DR Anil Khandelwal

Doing Business in India
The Big Picture

A Banker’s Perspective
US – India Business Summit
November 29, 2006
Dr. Anil K Khandelwal

Chairman & Managing Director
Bank of Baroda
April 21, 2008 US – India Business Summit, 2006 1
Indian Economy – A Snapshot
 One of the fastest growing in the world
 Consumption growth fuelling economic growth – consumption
expenditure forming 78% of GDP
 Services sector contributing over 60% to GDP
 Emerging as a hub of manufacturing excellence. new growth
engines of Indian economy include IT, ITes, pharmaceuticals, bio-
technology, nano technology, agri. businesses
 Where forces of competition are at work
 Innovation driving enterprises
 Economic reforms well on course – entering second phase
Indian Economy – A Snapshot
 “Inclusive growth” occupying central place
 High untapped potential in rural / agri - economy
 Indian companies on acquiring spree and going global
 Indian companies pursuing global best practices and producing
world-class managers
Improved Ranking on Business Front
World Bank – IFC Report on Doing Business in India
for 2007 has given a higher rank to India compared
to last year because :
- India has cut the time to start a business from 71 to 25 days
- Reduced the Corporate Income Tax rate from 36.59% to 33.66%
- Supreme Court’s decision has made enforcing collateral simpler –

easing access to credit
- Reforms to Stock Exchange Regulations have toughened investor

protection
The Indian Financial Sector
 Robust financial system
 Well established institutions
 Strong supervisory system
 Progressive integration of financial markets - banking, insurance,
mutual funds, securities, commodities
 High competition marked by innovation
 High technology absorption
 Rediscovery of the Indian customer
 21st century customer driving innovations in banking
 Banking plus financial services becoming the new offerings
 Alternate e-delivery channels becoming popular with Indian
customers
 Financial sector bracing to meet life cycle and life style needs of
the great Indian middle class
 “Cradle to Grave” becoming the new spectrum of life cycle needs
 Banking graduating beyond traditional boundaries of vanilla
banking
 Indian customer demanding TOTAL FINANCIAL SOLUTIONS
 Banking sector bracing itself to offer customized and structured
products
 Banking sector entering newer areas like wealth management, private
banking, doorstep banking, electronic banking, credit cards, investment
advisory services, etc.
 Indian banks in a war game to acquire and retain customers
 Indian middle class being reached out and wooed by banks
 Indian middle class and financial sector beginning to dream together and
weave a new bond of relationship
 Financial products like mutual funds, life policies, non-life policies competing
with traditional banking products
 Banking sector fully geared for helping Indian middle class realize its dream
 Banking sector in good health – with low non-performing assets and

prudential accounting standards in place
 Indian banking entering the phase of consolidation (2nd Phase of Reform) – on
way to acquire global size
Robust & Resilient Banking Sector
 A free & open banking sector where most businesses are now covered at the
market-determined rates
 Full banking license system
 Highly Stable Sector despite a series of Exogenous Shocks like the Asian
Crisis, Sanctions due to Nuclear Explosions, Record High Oil Prices and
Large Corrections in Stock Markets
 Significant improvement in the Asset Quality: Net NPAs (%) have decreased
from 8.1% at end-March 1997 to 2.0% at end-March 2006 despite tightening of
prudential norms
 Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% at
end-March 1997 to 12.8% at end-March 2006
 Operating Expenses of SCBs have declined from 2.1% of Total Assets in 1992
to 1.8% in 2005 indicative of improved efficiency
 Intermediation costs of SCBs have declined from 2.9% in 1995-96 to 2.1% in
2005-06
Indian Banks – in good health…
 Strong Regulatory & Supervisory system
 RBI has strengthened prudential norms with respect to income recognition,
disclosures and capital adequacy

 India complies with BIS 26 norms of best practices of supervisory criteria,
country risk & convertibility

 Indian banks are well on road towards BASEL II compliance
 Credit Deposit Ratio is increasing – PSB : 66.2%, Pvt. Banks : 76.3%
 Bank credit is growing by about 30%
 Indian banks compare favourably with its Asian peers in asset quality
 Indian banking sector grew by 6 times in the last decade – from Rs. 5,984 bn in
1995 to Rs. 36,105 bn.

