(3

Loan Deman#5
45

8ver the past three years, Indian 'anking Industry has seen sustained strength in credit growth, which is not !ust a function of economic buoyancy but also the broad5basing of loan demand. This has recently been articulated by the central bank tooA contextual analysis of the co-movement between macroeconomic performance and bank credit in the current phase of the business cycle suggests that factors other than demand may also be at work: financial deepening from a low base structural shifts in supply elasticity!s rising efficiency of credit markets and competitive pressures augmenting the overall supply of credit"# G*eserve 'ank of India, $onetary Policy %eview, 8ctober 6## H. :oan growth sustained for very long
&ource: %B'
The slowdown of the mid5199#s hit the banks very hard because corporate, which accounted for a lionEs share of bank credit, went into a less profitable and hence a financial restructuring mode. There was no retail credit then, banks did not focus on )mall and &edium +nterprises and farm lending was done grudgingly, under compulsion. Along with the diversification of the pie that
46

keeps the tempo of demand intact, after a long time industry has also started demanding higher levels of credit. In the five years prior to F3#A, growth in industrial credit was almost wholly driven by infrastructure. There is a perceptibly wider participation from other segments during F3#A and F3# . If a substantial portion of loan growth gets driven by the banking system taking away market shares from informal sectors C this is clearly happening to farm credit, )&+s and to a limited eDtent non5mortgage retail C interest rate considerations influencing demand will be relatively low. )&+s and the rural folk have accessed credit from other sources at eDorbitant interest rates, and hence banksE rates going by 6##5(##bps is not so meaningful. That eDplains the apparent lack of correlation between rates that have been rising and loan demand.
(isin fun#in 0osts with soft /en#in rates irrationa/5
'/ent+ of histori0a/ e.i#en0e of return of 4ri0in 4ower to $an&s5 0oncerns are often eDpressed about banksE ability to increase lending rates in the face of competition and government pressure. The reality is that banks, which led the mortgage price war, have increased mortgage rate by 6##5(##bps from the bottom, and is yet to see significant resistance. That .)1 banks raised prime lending rates twice in. 0ompetition from overseas borrowings is a serious factor only with AAA companies, and banks have reduced eDposure to them considerably during the last (5? years. =overnment stand is understandably against higher interest rates. <owever, it is unlikely that the government will be able to influence the course of interest rates single5handedly.
Inf/eJi$i/it+ of #e4osit rowth a m+th5 9ith 1##56##bps increase in the card rates of deposits, banks have managed to move the deposit growth rate from 1A51 B to 195 6#B, on a larger base. In the last five years, household financial
47

savings have moved out of e$uities and long5term products to bank deposits in percentage terms. The point to note here is that component of cash GcurrencyH has marginally risen C thatEs the real, incremental opportunity as more cash from chests moves into bank deposits first before potentially going to other avenues. The R?F3#4 is eDpected to be a period of margin pressure. This is because as the last interest5 rate cycle showed, deposit costs increase first, and followed by lending rates. R? is also usually a period of tight li$uidity, and the *'I could be increasing 0** or ):* re$uirements to further tighten the li$uidity. Also, banks will be cautious about the actual implementation of the lending rate increases and may do it in a graduated fashion so as not to invite outright resistance or overt attention from the government. <,F0 'ank, .7', )'I and a few others have nevertheless already made a beginning by increasing their prime lending rates after the cash reserve ratio hike by the *'I. <owever, the fight for deposits has intensified and it is possible that in R?F3#4 banks could be increasing their eDposure to high5cost wholesale deposits, taken at higher than card rates. Ban&sK in0rease# ris& a44etite oo# for /oan +ie/#s5 The banksE lending risk appetite has increased significantly over the last five years C banks veering more towards lending at increasing spreads rather than investing in risk5free bonds. Accordingly, banks are willing to take higher risks, which is good for overall asset yields. In.estment s4rea#s ma+ in0rease in future5 As long5duration bonds at high interest rates have been coming up for maturity and getting re5 priced at lower interest rates, yields on investments have been continuously falling over the last few years.
Non L 'erformin Loans )N'Ls,5 0on0erns o.erstate#5
Loan rowth?N'L
4!

