DISSector A B-Gyan Initiative

DISSECTOR Banking Sector in India

A B-Gyan Initiative

B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Overview
The present Rs. 64 trillion (US$ 1.17 trillion) banking industry in India is governed by the
Banking Regulation Act of India, (1949) and is closely monitored by the Reserve Bank of India
(RBI). RBI manages the country's money supply and foreign exchange and also serves as a
bank for the Government of India and for the country's commercial banks.
According to an IBA-FICCI-BCG report, Indias GDP growth will make the Indian banking
industry the third largest in the world by 2025. 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.
Despite the financial instability, Indian banks continued to display high levels of resilience
aided by strong economic policies. The industry saw a growth of 16% and 11.6% in total
income and net profit respectively in FY13. However, moderation in credit demand led to the
slowdown in credit off take from 17.9% in FY12 to 15.8% in FY13. Despite this, the banks
managed to retain deposit growth of 15% for FY12 and FY13.
RBI initiated a series of stringent policy measures to enable Indian banks adopt the Basel III
norms, to curb further depreciation of Indian rupee and improve asset quality of the banks.
These measures will ensure that the Indian banking sector evolves. Achieving higher growth
and maintaining asset quality will play a vital role in shaping the future of the industry in the
near term.
Structure of Indian Banking Industry
The Banking sector in India is structured as below:

Reserve Bank Of India

Financial
Institutions

Banks

Scheduled
Commercial Banks

Co-operative credit
institutions

NBFCs

Capital Market
Intermediaries

All India Financial

Institution

Public Sector

Regional Rural
Banks

State Level
Insititution

Private Sector

Urban Cooperative

Other Institutution

Foreign Banks

Rural Cooperative Credit

Institutions

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DISSector A B-Gyan Initiative

Business Divisions in Banking

Retail banking

Wholesale banking

Loans to Individuals (Auto loan,

Housing Loan, Education Loan and
other personal loan) or small
businesses.

Loans to Mid and Large Corporate

(Working Capital loans, Project
finance, Term loans, Lease Finance)

Business
Divisions
Treasury Operations

Other Banking Businesses

Investment in Equity, Derivates,

Commodities, Mutual Funds, Bonds,
Trading and Forex operations

Merchant Banking, Leasing business,

Hire purchase, Syndication services,
etc.

A banks capital ratio is

the ratio of qualifying
capital
(utilized
for
expansion)
to
risk
adjusted (or weighted)
assets. A ratio below the
minimum defined by
central bank indicates
that the bank is not
adequately capitalized to
expand its operations.

CASA ratio

OPM = (Net interest

income - Operating
expenses) / Total interest
income

Its the ratio of current and

savings account deposits
to the total deposit base of
the bank. The bank pays
out much lower interest
rates on savings/current
accounts than other types
of deposits like FDs.
Raising money this way is
cheaper than loans from
other sources like RBI,
money market, etc.
Hence, higher the ratio
more profitable is the
bank.

Non-performing assets
(NPA)

The
ratio
indicates
percentage of funds lent
by the bank out of the
total amount raised
through deposits. Higher
ratio reflects ability of the
bank to make optimal use
of
the
available
resources.

Operating profit margins

(OPM)

NIM = (Interest income Interest expenses) /

Average earning assets

Operating profit for banks

is
calculated
after
deducting administrative
expenses, which include
salary
and
network
expansion cost.

Capital adequacy ratio

(CAR)

Interest income is the

income which the bank
earns from its core
business
of
lending.
Interest expense is the
interest paid to depositors
on financial products like
deposits, savings account
etc.

Credit to deposit ratio (CD

ratio)

Net interest margin (NIM)

Key parameters to determine a banks performance

When
a
customer
defaults on a loan
(interest is outstanding
for more than 90 days),
the bank writes it off
from its books and the
loan is termed as a NonPerforming Asset (NPA).
Higher ratio reflects rising
bad quality of loans.
NPA ratio = Net nonperforming assets / Loans
given

Return on Assets (ROA) & Return on Equity (ROE)

ROA = Net profit after taxes / assets

ROA indicates how efficiently a bank is being run because it indicates how much profits
are generated by each dollar of assets.
However, a banks shareholders care about most is how much the bank is earning on their
equity investment. This information is provided by return on equity (ROE).

