sector analysis of banking in india

8/7/2019 sector analysis of banking in india

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INDIAN BANKING SECTOR

REVIEW

HISTORY

For the past three decades India's banking system has several outstanding achievements to its

credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or

cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners

of the country. This is one of the main reasons of India's growth process. The government's

regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14

major private banks of India. The first bank in India, though conservative, was established in

1786. From 1786 till today, the journey of Indian Banking System can be segregated into three

distinct phases. Those are:-

Early phase from 1786 to 1969 of Indian Banks

Nationalizations of Indian Banks and up to 1991 prior to

Indian banking sector Reforms

New phase of Indian Banking System with the advent of

Indian Financial & Banking Sector Reforms after 1991

The steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200crore.


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Without a sound and e

ective banking syste in India it cannot have a healthyeconomy The

banking system of India should not only be hassle free but it should be able to meet ne

challenges posed by the technology and any other e ternal and internal factors

For the past three decades India's banking system hasseveral outstanding achievements to its

credit. It is no longer confined to only metropolitans or cosmopolitans in India; in fact, Indian

banking system has reached even to the remotecorners of thecountry. This is one of the main

reasons of India's growth process. The government's regular policy for Indian bank since1969

has paid rich dividends with the nationalisation of14 major private banks of India. Not long

ago, an account holder had to wait for hours at the bank counters for getting a draft or for

withdrawing his own money. Today, he has a choice. Gone are days when the most efficient

bank transferred money from one branch to other in two days. Now it issimple as instant

messaging or dial a pizza. Money has become the order of the day.

Post independence

In 1948, the ReserveBank of India, India'scentral banking authority, was nationalized, and it

became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of

India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an e isting bank

may be opened without a license from the RBI, and no two banks could have common

directors.


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Current situation

Currently, India has88scheduled commercial banks (SCBs) -28 publicsector banks (that is with

the Government of India holding a stake), 29 private banks (these do not have government

stake; they may be publicly listed and traded on stock e changes) and 31 foreign banks. They

have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by

ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of

the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Over the last four years, Indiaseconomy has been on a high growth trajectory, creating

unprecedented opportunities for its banking sector. Most banks haveenjoyed high growth

and their valuations have appreciated significantly during this period. Looking ahead, the most

pertinent issue is how well the banking sector is positioned to cater to continued growth. A

holistic assessment of the banking sector is possible only by looking at the roles and actions of

banks, their corecapabilities and their ability to meet systemic objec tives, which include

increasing shareholder value, fostering financial inclusion, contributing to GDP growth,

efficiently managing intermediation cost, and effectively allocating capital and maintainingsystem stability.


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LIBERALIZATION

PRIVATIZATION

GLOBALIZATION

OF BANKING


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Liberalization

The new policyshook theBanking sector in Indiacompletely. Bankers, till this time, were used

to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. In the early

1990s the then Narasimham Rao government embarked on a policy of liberalization and gave

licenses to a small number of private banks, which came to be known as New Generation tech-

savvy banks, which included bankssuch as Global Trust Bank (the first of such new generation

banks to be set up)which later amalgamated with Oriental Bank of Commerce, UTI Bank(now

re-named asAxisBank), ICICI Bank and HDFC Bank.

Privatization

In January 1993. RBI has issued guidelines for licensing of new banks in the private sector. It

had granted licenses of new banks in the private sector. It has granted licenses to 10 banks

which are presently in business based on a review ofexperience gained on the functioning of

new private sector banks, revised guidelines were issued in January 2000. Following are the

major revised provisions

y Initial minimum paid up capital shall be Rs200crore which will be raised to Rs 300crore

within threeyears ofcommencement of business.

y Contribution of promotersshall be minimum of40 per cent of the paid up capital of the

bank at any point of time. Thiscontribution of40 percent shall be locked in for 5 years

from the date of licensing of the bank.

y While augmenting capital to Rs 300crore within three7yeaRs promotersshall bring in

at least 40 percent of the fresh capital which will also be locked in for 5 years.

y NRI participation in the primaryequity of a new bank shall be to the maximum extent of

40 per cent.


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GLOBALISATION

Int odu

tion

Globalization refers to widening and Deeping of international flow of trade, capital, labour,

Technology, information and services. Globalization has led to an overall economic, political

and

Technological integration of the world. In our country, first economic reforms (1991) gave birth

to globalization and second phase of banking sectorreforms strengthened the globalization.

Various reform measures introduced in India have indeed strengthened the Indianbanking

system in preparation for the global challenges ahead. The major impact of banking sector

reforms can be viewed from the following chart:

Indi n Bankingonth Refo ms PathRefo ms Initiati

es Impacton Banks

1. Deregulation of deposit 1. Helped banks to gain control over cost of deposits

practices of risk management to enhance their

competitiveness.