The asset price deflation Gread real estate pricesH may hurting banksE asset $uality has been blown out of proportion. (esi#entia/ mort a es5 It is very unlikely in near term that there can be a large5scale increase in delin$uencies on loans taken for the first house Gtypically self5occupiedHM unless there is a household income problem, it does not matter to the borrower whether the price of the house he is staying in is rising or falling. +ven then, with an average loan5to5value of 4AB, a 6AB fall is theoretically not possible. :T2 ratios had gone up to more risky levels at the peak of the mortgage boom. .roblems can arise more fre$uently for loans taken for the second house, typically for investmentOspeculation. 'anks have been reluctant to disclose the eDact volume of second houses financed. &ost banks claim that it is in the range of 65AB of incremental mortgage lending. There is a possibility that some individuals have been hiding from banks the fact that they already have one more loan, but this is becoming increasingly difficult with a credit bureau now in full swing. +ven if the assumption that 1#B of the outstanding mortgages are for the second house and all of that goes bad, it will mean 1B of the banking systemEs loans go bad. 0ommercial real estate- According to figures disclosed by the *'I itself, real estate loans constituted 6.#B of gross non5food credit of banks as of end5;une 6## . +ven if it has been growing at high percentage rates is not material as the base was very low. In any case, by increasing standard assets provisioning on these loans to 1##bps from 6Abps, risk weights from 1##B to 1A#B and instructing banks not to lend unless the developer has Kall the permissions. 8ne stark eDample of this is the largest bank )'I itself. In the mid 199#s, )'IEs portfolio was distributed between large corporate, farm credit and trade, with little coming from others. The )epE# portfolio looks dramatically different.
SBIKs /oan 4ortfo/io now Fuite #i.ersifie#
4"
)ource- 0ompany data, Cost of $orrowin has risen! $ut so ha.e in0omes5 The apparent disconnect between interest rates rising now for two years and lending not losing steam can be eDplained by iH rising incomes in case of individuals, thereby imparting increased thrust to retail lending, and iiH improved corporate profitability through better pricing power. 9hile there are several studies illustrating the household income growth in India, according to 7ational 0ouncil for Applied +conomic *esearch, an eDplosive growth is underway in the percentage of households earning *s91, ###51,###,### pa, the most prominent individual borrowers for banks. The corporate pricing power story is less known because of the media harping on high competition and margin compression. 9hile these issues cannot be summarily dismissed, it is a fact that manufactured product inflation has been rising. +ven the *'I has recently commented on the increased ability of manufacturers to pass on cost increases. And with a considerably de5 leveraged corporate India compared with the earlyOmid 199#s, these levels of increases in interest costs have been easily absorbed by companies.
Te0hno/o +5
5&

The trend in banking is changing from computeri%ation of branches to laying a common platform by having a core banking solution in all the branches. At the same time, Indian banks are looking at internet banking which promises to grow into an alternate self5service channel. As the mindset of the Indian customer undergoes a change, Indian banks need to encompass the eDtension of all the services that are re$uired and dictated by customers. In future, banks will need to focus on value5differentiating services by keeping in5<ouser their competitive advantages while partnering with others who complement its services. The emergence of peer5to5peer money transmission mechanisms Gsuch as 9estern 1nion &oney TransferH poses a challenge to current role of bankers and emphasi%es the role of robust payment systems like *T=) in maintaining and promoting financial stability. Areas of Im4ro.ement5 Few challenges associated with technology adoption by banks are Indian banks still donEt have the robust systems re$uired for efficient functioning of online banking. *'I has provided guidelines relating to security and other issues and hopefully, online banking will see a surge in the usage from current 1B to at least 1#B in the neDt couple of years. 'anks need to eDplore newer channels such as )&), 9A. and (= mobile telephony applications to facilitate online access to customers. 'anks, in a drive to carry on with tremendous eDpansion in terms of customer base, needs to have employees who are well informed about products and services and are comfortable with technology which re$uires eDtensive training. 'otentia/ 'itfa//s5 'anks should not get overwhelmed by the concept of automation and online banking. The banks need to reali%e that they need to maintain different delivery for different generations. 'anks still need to maintain brick5and5mortar locations that people feel comfortable with.
51
VA(UATI$# T$$(S
ICICI Ban&5
52