ROE = Net profit after taxes / equity capital

B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Current Scenario The Competitive Landscape

Banking in India is moderately
consolidated, with the top 10 players
accounting for approximately 60 per
cent of the total industry. The Indian
banking sector is majorly dominated by
public sector banks. The figures
describe the respective shares of
government, private and foreign banks,
along with the market shares of the
leading players (based on total credit
portfolio).
The growth of the banking sector in
terms of percentage contribution to the
GDP has remained mostly uniform over
FY 06-10. The banking sector is currently
growing at approximately the same rate
as the countrys economy.

Split between types of Banks

7%
19%
Govt. Banks
Pvt. Banks
Foreign Banks

74%

Market shares of Leading Banks

State Bank of India
Punjab National
Bank
Bank of Baroda

18%
42%

6%

ICICI Bank

5%

Bank of India
5%
5%
3%

5%
3%

4%

Canara Bank
HDFC Bank

4%

Another important parameter for

assessing the performance of the
banking industry is the domestic credit
provided as a percentage of the GDP, as
exhibited in the below figure to the
right.

B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Key Players in the Indian Banking Sector

Public Sector
State Bank of India (SBI)
State Bank of India is the largest banking and financial services company in India. In addition to the
banking services, the Bank through their subsidiaries, provides a range of financial services, which
include life insurance, merchant banking, mutual funds, credit card, factoring, security trading,
pension fund management and primary dealership in the money market.
As of December 2013, it had assets of US$388 billion and a net income of US$ 3.3 billion.
The State Bank Group, with over 16,000 branches, has the largest banking branch network in India.
The bank has 131 overseas offices spread over 32 countries. The bank offers convenience of over
21000 ATMs in India.
Punjab National Bank (PNB)
Punjab National Bank is ranked as the 2nd largest bank in the country. PNB has total assets worth
US$72 billion with a net profit of US$ 770 million.
The bank has a wide network of 5189 branches which comprise of 2047 Rural, 1154 Semi Urban, 1111
Urban and 877 Metropolitan branches.
PNB is recognized as the bank offering highest levels of customer satisfaction in Delhi and Chennai. In
FY12, PNB forayed into life insurance business by tying up with Metlife India Insurance Company Ltd.
In FY13, PNB installed Self Service Pass Book Printer terminals in branches and e-lobbies, which help
the customer to get the passbook updated. During the same period, PNB has embarked on an
ambitious organizational restructuring exercise named PNB Pragati.
Bank of Baroda (BOB)
Bank of Baroda is a state-owned bank headquartered in Vadodara. It serves both corporate and retail
customers in the areas of retail banking, investment banking, credit cards, and asset management. Its
assets are US$ 70 billion with a net profit of US$ 0.8 billion. It has a fairly wide network of 4283
branches (4172 branches in India) and offices, and over 2000 ATMs.
Comparison of the top 3 public banks:

Income
Business
Assets
NII
Net Profit
RoA
NIM
NPM
C-I Ratio
CASA Ratio
CRAR - Basel II
Net NPA Ratio

SBI

PNB

12,08,729
1,91,12,263
1,33,55,192
4,32,911
1,17,073

4,06,306
67,33,633
45,81,940
1,34,144
48,842

0.88
3.38
9.69
45.23
44.81
13.86
1.82

1.19
3.21
12.02
39.75
35.34
12.63
1.52

BOB
Financials (INR mn)
3,30,961
67,22,484
44,73,215
1,03,170
50,070
Key Ratios (%)
1.24
2.56
15.13
37.55
26.9
14.67
0.54

B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Private Sector
ICICI Bank Ltd
ICICI Bank Ltd is the second largest bank and the largest private sector bank in India by market
capitalization. They are a publicly held banking company engaged in providing a wide range of banking
and financial services including commercial banking and treasury operations.
ICICI has total assets worth US$ 99 billion with a net profit of US$ 1.6 billion. The Bank has a network
of 2,752 branches and 8,003 ATMs in India, and has a presence in 19 countries, including India.
HDFC Bank
HDFC Bank Limited, incorporated in 1994, is the fifth largest bank in India by assets and the largest
bank by market capitalization. The bank was promoted by the Housing Development Finance
Corporation, a premier housing finance company of India.
As of 31 March 2013, the bank had assets of US$ 70.2 billion and has reported net profit of US$ 978
million, up 31% from the previous fiscal year. Its customer base stood at 28.7 million customers on 31
March 2013.
Axis Bank
Axis Bank Ltd (Axis Bank) was promoted in 1993, jointly by UTI, LIC, GIC and United India Insurance
Company Ltd. Axis Bank offers the entire spectrum of financial services covering large and midcorporates, SME, agriculture and retail businesses. Axis Bank operates its business into four segments
namely treasury, retail banking, corporate & wholesale banking and other banking business.
The network of Axis Bank spreads across 1,139 cities and towns. In FY13, the bank added 325 branches
and 1321 ATMs to its network. In FY13, the bank launched two new products namely Micro Power
and Service Power for providing finance to micro or small enterprises.