2. More stability in the banking

system

2. Increase in Capital Ade uacy Ratio

3. Flexibility to price loan productsand competitive pricing

3. Deregulation of lending rates

4. Availability of more funds for

lending

4. Lower CRR & SLR

5. Encourage banks to strengthen

their credit and this brought down

the NPA generate rate

5. Asset classification and provisioning norms

7. Emerge as financial super markets

and build the top and bottom line

7. Entry into new business lines

8. Help banks in proper allocation of

funds across various business lines

and adapt global best

8. Increased thrust on banking supervision and risk

management


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Globalization, which is outcome ofeconomic reforms, is both a challenge and an opportunity

for Indian banks to gain strength in the domestic market and increase presence in the global

market. The present paper analyzes the impact of globalization on Indian banking from the

point view of penetration of Indian banks in foreign countries and compares the performance

of Indian banks particularly the performance of branches operating in foreign countries with

that of foreign banks operating in India and at theend suggestssomestrategies for the

globalization of Indian banks.

Globalization and Future Opportunities for Indian Ban s

Globalization will gain greater speed in thecoming years with the opening up of the financial

sectors under WTO regime. Consolidation of Banks: Consolidation is a crucial preparatorystep

to be undertaken by banking sector in India.

Weak banks need to exit and one of the options will be to merge with a stronger bank.

Mergers amongst publicsector banks are politicallyverysensitive, therefore the government

has a big role in establishing the framework, which will include flexible labour laws.

Increased revenue, size and scale

Increased productivity by reducing transaction cost

Benefits to stakeholders through lesser intermediation cost

Increased ability to meet competition from global banks

Easy mobilizing resources from the market

Asset Quality:Indian banksshould concentrate on asset quality and earnings there from.

Global Players and Customers Satisfaction: In theemerging scenario, with more and more

global players operating in India, there has been an urgent need to serve the customers

promptly and efficiently.


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Competitiveness in Banks:Domestic banksshould begin to make themselves ascompetitive as

possible. Theyshould also increase their productivity and profitability because at the present

day

context, size is no longer a key indicator in the banking industry.

E-Delivery Channels: The Indian banks particularly publicsector banksshould create awareness

among the masses about all thee-deliverychannels with demo for how to operate and use.

Theyshould provideefficient services through e-deliverychannels.

Autonomy in HRM : Autonomy in HRM areassuch as deciding categorization o f branches,

vacancy, placementsshould be given to banks.

Efficient Capital Markets: An efficient capital market should be developed to channelize

private

savings into infrastructure financing.

Privatization of Public Sector Banks : Productivity, profitability and efficiency isquite higher in

partially privatized publicsector banks. The government should continue the process to make

the

Indian bankscompetitive at the global level.

Resources Optimization:Asset optimization, which include unlocking mone y from real estate

investment to strengthening capital, human resources optimization and valuesourcing with the

focus on risk and associated benefits besidescost arbitrage.

CustomerExperience:Creating uniform transaction experience, developing appropriate

deliverystrategies and strengthening CRM aresome of the key requirements for banks.


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Strate ies for Globalization ofIndian Ban s

The following are thestrategies for the globalization of Indian banks

Cadre ofExperts

A cadre ofexperts needs to be built up; personnel should haveexposure in functioning in truly

global environment.

Information Technology

Indian banks must build their expertise in rolling out technology and in Basel - II. IT can explore

new possibilities in foreign countries.

International Capital Markets

Weshould be active in international capital markets, approaching them off and on for trenches

ofcapital subscription. Indian banksshould try t o capture at lower cost

Linkages with other financial or ganization

Indian banks have linkage with the rest of the finance infrastructure in India such as term

lenders, investment banks, insuranceventures and credit rating agencies. Together theycan

faceeven tough competition at global level.

Strategic alliances

Strategic alliances with national banks in oil rich countriescan beveryvaluable, especially as

Indian and China are becoming largeconsumers and there is an expectation of large India

related and Asia- related investments in thissector and thesecountries.

Acquisitions of Retail Banks

Acquisitionsshould be of retail banks in selected markets. Theselection will depend on the

ability to implement technology, improvecustomer service and upgrade to Basel -II.


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Research of Products and Services

Indian banksshould makecomprehensive research in foreign countries regarding the financial

requirements of the people and then theyshould enter in a big way.

Prices of Products and Services

At the initial stages Indian banksshould provide products and services at comparatively lower

prices to capture their market share.

Change in Mind- Set

The bankersshould change their own mindset to win the customers in other countries. A

friendly

customersenvironment should help to penetrate in other countrie s.

Alliance with Big Houses/Companies

Indian banksshould makesome alliance with profit making big houses and companies to

capture

foreign market.