Business I0I0I 'ank was promoted in 199? by I0I0I :td., an Indian development financial institution. The two entities subse$uently merged to become the largest commercial bank in the private sector. A new generation bank, I0I0I 'ank started with all the latest technologies to hit the Indian banking industry in the second half of the nineties. All its branches are fully computeri%ed with the state5of5the5art technology and systems, networked through 2)AT technology. The bank is connected to the )9IFT International network. In 6##A, it eDpanded its network to A 6 branches and 1,91# AT&s. It continued to eDpand its electronic channels, namely internet banking, mobile banking, call centers and AT&s, and migrate customer transaction volumes to these channels. 8ver 4#B of customer induced transactions take place through these electronic channels. It has ac$uired a small *ussian banking entity, Investitsionno5@reditny 'ank GI@'H, which will help boost its corporate business and deposit franchise overseas. The bank has also built several strategic alliances with banks like 9ells Fargo in 1)A, :loyds T)' in 1@ and ,') in )ingapore.
I0I0I has entered into strategic alliance with .rudential plc. of 1@ for its mutual find
business. The duo has been fairly aggressive through their companies, .rudential I0I0I Asset &anagement 0ompany :imited and .rudential I0I0I Trust :imited. The bank is also keen to offer its services to the Indian agricultural sector. 8ver 6,### Internet kiosks and 4# agri5desks have been established in locations with large agricultural markets.
De.e/o4ments
I0I0I 'ank launched S&utual Fund )weep AccountS 5 an automatic sweeping facility which allows current account holders to park their short5term surpluses into li$uid mutual funds and earn higher returns. Initially, I0I0I 'ank current account customers will have the facility to invest their account surpluses in the li$uid fund schemes of .rudential I0I0I Asset &anagement 0ompany and =I0 &utual Fund.
53

The bank is in the process of the reverse merger of I0I0I with I0I0I 'ank. The merger of two wholly5owned subsidiaries of I0I0I, I0I0I .ersonal Financial )ervices :imited and I0I0I 0apital )ervices :imited, with I0I0I 'ank is also underway.
I0*A has assigned an A1F rating, indicating highest safety in the short5term, to the *s
A## crore certificates of deposit G0,H programme of I0I0I 'ank :td GI':H. The rating agency said in its report that the rating takes into consideration I':Ss strategic importance to its parent I0I0I, I':Ss comfortable profitability and capital ade$uacy, good control on asset $uality. I0I0I 'ank has tied up with &aster0ard International to launch I0I0I 'ank &aster0ard credit cards. At present I0I0I 'ankEs credit card base stands at around A, A#,###, while for debit cards it is ?,A#,###. I0I0I 'ank is the largest card issuer in the market. The bank is adding credit and debit cards at the rate of 1,##,### per month. The bank had launched the credit card business 6 years back, while the debit card business is relatively new. I0I0I 'ank is IndiaTs second5largest bank with total assets of *s. (,A 6.6" billion G1)P 44 billionH at ,ecember (1, 6##9 and profit after taD *s. (#.19 billion G1)P ?"." millionH for the nine months ended ,ecember (1, 6##9. The 'ank has a network of 1, ? branches and about ?,""( AT&s in India and presence in 1" countries. I0I0I 'ank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking, life and non5life insurance, venture capital and asset management. The 'ank currently has subsidiaries in the 1nited @ingdom, *ussia and 0anada, branches in 1nited )tates, )ingapore, 'ahrain, <ong @ong, )ri :anka, Ratar and ,ubai International Finance 0entre and representative offices in 1nited Arab +mirates, 0hina, )outh Africa, 'angladesh, Thailand, &alaysia and Indonesia. 8ur 1@ subsidiary has established branches in 'elgium and =ermany. I0I0I 'ankTs e$uity shares are listed in India on 'ombay )tock +Dchange and the 7ational )tock +Dchange of India :imited and its American ,epositary *eceipts GA,*sH are listed on the 7ew 3ork )tock +Dchange G73)+H.
54

