A Project Report On Financial Analysis Of ICICI Bank

Submitted To: Mrs. Mamatha Madam

By: P.SHASHANK

CHAPTER-2
2.1 REFORMS IN THE BANKING SECTOR:

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank has to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number scheduled commercial banks increased four-fold and the number of banks branches increased eight-fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services. During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25% share in deposits and 28.1% share in credit. The 20 nationalized banks accounted for 53.5% of the deposits and 47.5% of credit during the same period. The share of foreign banks ( numbering 42 ), regional rural banks and other scheduled commercial banks accounted for 5.7%, 3.9% and 12.2% respectively in deposits and 8.41%, 3.14% and 12.85% respectively in credit during the year 2000.

1.2

CURRENT BANKING SCENARIO OF INDIA:

As per the Advance Estimates of GDP for 2008-09 released by the Central Statistical Organization on 9, February, 2009, the growth of GDP at factor cost (at constant 99-

2000 prices) is estimated to grow at 7.1% during the year. The growth of GDP during 2007-08 (Quick estimates) was 9.0%. The International Monetary Fund (IMF) has forecast that Indias gross domestic product (GDP) growth will slow dramatically to 6.25% in the fiscal year to March, and to 5.25% in the following year. This is well below the 9% growth in the year to March 2008 and even lower than the governments prediction of 7.1% growth in 2008-09. The average growth in the first three quarters of the fiscal year was 6.9%. This effectively means IMF expects the economy to grow only 4.4% in the last quarter.

As per the above estimates, the growth rate for Agriculture, Industry and Services is estimated to be 2.6%, 4.8% and 9.6% respectively in 2008-09. In the quick estimates for 2007-08, the corresponding growth rates for these three sectors were 4.9, 8.1 and 10.9% respectively. After growing at 5.0% in 2006 and 4.9% in 2007, IMF estimates global GDP growth to decelerate to 3.7% in 2008 in the wake of the current financial crisis. The financial market turbulence in developed economies following the US sub-prime mortgage crisis has reduced financial leverage, lowered credit availability and negative wealth effects have emerged as risks to consumption and growth in advanced economies, especially in the US. Continuing inflationary pressures from food and commodity prices as well as high and volatile crude oil prices are other risks being faced by the global economy.

India continued to be one of the fastest growing economies of the world. During 2007-08, the Indian economy grew at a robust pace for the fifth consecutive year. Real GDP growth, estimated at 8.7% in 2007-08, is in tune with the average annual GDP growth of 8.7% in the five year period 2003-04 to 2007-08. Agriculture and allied activities are estimated to grow by 2.6% in 2007-08, which is in line with the average growth of 2.6% per annum during 2000- 01 to 2007-08. Food grains production touched a record high in FY08, with total food grains production placed at 227.3 million tones, surpassing the target of 221.5 million tonnes.

INTERNET BANKING IN INDIA: The Reserve Bank of India constituted a working group on Internet Banking. The group divided the internet banking products in India into 3 types based on the levels of access granted. They are: Information Only System: General purpose information like interest rates, branch location, bank products and their features, loan and deposit calculations are provided in the banks website. Electronic Information Transfer System: The system provides customerspecific information in the form of account balances, transaction details, and statement of accounts. Automated Teller Machine (ATM): ATM is designed to perform the most important function of bank. It is operated by plastic card with its special features. The plastic card is replacing cheque, personal attendance of the customer, banking hours restrictions and paper based verification.

Smart Card: Banks are adding chips to their current magnetic stripe cards to enhance security and offer new service, called Smart Cards. Smart Cards allow thousands of times of information storable on magnetic stripe cards.

Credit Cards/Debit Cards: The Credit Card holder is empowered to spend wherever and whenever he wants with his Credit Card within the limits fixed by his bank. Credit Card is a post paid card. Debit Card, on the other hand, is a prepaid card with some stored value.

REAL TIME GROSS SETTLEMENT (RTGS): RTGS is an electronic settlement system of Reserve Bank of India without involvement of papers. To facilitate an Efficient, Secure, Economical, Reliable and Expeditious System of Fund transfer and clearing in the Banking sector throughout India. Real time gross settlement systems (RTGS) are a funds transfer mechanism where transfer of money takes place from one bank to another on a "real time" and on "gross" basis.

ELECTRONIC CLEARING SERVICE: Electronic Clearing Service is another technology enhancement happened in the banking industry. The customer willing to use this facility is required to fill in the mandate form from the corporate/any utility service institution for ECS mode of credit and debit. The customer needs to prepare the payment date and submit it to the sponsor Bank and after that everything happened electronically. So customers can thereby make payments as well as receive all incomes electronically. MOBILE BANKING Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. PORTERS FIVE-FORCE ANALYSIS FOR INDIAN BANKING INDUSTRY

KEY POINTS:

SUPPLY Liquidity is controlled by the Reserve Bank of India (RBI).

DEMAND India is a growing economy and demand for credit is high though it could be cyclical.

BARRIERS TO ENTRY Licensing requirement, investment in technology and branch network.

BARGAINING POWER OF SUPPLIERS High during periods of tight liquidity. Trade unions in public sector banks can be anti reforms. Depositors may invest elsewhere if interest rates fall.

BARGAINING POWER OF CUSTOMERS For good creditworthy borrowers bargaining power is high due to the availability of large number of banks.

COMPETITION High there are public sector banks, private sector and foreign banks along with non banking finance companies competing in similar business lines.