Effective Advertisements

Indian banksshould makeeffective and attractive advertisements according to the customers

tastes regarding our financial products.

Incentives

Indian banksshould provide allurement and incentives to the potential customers in the

beginning.

Effective CRM

Indian banksshould makeeffective CRM in foreign countries. It will help to win potential

customers.


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Experiences and Lessons fro Ban s Which Went Global

Going global is the way forward for banks to gain size and scale. It is a natural progression for

any organization. However, there are mixed experiencese.g.

- In India, Grind laysBank sold its Indian operation to Standard Charted Bank and exited.

-BNP Paribas, though, present in India for more than hundred years, decided to shut its Indian

operations

-SBI, e.g. had to close its Panama branch for bad external relations

- Though there are 33 foreign banks operating in our country, only top four, others only in India

have marginal presence

-SBI presently has planed to increase its presence in the globa l market from the present 54 to

75 branches

Some of the lessons that can be drawn are as under:

- A major lesson is that the management processes in thecross -border initiativeshould be

aligned with theculture. There are two vital aspects, everycountry should keep in mind:

(a) Differing national cultures, and

(b) Differing corporatecultures

The failures of Japanese banks in US partly relate to culture mismatch. It is necessary to

announce at the time of acquisition itself as to what the approach/goals of the acquired entity

will be post-acquisition.

- After acquisition, effective methodsshould be adopted for all the transactions.

- Risk management needs maximum focus when expanding internationally.

- Whileentering new areas, especially international ly, there is a need for the top managementto be aware of theemerging areas in finance.


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BANKING STRUCTURE IN INDIA

The banking institutions in the organized sector, commercial banks are the oldest institutions,

some them having their genesis in the nineteenth century. Initially they were set up in large

numbers, mostly as corporate bodies with shareholding with private individuals. Today 27

banks constitute a strong Public Sector in Indian Commercial Banking. Commercial Banks

operating in India fall under different sub categories on the basis of theirownership and

control over management;

RESERVE BANK OF INDIA

SCHEDULED BANKS

COMMERCIAL BANKS

PUBLICSECTOR BANKS (27)

SBI AND ASSOCIATES (8)

NATIONALIZED BANKS (19)

PRIVATE BANKS (31)

OLD BANKS (23)

NEW BANKS (8)

CO-OPERATIVEBANKS

URBAN CO-OPERATIVE (52)

STATECO-OPERATIVE (16)


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Public Sector Ban s

PublicSector Banksemerged in India in threestages. First theconversion of the then existing

Imperial Bank of India into StateBank of India in 1955, followed by the taking over of theseven

associated banks as itssubsidiary. Second the nationalization of14 ma jor commercial banks in

1969and last the nationalization of6 morecommercial Bank in 1980. Thus27 banksconstitute

the PublicSector Banks.

New Private Sector Ban s

After the nationalization of the major banks in the privatesector in 1969 and 1980, no new

bank could besetup in India for about two decades, though there was no legal bar to that

effect. The Narasimham Committee on financial sector reforms recommended the

establishment of new banks of India. RBI thereafter issued guidelines for setting up of new

privatesector banks in India in January1993. These guidelines aim at ensuring that new banks

are financiallyviable and technologically up to da te from thestart. They have to work in a

professional manner, so as to improve the image ofcommercial banking system and to win the

confidence of the public. Eight privatesector banks have been established including bankssector by financially institutions like IDBI, ICICI , and UTI etc.

Local Area Ban s

Such Bankscan beestablished as public limited companies in the privatesector and can be

promoted by individuals, companies, trusts and societies. The minimum paid up capital ofsuch

banks would be5crores with promoterscontribution at least Rs. 2crores. They are to beset up

in district towns and the area of their operations would be limited to a maximum of 3 districts.

At present, four local area banks are functional, oneeach in Punjab, Gujarat, Maharashtra and

Andhra Pradesh.


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Forei

n Ban s

Foreign commercial banks are the branches in India of thejoint stock banks incorporated

abroad. There number was 38 as on 31.03.2009.

Scheduled Co

ercial Ban s in India

Thecommercial banking structure in India consists of:

Scheduled Commercial Banks in India

Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in theSecond

Schedule of ReserveBank of India (RBI) Act, 1934. RBI in turn includes only those banks in this

schedule which satisfy thecriteria laid down videsection42 (6) a) of the Act.

"Scheduled banks in India" means theStateBank of India constituted under theStateBank of

India Act, 1955 (23 of1955), a subsidiary bank as defined in theS tateBank of India (Subsidiary

Banks) Act, 1959 (38 of1959), a corresponding new bank constituted under section 3 of the

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of1970), or under

section 3 of theBanking Companies (Acqui sition and Transfer of Undertakings) Act, 1980 (40 of

1980), or any other bank being a bank included in theSecond Schedule to the ReserveBank of

India Act, 1934 (2 of1934), but does not include a co -operative bank". "Non-scheduled bank in

India" means a banking company as defined in clause (c) ofsection 5 of theBanking Regulation

Act, 1949 (10 of1949), which is not a scheduled bank".