*D"C Ban&5
<,F0 'ank :td was set up in 199? by IndiaEs leading housing finance company <ousing ,evelopment Finance 0orporation G<,F0H. The bank offers a wide range of services which can be classified into three categories namely, treasury, wholesale banking and retail banking services. The bank has a distribution network of A(A Gin 66" citiesH and 1,(6( AT&s and a customer base of 9. million as of &arch 6## . 1nder wholesale banking, it provides working capital finance, trade services, transactional services and cash management. Treasury function includes foreign eDchange I derivatives, money market securities and e$uities. *etail loan products are auto loans, personal loans and loans for two5wheelers. It also provides depository participant services for retail customers. It was the first Indian bank which launched an international debit card. 9ith products including the @isan =old 0ard, rural supply chain initiatives and commodity finance covering the entire agriculture financing cycle, the bankEs agriculture lending increased by over #B during the year. The proportion of 7.ASs to total advances increased to #.? per cent from #.( per cent last year. This marginal increase is because of the changing miD of loans as <,F0 'ank has a high share of auto loans. The bankEs focus on semi5urban and under banked markets continued with more than half of its retail loans being given in non5metro markets. The bankEs total capital ade$uacy ratio G0A*H as on &arch (1, 6## stood at 11.?1B The authori%ed capital of <,F0 'ank is *s.?A# crore G*s.?.A billionH. The paid5up capital is *s.(11.9 crore G*s.(.1 billionH. The <,F0 =roup holds 66.1B of the bankTs e$uity and about 19.?B of the e$uity is held by the A,) ,epository Gin respect of the bankTs American ,epository )hares GA,)H IssueH. *oughly (1.(B of the e$uity is held by Foreign Institutional Investors GFIIsH and the bank has about 19#,### shareholders. The shares are listed on the )tock +Dchange, &umbai and the 7ational )tock +Dchange. The bankTs American ,epository )hares are listed on the 7ew 3ork )tock +Dchange G73)+H under the symbol J<,'J.
55
Te0hno/o +5
<,F0 'ank operates in a highly automated environment in terms of information technology and communication systems. All the bankTs branches have online connectivity, which enables the bank to offer speedy funds transfer facilities to its customers. &ulti5branch access is also provided to retail customers through the branch network and Automated Teller &achines GAT&sH. The 'ank has made substantial efforts and investments in ac$uiring the best technology available internationally, to build the infrastructure for a world class bank. The 'ankTs business is supported by scalable and robust systems which ensure that our clients always get the finest services we offer. The 'ank has prioritised its engagement in technology and the internet as one of its key goals and has already made significant progress in web5enabling its core businesses. In each of its businesses, the 'ank has succeeded in leveraging its market position, eDpertise and technology to create a competitive advantage and build market share.
Business5
<,F0 'ank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments Who/esa/e Ban&in Ser.i0es5
The 'ankTs target market ranges from large, blue5chip manufacturing companies in the Indian corporate to small I mid5si%ed corporates and agri5based businesses. For these customers, the 'ank provides a wide range of commercial and transactional banking services, including working capital finance, trade services, transactional services, cash management, etc. The bank is also a leading provider of structured solutions, which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers.
56
'ased on its superior product delivery O service levels and strong customer orientation, the 'ank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals, companies from the domestic business houses and prime public sector companies. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock eDchange members and banks.
(etai/ Ban&in Ser.i0es5
The ob!ective of the *etail 'ank is to provide its target market customers a full range of financial products and banking services, giving the customer a one5stop window for all hisOher banking re$uirements. The products are backed by world5class service and delivered to customers through the growing branch network, as well as through alternative delivery channels like AT&s, .hone 'anking, 7et'anking and &obile 'anking. The <,F0 'ank .referred program for high net worth individuals, the <,F0 'ank .lus and the Investment Advisory )ervices programs have been designed keeping in mind needs of customers who seek distinct financial solutions, information and advice on various investment avenues. The 'ank also has a wide array of retail loan products including Auto :oans, :oans against marketable securities, .ersonal :oans and :oans for Two5wheelers. It is also a leading provider of ,epository .articipant G,.H services for retail customers, providing customers the facility to hold their investments in electronic form. <,F0 'ank was the first bank in India to launch an International ,ebit 0ard in association with 2I)A G2I)A +lectronH and issues the &astercard &aestro debit card as well. The 'ank launched its credit card business in late 6##1. 'y &arch 6##9, the bank had a total card base Gdebit and credit cardsH of over 1( million. The 'ank is also one of the leading players in the Kmerchant ac$uiringL business with over 4#,### .oint5of5sale
57