Comparison of the above private banks:

ICICI Bank
Income
Business
Assets
NII
Net Profit
RoA
NIM
NPM
C-I Ratio
CASA Ratio
CRAR - Basel II
Net NPA Ratio

4,10,454
50,92,277
47,36,471
1,07,342
64,653
1.5
2.44
15.75
43.05
43.45
18.52
0.73

HDFC Bank
Axis Bank
Financials (INR mn)
3,25,300
2,74,149
44,21,264
38,98,638
33,79,095
28,56,278
1,22,968
80,177
51,671
42,422
Key Ratios (%)
1.77
1.68
4
3.04
15.88
15.47
48.97
44.7
48.4
41.54
16.52
13.66
0.18
0.27
B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Concerns
Increasing NPA
Despite
remaining
sufficiently
capitalized, non-performing assets of
Indian banks continued to remain a
great concern, with gross NPAs
increasing significantly from 3.1% in
FY12 to 3.7% in FY13 and rising.
Prevailing slowdown in the domestic
economy,
declining
business
confidence in the industry due to
slackening demand, prevailing high
interest environment, and high
exposure of Indian banks, especially
public sector banks, to the real estate,
textile, infrastructure (specifically
power and telecom segments), in
addition to the priority sector are few of the reasons for the substantial increase in NPAs.
To improve the banks ability to manage their non-performing assets (NPAs) and restructured
accounts in an effective, the RBI proposed the following measures in its Monetary Policy Statement:
To mandate banks to put a robust mechanism in place for early detection of signs of distress,
and measures, including prompt restructuring to preserve the economic value of such
accounts.
To mandate banks to have proper system generated segmentwise data on their NPA
accounts, write-offs, compromise settlements, recovery and restructured accounts.
Slower credit growth due to subdued domestic demand
Despite the increased infusion of liquidity by
the RBI, growth of bank lending contracted to
15.8% in FY13 from 17.9% in FY12.
FY13 saw lower credit demand across various
sectors on the back of slowdown in domestic
economic activity and uncertain global
macroeconomic environment, which resulted
in subdued industrial production and investment activities.
Credit supply also slowed down due to greater risk aversion of banks on the back of weakening
economic environment and rising non-performing assets, resulting in banks opting for SLR
investments due to large government market borrowings.
Intensifying competition for PSBs
As a result of globalization, many new banks have entered the Indian banking industry, intensifying
the competition. Due to new emerging competition, Indian banks, especially PSBs, are trying their best
to improve their performance and preparing to compete in the emerging global market.
New private sector banks and foreign banks have more customer-centric policies, high quality services,
new attractive schemes and computerized branches, attracting more and more customers to their
banks. In this context, there is a need to examine the efficiency of public sector banks operating in
India.
However, the upside of this challenge is that due to intensifying competition banks will become more
efficient.
B-Gyan - Business Interaction Committee, NITIE

DISSector A B-Gyan Initiative

Key policy developments impacting performance of banks in FY13

RBI reduced repo rate by 100 bps in FY13 from 8.5% in FY12 to 7.5% in FY13.
RBI reduced Cash Reserve Ratio (CRR) by 75 bps in FY13 from 4.75% in FY12 to 4% in FY13.
RBI reduced Statutory Liquidity Ratio (SLR) by 100 bps from 24% in FY12 to 23% in FY13.
The deposit rate of major banks for one year maturity and above moderated from 8.50-9.25%
in FY12 to 7.5-9.0% in FY13.
The base rate of major banks dropped from 10.0-10.75% in FY12 to 9.70-10.25% in FY13.
RBI to issue new bank licenses in FY14, which will contribute towards financial inclusion as
well as intensify competition leading to development of banking sector.
Implementation of Basel III capital regulation in India, effective from Apr 2013, which will be
fully implemented in a phased manner by Mar 2018.