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Cooperative Ban

s

Besides thecommercial banks, thereexists in India another set of banking institutionscalle d

cooperativecredit institutions. These have been made in existence in India since long. They

undertake the business of banking both in urban and rural areas on the principle of

cooperation. They haveserved a useful role in spreading the banking habit throughout the

country. Yet, there financial position is not sound and a majority ofcooperative banks hasyet

to achieve financial viability on a sustainable basis.

Thecooperative banks have been set up under various CooperativeSocieties Actsenacted by

State Governments. Hence theState Governments regulate these banks. In 1966, need was felt

to regulate their activities to ensure their soundness and to protect the interests of depositors

According to the RBI in March 2009, number of all Scheduled Comme rcial Banks (SCBs) was171

of which, 86 were Regional Rural Banks and the number of Non -Scheduled Commercial Banks

including Local Area Banksstood at 5. Taking into account all banks in India, there are overall

56,640 branches or offices, 893,356employee s and 27,088 ATMs. Publicsector banks made up

a largechunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent ofstaff and 60.3per cent of all automated teller machines (ATMs).


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Reserve Bank of India

RBI is the banker to bankswhether commercial, cooperative, or rural. The relationship is

established once the name of a bank is included in theSecond Schedule to the ReserveBank of

India Act, 1934. Such bank, called a scheduled bank, isentitled to faci lities of refinance from

RBI, subject to fulfilment of the following conditions laid down in Section 42 (6) of the Act, as

follows:

It must have paid-up capital and reserves of an aggregatevalue of not

less than an amount specified from time to time; and

It must satisfy RBI that its affairs are not being conducted in a

manner detrimental to the interests of its depositors.

MAJOR REFROMS INITIATIVES

Some of the major reform initiatives in the last decade that havechanged the face of the Indian

banking are:-

Interest Rate Deregulation-Interest rates on deposits and lending have been deregulated with

banksenjoying greater freedom to determine their rates.

Government equity in banks has been reduced and strong banks have been allowed to access

thecapital market for raising additional capital.

New privatesector banks have been set up and foreign banks permitted to expand their

operations in India including through subsidiaries.

New areas have been opened up for bank financing like - insurance, credit cards,

infrastructure financing, leasing, gold banking, besides of course investment banking, asset

management, factoring, etc.

Banks havespecialized committees to measure and monitor various risks and have been

upgrading their risk management skills and systems.

Adoption of prudential norms in terms ofcapital adequacy, asset classification, income

recognition, provisioning, exposure limits, investment fluctuation reserve, etc


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the major announcements arecovered by the financial press. But some announcements not

regarded asso important and sometimes, particularly among smaller firms that are monitored

less by investors and financial journalists, indicators of thecompanys health can be missed.

Takeovers or even rumours of takeovers also have a big influence on prices. This is because

investorsexpect the bidder to pay a premium to shareholders. Also any other news or

speculation about factors likechange in Repo Rate, Cash Reserve Ratio, Reverse Repo Rate, any

change or likelychange in the policies of government or RBI or SEBI, any n ew guidelines issued

by theconcerned authority, etc. affect the price of theshare. A positive news in any of these

respects leads to a rise in price and a negative takes it to the other side.

Thus, news in any respect is undoubtedly a huge factor when i t comes to stock price. Positive

news about a companycan increase buying interest in the market while a negative press

releasecan ruin the prospect of a stock. Having said that, we must always remember that often

times, despite amazingly good news, a sto ck can show least movement. It is the overall

performance of thecompany that matters more than news. It is always wise to take a wait and

watch policy in a volatile market or when there is mixed reaction about a particular stock.

Internal Affairs Of The Company:

Any happening inside thecompany or any internal news does affect itsshare price. For

example any key person moving out of thecompany, acquisition or takeover or merger news,

sharesplit, employeestrike and any other thing internal to the affairs of the bank affects the

share price. A positive note from the internal affairs takes the price to new highs and a negative

doesviceversa.


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Price/Earnings Ratio:

Price/Earnings ratio or the P/E ratio gives us a fair idea of how a company'sshare price

compares to itsearnings. If the price of theshare is too much lower than theearning of the

company, thestock is undervalued and it has the potential to rise in the near future. On the

other hand, if the price is way too much higher than the actual earning of thecompany and

then thestock issaid to overvalued and the pricecan fall at any point. Theearnin gs also have a

direct relation with price which is alreadyexplained above.