G.8)H terminals for debit O credit cards acceptance at merchant establishments. The 'ank is well positioned as a leader in various net based '60 opportunities including a wide range of internet banking services for FiDed ,eposits, :oans, 'ill .ayments, etc.
Treasur+
9ithin this business, the bank has three main product areas 5 Foreign +Dchange and ,erivatives, :ocal 0urrency &oney &arket I ,ebt )ecurities, and +$uities. 9ith the liberalisation of the financial markets in India, corporates need more sophisticated risk management information, advice and product structures. These and fine pricing on various treasury products are provided through the bankTs Treasury team. To comply with statutory reserve re$uirements, the bank is re$uired to hold 6AB of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio.
Mana ement5
&r. ;agdish 0apoor took over as the bankTs 0hairman in ;uly 6##1. .rior to this, &r. 0apoor was a ,eputy =overnor of the *eserve 'ank of India. The &anaging ,irector, &r. Aditya .uri, has been a professional banker for over 6A years, and before !oining <,F0 'ank in 199? was heading 0itibankTs operations in &alaysia. The 'ankTs 'oard of ,irectors is composed of eminent individuals with a wealth of eDperience in public policy, administration, industry and commercial banking. )enior eDecutives representing <,F0 are also on the 'oard. )enior banking professionals with substantial eDperience in India and abroad head various businesses and functions and report to the &anaging ,irector. =iven the professional eDpertise of the management team and the overall focus on recruiting and retaining the best talent in the industry, the bank believes that its people are a significant competitive strength.
5!
SBI 5
State Ban& of In#ia G)'IH is the largest bank in India. It is also, measured by the number of branch offices and employees, the largest bank in the world. +stablished in 1"# as 'ank of 'engal, it remains the oldest commercial bank in the Indian )ubcontinent and also the most successful one providing various domestic, international and 7*I products and services, through its vast network in India and overseas. 9ith an asset base of P16 billion and its reach, it is a regional banking behemoth. The bank was nationali%ed in 19AA with the *eserve 'ank of India having a #B stake. It has laid emphasis on reducing the huge manpower through =olden handshake schemes and computeri%ing its operations. )tate 'ank of India has often acted as guarantor to the Indian =overnment, most notably during 0handra )hekharTs tenure as .rime &inister of India. 9ith more than 9?## branches and a further ?###F associate bank branches, the )'I has eDtensive coverage. )tate 'ank of India has electronically networked most of its metropolitan, urban and semi5urban branches under 0ore 'anking )ystemG0')H. The bank has the largest AT& network in the country having more than A ## in number W1X. The )tate 'ank of India has had steady growth over its history, though it was marred by the <arshad &ehta scam in 1996.Following its arch5rival I0I0I 'ank, the bank has started 0ore banking process by which more than ??##F branched have been completed so far. In recent years, the bank has sought to eDpand its overseas operations by buying foreign banks. It is the only Indian bank to feature in the top 1## world banks in the Fortune =lobal A## rating and various other rankings. According to the Forbes 6### listing it tops all Indian companies. Grou4 0om4anies )'I 0apital &arkets :td )'I &utual Fund GA TrustH
5"