 KYC norms and Anti Money Laundering regulations in force
 Indian banks are serving the “Two Faces” of India – the Underprivileged, the
Progressive & the Opulent – with equal aplomb
Indian Banks – in good health…
• PSBs : 72%
 About 70000 strong branch network – More
• Pr.Bks : 19%
than 60% presence in Rural areas • Fgn. Bks.: 7%
• Others include UCBs,
RRBs, LABs & NBFCs
 Consistent growth in profitability – Spread is
• Spread : 3.2%
getting healthier – from 3.1% in 2004-05 to • CAR : 12.0%
3.2% in 2005-06 • ROA : 1.0%+
 NPL Ratios compare favourably with global • Gross NPA : 3.34%

• Net NPA : 2.00%
trends
TRS Apr 01 – Apr 05
• PSU Banks : 61.2%
 Consistently out-performing stock indices –
• India Banking : 51.3%
Total Return to Shareholders continues to be • Old Private : 40.0%
attractive • New Private : 33.9%
Banks – Major Financiers of Growth
 India has one of the strongest financial sector with low systemic
risk
 Upturn in economic activity is mirrored in the sustained growth in
“Demand for Bank Credit”
 Bank credit has increased sharply from 30% of GDP at end-March
2000 to 48% at end-March 2006
 Non-food credit by SCBs increased by an average of 26.1% between
2002-2006 versus its long-term average of 17.8% from 1970 to 2006
 Deployment of credit is quite broad-based with increasing flows
going to infrastructure , SMEs, agriculture and retail sector

(especially residential mortgages) during the past three years
Indian Banks in the Best of the League of Asian Peers
According to Moody’s Investor Services Analysis :
 Indian lenders have highest Return on Equity (ROE) in Asia
(20.38%), followed by Indonesia (20.19%), New Zealand

(18.83%), Japan (-6.42%)
 Average gross bad loans as share of total loans – India
(8.18%), Philippines (15.05%), Thailand (13.08%), China

(11.80%) and Malaysia (9.73%)
 Cost to Income Ratio in India at 44.56% is in line with the
best regulated Asian countries like Singapore (44.15%),

Taiwan (42.61%) and Hong Kong (40.05%)
Financial Sector Reforms – Going Ahead
Requirements Fulfillments
 Banking Regulations • Deregulated Interest rate
• Greater freedom to banks
• Significant steps towards Full capital
• Account Convertibility
 Credit & Recovery • SARFAESI Act 2002
• Debt Recovery Tribunal (DRT)
 Payment Systems • Real Time Gross Settlements(RTGS)
• Electronic Clearing System (ECS)
• Electronic Fund Transfer (EFT)
• Cheque Truncation - in the pipeline
 Communications & • Internet Banking, E-Banking, On-line
Infrastructure • Tax Payment / Utility Payments,
• ATM, Mobile Banking
Significant Steps for Improvement…
Area Status
 Capital Norms - Min. Capital @ 9% as against 8% by BIS
- Indian Banks are ahead in Basel II readiness
– implementation road-map targets March
2009
- Min. Capital requirement for entry set @ Rs.
3 bn. for all banks in private sector
 Credit Information - Credit Information Bureau of India Ltd

- List of defaulters on RBI website
 Financial Track record - No financial crisis – escaped contagion
effect of South East Asian meltdown
 Other Regulatory Initiatives - Strong Regulatory Practice & Prudence in
place for “Managing Affluence”
- Regulatory provisions to bring NBFCs &
UCBs under uniform prudential norms
Indian Banks are on a high growth track…
1. Overall banking sector is growing by – 18%
2. Retail Sector (CAGR – 5 years)

- Housing Loan : 50.%
- Consumer Durables : 16%
- Credit Card : 45%
- Two Wheeler Loan : 31%
- Car Loans : 26%
- Other Personal Loans : 38%
More than 25% of the Bank Loan Assets are in Retail sector
ensuring high returns - likely to cross Rs. 5700 bn by 2010
Indian Banks are on a high growth track…
Online Banking in India . . .
Growth of e-Commerce Transactions
2002-03 2003-04 2004-05 2005-06 2006-07 • Estimated 4.6* million Indian Internet users
2500 are Banking Online today
• Indians paying bills online is expected to

2000
increase from the current 0.3 million in
1500 2300
1180 2005-06 to 1.8 million by 2007-2008.
Rs. CR
1000 • E-commerce transactions will cross the Rs