Demand And Supply:

This fundamental rule ofeconomics holds good for theequity market as well. The price is

directly affected by the trend ofstock market trading. When more peo ple are buying a certain

stock, the price of that stock increases and when more people areselling thestock, the price of

that particular stock falls. Now it is difficult to predict the trend. Thus, weshould bevery

careful while dealing in stocks as buy ing or selling pressure may lead to steep rise or fall in price

of theshares.

Analysts Reports:

Reports produced by independent analysts also influenceshare prices. If an analyst changes

their recommendation from sell to buy, for example, theshares will often rise in value.

Analysts reports are produced primarily by investment banks for professional investo Rs,

although somestockbrokeRs will make their research available to private investoRs. We may

find summaries ofsome reports published on financial news websites or in newspapeRs and

magazines. Some investment banks also publish their reports on their websites for free. We

should remember that the recommendation an analyst puts on a company will affect itsshare

priceveryquickly and can become irrelevant within houRs. This is because the analyst will

usuallysay a stock is a buy within a particular price range. If the price moves above their

targets the improvements the analyst expects may be priced in and so theshares are not

worth buying. But analysts reports are always worth reading, even if the recommendation is

out of date. The reports usuallycontain a great deal of useful in fromation on thecompany and


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how its business is developing. They also often look at how thecompany rate s against its

competitoRs.

OTHER FACTORS:

Some other factoRs which influenceshare prices are as follows:

Change in Rates by RBI:

Looking at thechanging scenario, RBI keEPS on changing rates like Repo Rate, ReveRse Repo

Rate and Cash Reserve Ratio. These rates have a direct relation with the Banks performance

and in turn theshare prices are linked with Banks Performance. Thus, a change in these rates

or even a speculation ofchange in these rates affectsshare p rices.

Global Changes:

Anychange in the global economy or in other words global changes also affects Indian

economy. Thus, the performance of an economy and its banks is affected by these global

changes. For example: The recession was first observed in the USA and later on it caught its

lead in other countries too. When it entered India, theshare market crashed literally. So, a

careful and logical investor always keEPS this in mind that what global changes affect the

market and thus leads to rise or fall in share prices.

Change in Government Policies:

Keeping in mind the progress and well wishes about thecountry, the government takes

desired steps and keEPS on reviewing its policies, rules and regulations and procedures. A

change in FDI and FII inflow restrictions, entryexit barriers for foreign banks in India, EXIM

regulations, change in Basel Norms, etc from part of important government policies. Thus, a

change in these policies affects the market scenario. For example: if government allowsentry

of foreign Banks in India, then thecompetition would rise and it might happen that those

foreign Banks may outperform and leave our own banks far behind. Then in thiscase, the

investoRs would be interested in investing in those foreign Banks and a govern ment would

never like that the funds are invested in some foreign banks rather than our own banks. Thus,

some restriction would follow and this will definitely affect theshare prices


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S.W.O.T ANALYSIS OF BANKING INDUSTRY

STRENGTH

y Indian banks have compared favourably on growth, asset uality and profitability with

other regional banks over the last few years. The banking index has grown at a

compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per

cent growth in the market index for the same period.

y Policy makers have made some notable changes in policy and regulation to help

strengthen the sector. These changes include strengthening prudential norms,enhancing the payments system and integrating regulations between commercial and

co-operative banks.

y Bank lending has been a significant driver of GDP growth and employment.

y Extensi e reach: the vast networking & growing number of branches & ATMs. Indian

banking system has reached even to the remotecorners of the country.

y

The government's regular policy for Indian bank since 1969 has paid rich dividends withthe nationalisation of 14 major private banks of India.

y In terms of ! uality of assets and capital ade ! uacy, Indian banks are considered to have

clean, strong and transparent balance sheets relative to other banksin comparable

economies in its region.


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y India has 88 scheduled commercial banks (SCBs) - 27 publicsector banks (that is with

the Government of India holding a stake)after merger of New Bank of India in Punjab

National Bank in 1993, 29 private banks (these do not have government stake; they may

be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a

combined network of over 53,000 branches and 17,000 ATMs. According to a report by

ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total

assets of the banking industry, with the private and foreign banks holding 18.2% and

6.5% respectively.

y Foreign banks will have the opportunity to own up to 74 per cent of Indian private

sector banks and 20 per cent of government owned banks.