)'I Factors and 0ommercial )ervices :td )'I ,F<I :td )'I 0ards and .ayment )ervices .vt :td )'I :ife Insurance 0o. :td 5 'ancassurance G:ife InsuranceH )'I Funds &anagement .vt :td
According to .& 7etwork, )tate 'ank of India launched a pro!ect in 6##6 to network more than 1?,### domestic and 4# foreign offices and branches. The first and the second phases of the pro!ect have already been completed and the third phase is still in progress. As of ,ecember 6## , over 1#,### branches have been covered.The new infrastructure serves as the bankTs backbone, carrying all applications, such as the I. telephone network, AT& network, Internet banking and internal e5mail. The new infrastructure has enabled the bank to further grow its AT& network with plans to add another (,### by the end of 6##" raising the total number to ", ##.
6&
MA.$R -I#%I#)S
61
MA@O( "INDINGS
Ma%or Ma0ro L E0onomi0 "a0tors include =ross ,omestic .roduct C which has grown by over "B in 6##A5# , F,I 0onfidence IndeD C where India stands II in the world, Inflation C which has slow down due to falling crude prices, =ross Fiscal ,eficit Interest *ate C the 1.A government is confident to achieve the budgeted targets, *ising 8il prices I +Dchange *ate C Indian government and oil companies are relaD as oil prices have fallen beside Indian *upee has strengthen against 1),, +1*8 and 3en and 0apital &arket C the year is booming for market with FII and mutual fund are pumping money increasing ')+ )enseD returns over A#B. In ;une 6## , Indian 'anking )ystem is spread through ### branches with an asset base of
about P64# billion. There are "4 )cheduled 0ommercial 'anks operating in India including " 'ank of )'I I Associates, 6# 7ationali%ed 'anks, 69 .rivate 'anks and (# Foreign 'anks. In terms of asset si%e, public sector banks have highest base compared to private and foreign banks. )'I I Associated have asset base of *s. 91"46 cr. 'ank group5wise, new private sector banks grew at the highest rate during 6##A5# G?(.6 per centH, followed by foreign banks G(1.6 per centH, public sector banks G1(. per centH and old private sector banks G16.6 per centH. As a result, the relative significance of .)'s declined significantly with their share in total assets of )0's declining to 46.( per cent at end5&arch 6## from 4A.( per cent at end5&arch 6##A, while that of new private sector banks increasing to 1A.1 per cent from 16.A per cent. 0redit to the priority sector increased by ((.4 per cent in 6##A5# as against ?#.( per cent in the previous year. The agriculture and housing sectors were the ma!or beneficiaries, which together accounted for more than two5third of incremental priority sector lending in 6##A5# . 0redit to
62

small scale industries also accelerated. *etail loans, which witnessed a growth of over ?#.# per cent in 6##?5#A and again in 6##A5# , have been the prime driver of the credit growth in recent years. *etail loans as a percentage of gross advances increased from 66.# per cent in &arch 6##? to 6A.A per cent in &arch 6## .
I0I0I 'ank is the leading market player with change in loans market share in F3#65# of over AB and change in deposits market share in F3 #65# is nearby 6.AB. <,F0 'ank and 1TI 'ank are also in high growth phase. The laggards are )'I 'ank, 'ank of 'aroda 'ank, 'ank of India and .un!ab 7ational 'ank.
Mi0ro?E0onomi0 "a0tors affe0tin identified in the report are-
Ban&in
In#ustr+5 )ome of &icro5+conomic factors
:oan ,emand in which the Indian 'anking Industry has seen sustained strength in credit growth Ga (#B increase in 8ct 6## , of which A"B growth has seen in service sector and 1##B in real estate sectorH. *ising funding costs with soft lending rates C ,eposits has seen a growth of 66B of which household savings contribute to ?(B, credit spread increase to (.(B and 3ield on government bonds reduced to 4.4AB due to rising interest cost 7on C .erforming :oans G7.:sH 5 The Total bank loans stood at *s 1A,6(1.4bn, of which housing loans are *s. 1419.6bn. <owever, the IndustryEs share of total credit has dropped to ?#B Technology 5 Indian banks still donEt have the robust systems re$uired for efficient functioning of online banking and 'anks need to eDplore newer channels such as )&), 9A. and (= mobile telephony applications to facilitate online access to customers.
63
/0n/12si0n
64
CONCL-SION
The pro!ect involves valuation of ma!or Indian 'anks including I0I0I 'ank, )'I and <,F0 'ank. The methodology followed is Target .ricing, which including estimating growth rate by regression on historical sales to forecast neDt year sales, earning and .rofit and :oss account. Then +.) is calculated which is multiplied to <istorical .O+ to forecast intrinsic value of share. All shares are undervalued and eDpected to give positive risk ad!usted returns to investors. )ince the intrinsic value is more than current market price for all the companies, the share can be recommended to conservative investors.
65
BIB(I$)RA3'
66
BIBLIOG(A'*3
0ompany *eports =overnment of India, 199", Report of the Committee on Banking Sector Reforms =overnment of India, 1991, Report of the Committee on the Financia S!stem I&F 9orking .aper 5 0ompetition in Indian 'anking by A. .rasad and )aibal =hosh Indian 'anks Association, 2arious 3ears, "erformance High ights of Banks G&umbaiH. Indian 'anking Association &inistry of commerce and Industry *eserve 'ank of India, 6##", KAnnual .olicy )tatement for the year 6##45#"L G&umbaiH.
67