570
2000 crore mark (2006-2007) which
500 255
130 translates into an increase of over 300%
0
from financial year 2004-05.
Doing Business in India …
 Is there any Untapped Potential in Indian
Financial Market ?
 What is the ‘Big Picture’ ?
The Big Picture…
Consumption boom in India
Consumer Loans / Mortgages / GDP(%)
GDP(%)
40
60 58 37
35
50
30
India
40 India 25
36 Thailand
Thailand
20 Malaysia
30 Malaysia 17
26 Taiwan
15 13
Taiwan
20 Korea
Korea 10 9
13
10 8 5 4
0
0 India Thailand Malaysia Taiwan Korea
India Thailand Malaysia Taiwan Korea
Other Retail Loans / GDP

Credit Cards / GDP (%)
(%)
140
121.9 45
120
40
41
100 India 35
82.4 Thailand 30 India
80
Malaysia 25 Thailand
60 Malaysia
20
Taiwan
16 17 Taiwan
40 Korea 15
Korea
20
10 8
2.8
9.8 5 4
0 0.4
India Thailand Malaysia Taiwan Korea 0
India Thailand Malaysia Taiw an Korea
In
April 21, 2008 each of the US – India Business Summit, 2006
area, huge untapped potential left 18
The Big Picture…
Mutual Funds – Global Perspective
Mutual Funds as a % of GDP
100
87
90
80 72
70
60
50
Global Investment Fund Asset Pool
40
30
30 23 21
1600
20
13711396
10 6 5 1400
0 1200
Brazil
UK
US$bn
India
Korea
USA
Japan
Australia
1000
800
635
600 468 493 512
399
344
400 274
177
200 77
11 44
1
0
Luxembourg
Philippines
Ireland
UK
Korea
India
Hong Kong
Australia
Singapore
Zealand
Italy
Japan
Taiwan
France
New
Low Penetration – Indian industry still in early stages

April 21, 2008 US – India Business Summit, 2006 19Pacific
Source : CLSA Asia
Markets
The Big Picture…
Insurance Penetration – Global Landscape
Life premium/ GDP (%)
10
9
8.9
8.32 Insurance density (US$ premiums per
7.27
8
7
7.08
capita)
6
5 4.14
3.6 3.51
4
2.53
3 1.78 Country Life Non Life
2 0.82
1
0 UK 3287 1311
Indonesia
Australia
Malasiya
France
Korea
India
China
Japan
South
UK
US
Japan 2954 790

France 2474 1093
US 1753 2122
Australia 1366 1203
Non Life premium/ GDP (%)
South Korea 1211 495
6 Malasiya 188 95
5.01
5 India 18 4.5
4 3.55
3.13 3.09 2.98 China 13 16
3 2.22
1.82 Indonesia 10 10
2
0.92 0.7
1 0.61
0
Indonesia
Malasiya
Australia
Japan
France
South
Korea
India
China
US
UK
Low Penetration – A large potential still untapped

Source : Swiss Re Report 2005
The Big Picture…
Growth of Card Spending in India . . .
Growth of Credit and Debit Cards in India
 Increasing trend of Plastic Spend
8  High Technology Banking Products

7  Need for value added services on card
6 products
5
NUMBER OF 7.3
CARDS IN Cr 4
3 4.9 Growth of ATMs in India
2 2.8 30000
1
25000
0
2004 2005 2006 20000
15000
 Larger Number of Access Points for No of ATMs
Customers 10000
 Convenience to customer is the key 5000

 Shared network is the future 0
2000 2001 2002 2003 2004 2005 2006
Wealth Management & Private Banking – New Growth Opportunities…
 India - one of 10 fastest-growing population of HNWIs globally

 There are at least 23 Indian citizens amongst the richest people on the
planet
 Non Resident Indians can invest in all Indian Asset Classes
 No. of HNWIs in India – 100,000 (19.3% growth in 2005)
 Salary increases in India – 13.9% is the highest in the world
 Increasing Investment avenues – Art, Realty Funds, Commodities
 Penetration level of wealth management services in India - 10% in
comparison to European markets (60-90%)
 The number of companies listed on the Bombay Stock Exchange, at more
than 6,000, is second only to NYSE.
 Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.)
and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in
India alone.
The Big Picture…
India is fast emerging as the “Back Office” of
the World & the “Global Knowledge Hub”
 100 Global Companies outsource from India