WEA " NESS

y PSBs need to fundamentally strengthen institutional skill levels especially in sales and

marketing, service operations, risk management and the overall organisational

performanceethic&strengthen human capital.

y Old privatesector banks also have the need to fundamentallystrengthen skill levels.

y

Thecost of intermediation remains high and bank penetration is limited to only a fewcustomer segments and geographies.

y Structural weaknesses such as a fragmented industry structure, restrictions on capital

availability and deployment, lack of institutional support infrastructure, restrictive

labour laws, weak corporate governance and ineffective regulations beyond Scheduled

Commercial Banks (SCBs), unless industry utilities and ser vice bureaus.

y Refusal to dilute sta # e in PSU ban # s: The government has refused to dilute itsstake in

PSU banks below 51% thus choking the headroom available to these banks for raining

equitycapital.

y I$

pedi$

ents in Sectorial refor$

s: Opposition from Left and resultant cautious

approach from the North Block in terms of approving merger of PSU banks may hamper

their growth prospects in the medium term.


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OPPORTUNITY

y The market is seeing discontinuous growth driven by new products and services that

include opportunities in credit cards, consumer finance and wealth management on the

retail side, and in fee-based income and investment banking on the wholesale banking

side. These require new skills in sales& marketing, credit and operations.

y \banks will no longer enjoy windfall treasury gains that the decade-long secular decline

in interest rates provided. This will expose the weaker banks.

y With increased interest in India, competition from foreign banks will only intensify.

y Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities and

service levels from banks.

y New private banks could reach the next level of their growth in the Indian banking

sector by continuing to innovate and develop differentiated business models to

profitablyservesegments like the rural/low income and affluent/HNI segments; actively

adopting acquisitions as a means to grow and reaching the next level of performance in

their service platforms. Attracting, developing and retaining more leadership capacity

y Foreign banks committed to making a play in India will need to adopt alternative

approaches to win the race for the customer and build a value-creating customer

franchise in advance of regulations potentially opening up post 2009. At thesame time,

theyshould stay in the game for potential acquisition opportunities as and when they

appear in the near term. Maintaining a fundamentally long-term value-creation

mindset.

y reach in rural India for the privatesector and foreign banks.

y With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services areexpected to bestrong.


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y the ReserveBank of India (RBI) has approved a proposal from the government to amend

the Banking Regulation Act to permit banks to trade in commodities and commodity

derivatives.

y Liberalization ofECB nor % s: The government also liberalized the ECB norms to permit

financial sector entities engaged in infrastructure funding to raise ECBs. This enabled

banks and financial institutions, which were earlier not permitted to raisesuch funds,

explore this route for raisin g cheaper funds in the overseas markets.

y Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has

allowed them to raise perpetual bonds and other hybrid capital securities to shore up

their capital. If the new instruments find takers, it would help PSU banks, left with little

headroom for raising equity. Significantly, FII and NRI investment limits in these

securities have been fixed at 49%, compared to 20% foreign equity holding allowed in

PSU banks.

THREATS

y Threat ofstability of thesystem: failure ofsome weak banks has often threatened the

stability of thesystem.

y Rise in inflation figures which would lead to increase in interest rates.

y Increase in the number of foreign players would pose a threat to the PSB as well as the

private players.


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29

Focus ofban 0 s in India

The banking industry is slated for growth in future with a more qualitative rather than

quantitative approach.

The total assets of all scheduled commercial banks byend-March 2010 is projected to

touch Rs40,90,000cr. This is going to comprise around 65% of GDP at current market

prices ascompared to 67% in 2002-03.

The bank's assets are estimated to grow at an annual composite rate of growth of

13.4% during the rest of the decade as against 16.7% between 1994-95 and 2002-03.

Barring the asset side, on the liability perspective, there will be huge additions to the

capital base and reserves.

People will rely more on borrowed funds, pace of deposit growth slowing down side by

side. However, advances and investments would not see a healthy growth


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30

POSITIVE IMPACT ONBANKING

Key announcements ImpactWhat came in?

New banking licenses for few

privatesector players and

NBFCssubject to meeting RBIs

eligibilitycriteria.

Positive for NBFCssuch as Reliance Capital, IFCI,

M&M Financial services.

Capital Infusion of Rs165bn for

PSU banks in FY11 thereby

enabling them maintain Tier I

capital above8% by March 31,

2011.

Positive for small PSU Banks- Dena Bank, Syndicate

Bank, UCO Bank & United Bank of India.

Extension in repayment of theloan under the Debt Waiver and

Debt ReliefScheme for farmers

bysix months to June 30, 2010

Positive for PSU Banks.

IIFCL to refinance bank lending

towards infrastructure projects.

Positive for banks as it would improve ALM and

increase funding to thesector

FY11 net market borrowings of

Government estimated at lower

Rs3.45tn; fiscal deficit for the

year pegged at 5.5% of GDP

Positive for thesector, with pick up in credit demand

clarity over the borrowing programme will ensure

adequate moves in interest rates, and leaving

negligible impact on banks treasury book.

Extension of interest subvention

scheme to March 31, 2011 onhousing loans up to Rs1mn on

propertyvalue up to Rs2m.