*eserve 'ank of India GaH, 2arious 3ears, Report on Tren# an# "rogress of Banking in In#ia G&umbaiH. *eserve 'ank of India GbH, 2arious 3ears, Statistica Ta$ es Re ating to Banks in In#ia G&umbaiH.
6!

Indian Banking Sector Growth and Challenges

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Indian Banking Sector Growth and Challenges

Transféré par

Droits d'auteur :

Formats disponibles

Indian Banking System 201 0

A PROJECT REPORT ON COMPREHENSIVE STUDY OF INDIAN BANKING SYSTEM

UNDER THE GUIDENCE OF: MRS# BHA$ANA SHARMA (COLLEGE FACULTY"

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Banking System'a 201 es 0 #45#"

:I&ITATI87 8F T<+ )T1,3

*+)+A*0< &+T<8,8:8=3 *+)+A*0< ,+)I=7 )A&.:I7=- ,+)I=7 A7, .*80+,1*+

I7,IA7 +0878&3 &A0*8 FA0T8*) AFF+0TI7= I7,IA7 'A7@I7=

)T*10T1*+ 8F T<+ I7,IA7 'A7@I7= )+0T8* 0*+,IT =*89T<

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

(EVIEW O" LITE(AT-(E

Indian Banking System 201 0

Indian Banking System 201 0

OBJECTIVES OF THE STUDY

Indian Banking System 201 0

SIGNI"ICANCE O" T*E ST-D3

Indian Banking System 201 0

Indian Banking System 201 0

"OC-S O" T*E '(OBLEM

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

LIMITATION O" T*E ST-D3

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

Indian Banking System 201 0

SAM'LING5 DESIGN AND '(OCED-(E5

Indian Banking System 201 0

Indian Banking System 201 0

INDIAN ECONOM3?MAC(O "ACTO(S A""ECTING INDIAN BANKING

industry and services to grow at 1.4B, 1#.AB and 1#.4B respectively

Indian Banking System 201 0

The In#ian E0onom+ has seen ma%or Ma0ro 0han es in5

Indian Banking System 201 0

)ource- AT @earney *eport, 6##A

Indian Banking System 201 0

&# Gross "is0a/ Defi0it5

)ource- *'I, &inistry of commerce and Industry

Indian Banking System 201 0

Indian Banking System 201 0

(# (isin Oi/ 4ri0es an# EJ0han e (ate5

Indian Banking System 201 0

I#%IA# BA#*I#) I#%USTR

Indian Banking System 201 0

INDIAN BANKING IND-ST(3

Nee# for Ban&s

Indian Banking System 201 0

0hannel household savings

In#ian Ban&in Se0tor EJ4erien0e

Indian Banking System 201 0

Indian Banking System 201 0

+)+A0< &+T<8,8:8=3 +)+A0< ,+)I=7 )A&.:I7=- ,+)I=7 A7, .80+,1+

I7,IA7 +0878&3 &A08 FA0T8) AFF+0TI7= I7,IA7 'A7@I7=

)T10T1+ 8F T<+ I7,IA7 'A7@I7= )+0T8* 0+,IT =89T<