dr anil khandelwal

US – India Business Summit, 2006February 13, 2008 1

Doing Business in India

The Big PictureA Banker’s Perspective

US – India Business Summit

November 29, 2006

Dr. Anil K KhandelwalChairman & Managing Director

Bank of Baroda


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


“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

Indian Economy – A Snapshot


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


The Indian Financial Sector

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


The Indian Financial Sector 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


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…


Indian Banks – in good health…

About 70000 strong branch network – More

than 60% presence in Rural areas

Consistent growth in profitability – Spread is

getting healthier – from 3.1% in 2004-05 to

3.2% in 2005-06

NPL Ratios compare favourably with global

trends

Consistently out-performing stock indices –

Total Return to Shareholders continues to be

attractive

• PSU Banks : 61.2%

• India Banking : 51.3%

• Old Private : 40.0%

• New Private : 33.9%

TRS Apr 01 – Apr 05

• PSBs : 72%

• Pr.Bks : 19%

• Fgn. Bks.: 7%

• Others include UCBs,

RRBs, LABs & NBFCs

• Spread : 3.2%

• CAR : 12.0%

• ROA : 1.0%+

• Gross NPA : 3.34%

• Net NPA : 2.00%


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%)


Banking Regulations

Credit & Recovery

Payment Systems

Communications &

Infrastructure

• Deregulated Interest rate

• Greater freedom to banks

• Significant steps towards Full capital

• Account Convertibility

• SARFAESI Act 2002

• Debt Recovery Tribunal (DRT)

• Real Time Gross Settlements(RTGS)

• Electronic Clearing System (ECS)

• Electronic Fund Transfer (EFT)

• Cheque Truncation - in the pipeline

• Internet Banking, E-Banking, On-line

• Tax Payment / Utility Payments,

• ATM, Mobile Banking

Requirements Fulfillments

Financial Sector Reforms – Going Ahead


Capital Norms

Credit Information

Financial Track record

Other Regulatory Initiatives

- 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 Bureau of India Ltd

- List of defaulters on RBI website

- No financial crisis – escaped contagion

effect of South East Asian meltdown

- Strong Regulatory Practice & Prudence in

place for “Managing Affluence”

- Regulatory provisions to bring NBFCs &

UCBs under uniform prudential norms

Area Status

Significant Steps for Improvement…


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%

Indian Banks are on a high growth track…

More than 25% of the Bank Loan Assets are in Retail sector

ensuring high returns - likely to cross Rs. 5700 bn by 2010


Online Banking in India . . .Growth of e-Commerce Transactions

130255

570

11802300

0

500

1000

1500

2000

2500

Rs. C

R

2002-03 2003-04 2004-05 2005-06 2006-07 • Estimated 4.6* million Indian Internet users

are Banking Online today

• Indians paying bills online is expected to

increase from the current 0.3 million in

2005-06 to 1.8 million by 2007-2008.

• E-commerce transactions will cross the Rs

2000 crore mark (2006-2007) which

translates into an increase of over 300%

from financial year 2004-05.

Indian Banks are on a high growth track…


Is there any Untapped Potential in Indian

Financial Market ?

What is the ‘Big Picture’ ?

Doing Business in India …


813

26

36

58

0

10

20

30

40

50

60

India Thailand Malaysia Taiwan Korea

India

Thailand

Malaysia

Taiwan

Korea

4

9

13

17

37

0

5

10

15

20

25

30

35

40


India

Thailand

Malaysia

Taiwan

Korea

48

16 17

41

0

5

10

15

20

25

30

35

40

45

India Thailand Malaysia Taiw an Korea

India

Thailand

Malaysia

Taiwan

Korea

Consumer Loans / GDP(%)

Mortgages / GDP(%)

Credit Cards / GDP (%) Other Retail Loans / GDP (%)

0.4 2.89.8

82.4

121.9

0

20

40

60

80

100

120

140


India

Thailand

Malaysia

Taiwan

Korea

Consumption boom in India

In each of the area, huge untapped potential left

The Big Picture…


Mutual Funds – Global PerspectiveMutual Funds as a % of GDP

Global Investment Fund Asset Pool

87

72

3023 21

6 5

0

10

20

30

40

50

60

70

80

90

100

Aus

tral

ia

USA

Bra

zil

UK

Kor

ea

Indi

a

Japa

n

1 11 44 77177

274344 399

635

468 493 512

13711396

0

200

400

600

800

1000

1200

1400

1600

Philip

pin

es

New

Zeala

nd

India

Taiw

an

Kore

a

Sin

gapore

Hong K

ong

Japan

Aust

ralia

Irela

nd

UK

Italy

Fra

nce

Luxem

bourg

US

$bn

Low Penetration – Indian industry still in early stages

Source : CLSA Asia Pacific Markets

The Big Picture…


Life premium/ GDP (%)

Source : Swiss Re Report 2005

Insurance Penetration – Global Landscape

Non Life premium/ GDP (%)

Insurance density (US$ premiums per capita)

Low Penetration – A large potential still untapped

8.98.32

7.27 7.08

4.143.6 3.51

2.531.78

0.82

0123456789

10

UK

Japan

South

Kore

a

Fra

nce

US

Mala

siy

a

Austr

alia

India

Chin

a

Indonesia

5.01

3.553.13 3.09 2.98

2.221.82

0.92 0.7 0.61

0

1

2

3

4

5

6

US

UK

Fra

nce

Austr

alia

Sou

th

Kore

a

Jap

an

Ma

lasiy

a

Ch

ina

Indo

ne

sia

Ind

ia

1010Indonesia

1613China

4.518India

95188Malasiya

4951211South Korea

12031366Australia

21221753US

10932474France

7902954Japan

13113287UK

Non LifeLife Country

The Big Picture…


Growth of Card Spending in India . . .

0

5000

10000

15000

20000

25000

30000

2000 2001 2002 2003 2004 2005 2006

No of ATMs

Growth of ATMs in India

Increasing trend of Plastic Spend

High Technology Banking Products

Need for value added services on card products

Larger Number of Access Points for Customers

Convenience to customer is the key

Shared network is the future

Growth of Credit and Debit Cards in India

2.8

4.9

7.3

0

1

2

3

4

5

6

7

8

NUMBER OF CARDS IN Cr

2004 2005 2006

The Big Picture…


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.

Wealth Management & Private Banking – New Growth Opportunities…


India is fast emerging as the “Back Office” of the

World & the “Global Knowledge Hub”

The Big Picture…

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


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

The Story Continues…


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

Challenges Ahead….


Thank You