Towards Basel III Regime

Basel III norms are guidelines framed by a committee of central banks based in Basel, Switzerland, of
which RBI is also a member. The norms aim to toughen up the banking system in every country to
withstand financial shock. They focus on the risks that banks are vulnerable to, particularly after the
crisis in the banking sector, which was triggered by
the problem in the US sub-prime mortgage market.
Indian banks have initiated the process of
implementing Basel III norms in a phased manner
since January 1, 2013, and it will be implemented
fully by March 31, 2018. Once implemented, Basel III
guidelines ensure that banks would be well
capitalized to manage all kinds of risks.
The existing Basel II norms stipulate that banks
should maintain Tier-I capital, or core capital, and
Tier-II capital that comprise instruments with debtlike features. Under Basel III, banks will have to maintain a minimum 5.5% in common equity (as
against 3.6 now) by March 31, 2015, create a capital conservation buffer (consisting of common
equity) of 2.5% by March 31, 2018, and maintain a minimum overall capital adequacy ratio of 11.5%
(against the current 9%) by March 31, 2018.
It essentially targets bank-level (micro-prudential) regulation, which will help raise the resilience of
individual banks to periods of stress, and macro-prudential regulation to prevent system-wide risks
that can build up across the banking sector and the pro-cyclical amplification of these risks over time.
Early Warnings:
It is estimated that the new norms will push up the capital needs of Indian banks by $20-30 billion.
Since banks will now need additional capital for doing the same level of business, they may see a sharp
drop in their return on assets (ROA).
The higher capital requirements have drawn warnings from analysts and financiers about their impact
on bank lending rates and wider economic growth. About $15 billion was needed for Indian banks to
support 18% growth, of which around $11-12 billion was needed by the PSU banks. Additionally, banks
would be required to maintain liquidity coverage ratio and net stable funding ratio of above 100
percent.
The Basel III norms come at a time when banks are under pressure to set aside funds for a potential
increase in bad loans.
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DISSector A B-Gyan Initiative

Way Forward
The RBI has issued a paper entitled Banking Structure in India The Way Forward in August 2013.
The RBI recognises that today's banking structure in India has both the need and scope for further
growth in size and strength. It is reviewing the Indian banking structure to cater to the needs of Indias
growing and globalizing economy and to deepen financial inclusion, and has also been guided by
lessons learned from the global financial crisis particularly relating to banking structure.
The key features discussed in the paper for the future of Indian banking are highlighted below:
Government Ownership
Under the Basel III capitalisation norms, banks require large-scale infusion of capital by shareholders.
Since the Government is the majority shareholder of most PSBs, additional capital will be required to
be infused by the Government. While there are benefits to financial stability offered by government
ownership, there also arises mixed performance in comparison with private sector banks. As per RBI,
the Governments ownership in public sector banks needs to be reduced to 33% from the existing 51%
to reduce the Governments burden of recapitalising the banks.
Bank licensing
Differentiated licensing should be adopted where certain banks will be licensed only for servicing niche
segments such as infrastructure financing, retail banking, SME financing, etc. The proposed new
licensing policy suggests adopting continuous authorisations for opening new banks in India
(compared to the present stop and go review policy as to whether to allow new banks to enter the
market).
Improve risk management mechanism
Along with adopting strategies to combat high risk perception, increased usage of rating services must
be employed. Besides, SME specific risk management procedures must be setup to make the business
more viable, as the risk perception associated with lending to small enterprises is generally very high.
The availability and ease access to reliable data/information to both banks and regulators/supervisors
of the banking system is a key for prudent risk management. Hence, strengthen the existing system
would be another challenge for the banking industry.
Overseas presence of Indian banks
Large Indian banks, which have a global presence, should be consolidated to create three to four global
banks which are able to compete globally with the top international banks. This would enable such
banks to generate economies of scale, meet financing needs of infrastructure and large projects and
offer India as a banking destination to the world.
Envisaged structure for banking sector
RBI has envisaged a reoriented banking system with distinct tiers. The first tier would consist of a few
large Indian banks with a global presence along with branches of foreign banks in India. The second
tier would comprise mid-sized banking institutions, including subsidiaries of foreign banks and niche
banks providing investment and wholesale banking services. The third tier covers old private sector
banks, regional rural banks, and multi-state urban cooperative banks. The fourth tier would include
small privately owned local banks and cooperative banks, catering to the credit requirements of the
unorganised sector in unbanked and under-banked areas.
The tiered structure would increase competition driving efficiencies in the banking sector and also
pave the way of a market driven consolidation.

B-Gyan - Business Interaction Committee, NITIE