 Top Global Banks are present in India
 Largest talent pool
 World class educational / professional institutions
 Increasing Trade activities
 Cost of operations – low
The Story Continues…
 Savings Rate @ 29% is low – Offers high potential from an
increasingly affluent community
 Less than 40% of Indian household has a bank account
 Bulging Middle Class – likely to exceed 300 mn
 Only 2% of the Indian population have insurance cover
 Less than 1% of the population is actively participating in
the Stock market
 Number of high net worth households (> Rs. 500,000) is
likely to grow from 200,000 to 400,000 by 2010
 Consumer Finance stands at about 2% to 3% of GDP as
compared to 25% in European market
 Real Estate Market is projected to touch USD 50 bn by 2008
 SME Sector is catching up fast creating huge prospect of
growth
Challenges Ahead….
 Capital Requirements – to compete with Foreign banks in the
post 2009 phase

 Financial Inclusion – to remove imbalances in economic
growth
 Banking Sector Consolidation – for improving competitiveness
– need for a clear road-map for “Managed Consolidation”

 HR Challenges – Changing working conditions, re-skilling,
compensation etc.
 Coping with the massive technology adoption programme –
change management – from employees’ as well as customers’

perspectives
Challenges Ahead….
 High intermediation costs
 Low Productivity
 Better Corporate Governance – higher level of accountability
 Improvement in productivity and efficiency in line with
advanced markets
 Transformation from Plain Vanilla banking’ to “multi-specialist”
banking
Thank You

DR Anil Khandelwal

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DR Anil Khandelwal

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Doing Business in India

The Big Picture

Dr. Anil K Khandelwal

 Consumption growth fuelling economic growth – consumption

expenditure forming 78% of GDP

 Services sector contributing over 60% to GDP

 Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, bio-

technology, nano technology, agri. businesses

 Where forces of competition are at work

 Innovation driving enterprises

 Economic reforms well on course – entering second phase

 “Inclusive growth” occupying central place

 High untapped potential in rural / agri - economy

 Indian companies on acquiring spree and going global

 Indian companies pursuing global best practices and producing

- India has cut the time to start a business from 71 to 25 days

- Reduced the Corporate Income Tax rate from 36.59% to 33.66%

- Supreme Court’s decision has made enforcing collateral simpler –

- Reforms to Stock Exchange Regulations have toughened investor

 Well established institutions

 Strong supervisory system

 Progressive integration of financial markets - banking, insurance,

mutual funds, securities, commodities

 High competition marked by innovation

 High technology absorption

 Rediscovery of the Indian customer

 21st century customer driving innovations in banking

 Banking plus financial services becoming the new offerings

the great Indian middle class

 “Cradle to Grave” becoming the new spectrum of life cycle needs

 Banking graduating beyond traditional boundaries of vanilla

 Indian customer demanding TOTAL FINANCIAL SOLUTIONS

 Banking sector bracing itself to offer customized and structured

 Indian middle class being reached out and wooed by banks

 Banking sector in good health – with low non-performing assets and

disclosures and capital adequacy

country risk & convertibility

1995 to Rs. 36,105 bn.

Progressive & the Opulent – with equal aplomb

 NPL Ratios compare favourably with global • Gross NPA : 3.34%

attractive • New Private : 33.9%

 Upturn in economic activity is mirrored in the sustained growth in

“Demand for Bank Credit”

 Bank credit has increased sharply from 30% of GDP at end-March

2000 to 48% at end-March 2006

 Non-food credit by SCBs increased by an average of 26.1% between

2002-2006 versus its long-term average of 17.8% from 1970 to 2006

 Deployment of credit is quite broad-based with increasing flows

going to infrastructure , SMEs, agriculture and retail sector

According to Moody’s Investor Services Analysis :

 Indian lenders have highest Return on Equity (ROE) in Asia

(20.38%), followed by Indonesia (20.19%), New Zealand

 Average gross bad loans as share of total loans – India

(8.18%), Philippines (15.05%), Thailand (13.08%), China

 Cost to Income Ratio in India at 44.56% is in line with the

best regulated Asian countries like Singapore (44.15%),

 Credit Information - Credit Information Bureau of India Ltd

1. Overall banking sector is growing by – 18%

2. Retail Sector (CAGR – 5 years)

2500 are Banking Online today

• Indians paying bills online is expected to