Positive for Housing Finance Companies and Banks

with home loan portfolio.

Interest subvention of2% for

farmers who repay their short-

term crop loans on schedule.

Neutral as long as the interest part waived is re-paid

by the Go to banks.

Impetus towardsFinancial

Inclusion

Positive for thesector in general as it aims at reaching

unbanked areas thereby increasing the penetration

levels of Insurance and other financial products.


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31

STOCK MARKET IN INDIA

The Indian security market has become one of the most dynamic and efficient security markets

in Asia today. The Indian market now conforms to International Standards in terms of operating

efficiency. During the latter half of 19th century, shares of companies used to be floated in

India occasionally. There were share brokers in Bombay who assisted in the floatation of shares

of companies. A small group of stock brokers in Bombay joined together in 1875 to from an

association called Native Share & StockbrokeRs Association. The association drew up codes of

conduct for brokerage business and mobilizes private funds for investment in the corporate

sector. It was this association which later became the Bombay Stock Exchange, Mumbai or BSE

Later on in 1894 the brokers of Ahmadabad formed the Ahmadabad Stock Exchange, the

second stock exchange of the country. During the 1900s Kolkata became another majorcentre

of share trading and as a result Kolkata Stock Exchange wasformed in 1908. Later on ChennaiStock Exchange was started in 1920. However, by 1923, it ceased to exist. Then the Madras

Stock Exchange was started in 1937. Three more stock exchanges were established before

independence, at Indore in 1930, at Hyderabad in 1943 and at Delhi in 1947. Thus along with

the increase in number of stock exchanges, the number of listed companies and the capital of

listed companies grown tremendously after 1985 which results into growth and development

of stock market in India.


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32

ABOUT BSE SENSEX

BSE SENSEX or BombayStock ExchangeSensitive Index is a value-weighted index composed of

30stocksstarted in 01 of January, 1986. It consists of the 30 largest and most actively traded

stocks, representative ofvarioussectors, on theBombayStock Exchange. Thesecompanies

account for around one-fifth of the market capitalization of theBSE. The basevalue of the

SENSEX is100 on April 1, 1979, and the baseyear ofBSE -SENSEX is1978-79. At irregular

intervals, theBombayStock Exchange (BSE) authorities review and modify itscomposition to

makesure it reflectscurrent market conditions. The index iscalculated based on a free -float

capitalization method; a variation of the market cap method. Instead of using a company's

outstanding shares it uses its float, or shares that are readily available for trading. The free-

float method, therefore, does not include restricted stocks, such as those held bycompany

insiders.

The index has increased by over ten times from June1990 to the present. Using in fromation

from April 1979 onwards, the long -run rate of return on theBSE SENSEX works out to be18.6%

per annum, which translates to roughly9% per annum after compensating for inflation. There

are five major indices in BSE, thirteen sector specific indices and a B SE Dulled Index for dollar

prices and movements.


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33

ABOUT NSE AN NIFTY 50The National Stock Exchange of India Limited (NSE) is a Mumbai-based stock exchange. It is the

largest stock exchange in India in terms of daily turnover and number of trades, for bot h

equities and derivative trading. Though a number of other exchangesexist, NSE and the

BombayStock Exchange are the two most significant stock exchanges in India and between

them are responsible for thevast majority ofshare transactions. The NSE's key index is theS&P

CNX Nifty, known as the Nifty, an index of fifty major stocks weighted by market capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurancecompanies

and other financial intermediaries in India but its ownership and management operate as

separateentities. There are at least 2 foreign investoRs NYSE Euro next and Goldman Sachs

who have taken a stake in the NSE. As of2006, the NSE VSAT terminals, 2799 in total, cover

more than 1500cities across India. In October 2007, theequity market capitalization of the

companies listed on the NSE was US$1.46 trillion, making it thesecond largest stock exchange

in South Asia. NSE is the third largest Stock Exchange in the world in terms of the number of

trades in equities. It is thesecond fastest growing stock exchange in the world with a recorded

growth of16.6%.

TheStandard & Poor's CRISIL NSE Index 50 or S&P CNX Nifty nicknamed Nifty50 or simply

Nifty, is the leading index for largecompanies on the Nati onal Stock Exchange of India. The

Nifty is a well diversified 50stock index accounting for 22 sectors of theeconomy. It is used for

a variety of purposessuch as benchmarking fund portfolios, index based derivatives and index

funds. There areseven major Indices in NSE and fifteen sector specific Indices. CNX BANK

INDEX or BANK NIFTY is the index which has17 banks listed on it and is a separate index to look

upon price movements of banksshare prices. A brief account of thesame is given below.