2.4

PESTAL ANALYSIS PEST Analysis for Banking Services

POLITICAL/ LEGAL Influences which have an impact on banking services and consumer confidence include the following: State provision of pensions Government encouragement of savings and investment (for e.g. via tax benefits) Regulatory control and protection (to prevent the collapse of financial institutions and protect investors money) ECONOMIC Economic factors are key variables which have an impact on the activity in the banking services sector. The level of consumer activity is governed by income levels and personal wealth. As income levels grow, more discretionary income is available to spend on banking services. Consumer confidence in the economy and in job security also has a major impact; if lean times are foreseen ahead, savings will take priority over loans and other forms of expenditure. Consumers may also seek easy access savings and be willing to tie up their money for longer periods with potentially more attractive investments. The main economic factors that should be monitored with regard to banking services marketing are as follows: Personal and household disposable income Discretionary income levels Employment levels

 The rate of inflation Income tax levels and taxation structures Savings and investment levels and trends Stock market performance Consumer spending & Consumer credit SOCIO-CULTURAL Many demographic factors have an important bearing on banking services markets. Changing attitude towards consumer credit and debt Changing employment patterns Numbers of working women The ageing population Marriage/divorce/birth rates Consumption trends TECHNOLOGICAL Technology has a major impact on many industries including financial services and banking in particular. ATM services which not only provide cash but also allow for bill payments, deposits and instant statements are widely used. From the customers viewpoint, technology has played a major role in the development of the process whereby the service is delivered. Automated queuing systems have made visits to the bank easier and more convenient. Telephone Banking and insurance services are now being used in place of the traditional branch-based service process. Technology has also played a major role within organizations, bringing about far greater efficiency through computerized records and transaction systems and also in business development, through the setting up of detailed customer databases for effective segmentation and targeting.

The main technological developments fall within these categories; Process developments Information storage and handling Database system 2.5.RECENT TRENDS I. UNIVERSAL BANKING:

Universal banking refers to Financial Institution offering all types of financial services under one roof. Thus, for example, besides borrowing and lending for the long term, the Development Financial Institutions will be able to borrow/lend for the short-term as well. II. RBI NORMS:

The norms stipulated by RBI treat FDIs at par with the existing commercial banks. Thus all Universal banks have to maintain the CRR and the SLR requirement on the same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable to the commercial banks. These are the major hurdles as perceived by the institutions, as it is very difficult to fulfill such norms without hurting the bottom-line. Effect on the Banking Sector: However, with large Term lenders converting into Commercial banks, the existing players in the industry are likely to face stiff competition; lower bottom line ultimately leading to a shakeout in the industry with only the operationally efficient banks will stay into the business, irrespective to the size. III. Mergers & Acquisition

The Indian Banking Sector is more overcrowded then ever. There are 96 commercial banks reporting to the RBI. Ever since the RBI opened up the sector to private players, there have been nine new entrants. All of them are growing at a scorching pace and redefining the rules of the business. However they are dwarfed by many

large public and old private sector banks with a large network of branches spread over a diverse geographical area. Thus they are unable to make a significant dent in the market share of the old players. Also it is impossible to exponentially increase the number of branches. The only route available for these banks is to grow inorganically via the M & A route. Hence the new banks are under a tremendous pressure to acquire older banks and thus increase their business. Currently most of the institutionally promoted banks have already gobbled smaller banks. ICICI Bank has acquired ITC Classic, Anagram Finance and Bank of Madura within a period of two years. AXIS Bank has merged Times Bank with itself. UTI

IV.

Multiple Delivery Channels

Today the technology driven banks are finding various means to reduce costs and reach out to as many customers as possible spread over a diverse area. This has led to using multiple channels of delivery of their products. (A) ATM (Automatic Teller Machine): An ATM is basically a machine that can deliver cash to the customers on demand after authentication. However, nowadays we have ATMs that are used to vend different FMCG products also. An ATM does the basic function of a banks branch, i.e., delivering money on demand. Hence setting of newer branches is not required thereby significantly lowering infrastructure costs. Cost reduction is however possible only when these machines are used. In India, the average cash withdrawal per ATM per day has fallen from 100 last year to 70 this year. Though the number of ATMs has increased since last year, it is not in sync with the number of cards issued. Also, there are many dormant cardholders who do not use the ATMs and prefer the teller counters. In spite of these odds, Indian banks are increasing the number of ATMs at a feverish pace. These machines also hold the keys to future operational efficiency.

(B) NET BANKING: Net banking means carrying out banking transactions via the Internet. Thus the need for a branch is completely eliminated by technology. Also this helps in serving the customer better and tailoring products better suited for the customer. (C) PHONE BANKING: This means carrying out of banking transaction through the telephone. A customer can call up the banks helpline or phone banking number to conduct transactions like transfer of funds, making payments, checking of account balance, ordering cheques, etc,. This also eliminates the customer of the need to visit the banks branch. (D) MOBILE BANKING: Banks can now help a customer conduct certain transactions through the Mobile Phone with the help of technologies like WAP, SMS, etc,.This helps a bank to combine the Internet and telephone and leverage it to cut costs and at the same time provide its customer the convenience. VRS (Voluntary Retirement Scheme): VRS or the Golden Handshake is picking up very fast in the recent times due to the serious attention of the government towards overstaffing in the banks, especially among the public sector banks. The government had also cleared a uniform VRS framework for the sector giving the banks a seven months time frame to cut flab. The scheme was open till 31st march, 2001.