Banking

Last Updated: November 19, 2007

With the Indian economy clipping at 9 per cent, consumption levels soaring and investment riding high, the
Indian banking sector is on an upswing.

According to the Annual Statement on Monetary Policy for the year 2007-08 released by the Reserve Bank
of India (RBI), the Indian economy has witnessed robust growth during 2006-07 for the fourth year in
succession. The Central Statistical Organisation (CSO) estimates that the real Gross Domestic Product
(GDP) growth has accelerated from 9.0 per cent in 2005-06 to 9.2 per cent in 2006-07. The CSO’s estimates
for 2005-06 places gross domestic savings (GDS) above 32 per cent of GDP and gross domestic investment
(GDI) close to 34 per cent.

India could become the third largest banking hub in the world by 2040, according to a
PricewaterhouseCoopers (PwC) report.

The potential banking market waiting to be tapped in India is fairly huge. Out of the 203 million Indian
households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this
segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no
access to formal sources of credit. Similar data is not available for non-farm and urban households.

Given the huge potential, corporate houses like the Tatas and Reliance - Anil Dhirubhai Ambani Group,
besides several others, are said to be interested in having a slice of the banking pie.

An under-penetrated market and the opportunity to service a large, young, working age population, which
will create and therefore need help to manage wealth, emerging Indian multinationals with global horizons,
entrepreneurs with surplus wealth and limited investment options makes India an extremely attractive
market.

India's per capita income is expected to rise to US$ 1,000 by the end of the 2007/08 fiscal year on the back
of a 9 per cent economic growth, Finance Minister P. Chidambaram has said.

Per capita income stood at $797 in 2006/07, according to data from the central bank's web site, nearly
double from US$ 460 in 2000-01 thanks to robust economic growth.

Consumption, which today accounts for 60 per cent of India's gross domestic product, is set to quadruple to
US$1.5 trillion by 2025, overtaking Germany as the fifth-largest consumer market, according to a forecast
made by McKinsey.

The credit outgo from public sector banks is expected to grow by 25 per cent for 2007-08 while deposits are
set to grow by around 22 per cent.

Retail banking

Following the trend in other emerging economies, India is experiencing a boom in retail banking. Drawn by
the promise of huge returns in this sector, a number of foreign banks are falling over each other to acquire a
slice of the banking pie. A year and a half ago, Deutsche Bank launched its retail operations in India. Earlier,
another German company BHW Holding AG positioned itself in this space by taking over Birla Home
Finance Ltd. Now there are 29 foreign banks have a presence in India through their 268 branches. In May
2007, the 300-year old Barclays Plc followed suit. Besides credit cards, its retail foray will be in the personal
loan segment. These late entrants join the ranks of Citibank India, HSBC, ICICI Bank and HDFC Bank Ltd
that have aggressively begun tapping this business.

In May 2007, the retail portfolio of the Indian banking sector was US$ 111.7 billion or around 11 per cent of
India’s gross domestic product of US$ 1 trillion. Such loans accounted for 26 per cent of total non-food gross
bank credit in the country as on May 25, 2007 and increased by 23.9 per cent on a year-on-year basis over
May 26, 2006 after growing at 30 per cent for three years in a row. Mortgages or housing loans account for
more than half of the retail portfolio and grew at a sizzling pace of 40 per cent plus during the last three
years.

Rural banking

In October 2007, ABN Amro Bank announced its microfinance division has succeeded in providing basic
financial support to some 500,000 underprivileged households in India. The Dutch bank’s microfinance
portfolio is now US$ 50.8 million and the bank plans to double the coverage to a million households by 2009.
It’s a profitable business that achieved break-even in the first year itself.

Bank of Baroda is working on similar lines and has adopted Dungarpur district in Rajasthan. Dungarpur,
consisting of 800 villages, has a population of more than 1.1 million. The bank plans to set up more than 400
farmers’ clubs for expert advice on agricultural and financial issues and form 300 new self-help groups,
organise health camps and train more than 4,000 rural youth for employment generation.

Last year, the Chennai-based Indian Bank adopted Puducherry for extending banking services. State Bank
of India Ltd, the country’s largest commercial bank, is now drawing up plans to reach out to 100,000 villages.

Mergers and acquisitions

According to a PricewaterhouseCoopers (PwC) report, the banking sector in developing economies led by
China and India is likely to overtake banks in the currently richest countries of the world by 2050. China and
India show the greatest growth potential through organised growth and merger and acquisition (M&A)
activities, PWC said.

M&As volume in India's banking space increased to US$ 10.5 billion between January and September 2007
with 38 deals. In comparison, the sector had witnessed 23 deals worth US$ 707 million last year, according
to a report by global data provider Dealogic.

Investment banking

Investment banks operating in India have earned nearly as much in the first half of 2007 as they made
throughout fiscal 2006-07 from underwriting stock offerings and advising on takeovers.

Private equity and venture investments in India almost doubled to US$ 5.55 billion in the first half of this
year, according to Chennai-based Venture Intelligence, which tracks such deals. It expects investments to
cross US$ 10 billion by the end of the year

Indian banks in loan markets abroad

With the best of India Inc. flocking to overseas loan markets for funds, Indian banks have started following
their top customers. For the first time, two Indian lenders -- ICICI Bank and SBI -- figure among the top five
in the league tables for loan syndication.

Loan books of Indian banks with significant international operations grew sizeably in the first six months of
2007-08. In the aftermath of the US sub-prime mortgage losses, global banks had turned risk-averse
causing a global credit squeeze. This forced Indian companies to turn to State Bank of India (SBI), ICICI
Bank, Bank of India (BoI) and Bank of Baroda (BoB) to meet their credit requirements, particularly to fund
overseas acquisitions.

The loan books of the four banks grew at over 25 per cent at the end of September over the previous year,
much higher than the 21.9 per cent growth for the industry despite the fact that the cost of raising funds
overseas has increased by 150-200 basis points in the aftermath of the sub-prime crisis.

Overseas foray
As many as nine Indian banks, led by HDFC Bank and ICICI Bank, have made it to the list of top 50 Asian
Banks. Bank of Baroda, the fifth largest bank in India, has opened a representative office in the heart of
Sydney's central business district, adding to the 19 Indian banks that have 188 branches abroad.

Managed assets to rise 6-fold by 2015

The total assets managed by all funds in the country -- mutual funds, international funds, private banking,
including portfolio management services, unit-linked insurance and pension funds -- is likely to grow more
than six-fold to US$ 1,300 billion by 2015, from US$ 170 billion, says the Boston Consulting Group. The
potential of the Indian market is attracting many new entrants and this is likely to continue over the next five
years. The opportunity for various fund categories to invest in India will grow exponentially; managed assets,
excluding pension, are expected to grow at least 10 times over the next 10 years.