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36

FUNDAMENTAL ANALYSIS OF

STAT ANK F INDIA

ICICI (Industrial Credit and Investment

Corporation of India) ANK


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37

FUNDAMENTAL ANALYSIS OF

ICICI (Industrial Credit and Investment

Corporation of India) ANK


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39

Balance Sheet -- in Rs. Cr. --

Mar '09 Mar '10

Capital and Liabilities:Total Share Capital 1,463.29 1,114.89

Equity Share Capital 1,113.29 1,114.89

Share Application Money 0.00 0.00

Preference Share Capital 350.00 0.00

Reserves 48,419.73 50,503.48

Revaluation Reserves 0.00 0.00

Net Worth 49,883.02 51,618.37

Deposits 218,347.82 202,016.60

Borrowings 67,323.69 94,263.57

Total Debt 285,671.51 296,280.17

Other Liabilities & Provisions 43,746.43 15,501.18

Total Liabilities 379,300.96 363,399.72

AssetsCash & Balances with RBI 17,536.33 27,514.29

Balance with Banks, Money at 12,430.23 11,359.40

Advances 218,310.85 181,205.60

Investments 103,058.31 120,892.80

Gross Block 7,443.71 7,114.12

Accumulated Depreciation 3,642.09 3,901.43

Net Block 3,801.62 3,212.69

Capital Work In Progress 0.00 0.00

Other Assets 24,163.62 19,214.93

Total Assets 379,300.96 363,399.71

Contingent Liabilities 803,991.92 694,948.84

Bills for collection 36,678.71 38,597.36

Book Value (Rs) 444.94 463.01


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40

PROFIT AN LOSS OF ICICI

Profit & Loss account -- in Rs. Cr. --

Mar '09 Mar '10

IncomeInterest Earned 31,092.55 25,706.93

Other Income 8,117.76 7,292.43

Total Income 39,210.31 32,999.36

ExpenditureInterest expended 22,725.93 17,592.57

Employee Cost 1,971.70 1,925.79

Selling and Admin Expenses 5,977.72 6,056.48

Depreciation 678.60 619.50

Miscellaneous Expenses 4,098.22 2,780.03

Preoperative Exp Capitalised 0.00 0.00Operating Expenses 10,795.14 10,221.99

Provisions & Contingencies 1,931.10 1,159.81

Total Expenses 35,452.17 28,974.37

Net Profit for the Year 3,758.13 4,024.98

Extraordinary Items -0.58 0.00

Profit brought forward 2,436.32 2,809.65

Total 6,193.87 6,834.63

Preference Dividend 0.00 0.00

Equity Dividend 1,224.58 1,337.95

Corporate Dividend Tax 151.21 164.04

Per share data (annualised)Earning Per Share (Rs) 33.76 36.10

Equity Dividend (%) 110.00 120.00

Book Value (Rs) 444.94 463.01

AppropriationsTransfer to Statutory Reserves 2,008.42 1,867.22

Transfer to Other Reserves 0.01 1.04

Proposed Dividend/Transfer to Govt 1,375.79 1,501.99

Balance c/f to Balance Sheet 2,809.65 3,464.38

Total 6,193.87 6,834.63


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41

KEY FINANCIAL RATIOS OF ICICI BANK

RATIOS 2009 2010

Dividend Per Share 11.00 12.00

Operating Profit Per Share (Rs) 48.58 49.80

Net Profit Margin 9.74 12.17

Total Assets Turnover Ratios 0.10 0.09

Asset Turnover Ratio 5.14 4.60

Current Ratio 0.13 0.14

Quick Ratio 5.94 14.70

Dividend Payout Ratio 36.60 37.31

Return on Net Worth(%) 7.58 7.79

Earnings Per Share 33.76 36.10


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42

OUT7

OOK AND VALUAT 8 ON

I have a posi9 ive view onI@

I@

I Ban A , giveni9 s market-leading bB sinesses across the

financial services spectrum. Moreover,Ibelieve that the Bank is decisively executing a

credible strategy of consolidation that should result in animproved deposit and loan

mix and consequentlyinimproved operating metrics over the medium term.

The strategyinvolves maintaining strong capital adequacyin the current environment,

while building the necessarybase for strong@ C

D

C

mobilization, going forward. This is

to be achieved through a substantialbranch expansion, without diluting the current

focus on stringent cost-control measures. The management has indicated that cost

rationalizations stillin process to further bring down the operating expenses. The

Banks@

apitalC

dequacyis also amongst the highest at 17.4%, with a substantial 13.1%

Tier 1 capital.

Ibelieve that the Banks substantialbranch expansion and large@

apitalC

dequacy,

especially on Tier 1, are a precursor to market share gains that will contribute to a

substantial@

ore business growth, though with a lag effect until the macro-environment

starts improving again (hence, potentiallyin 12-18 months). It is focusing again on

replacing wholesale funds with retail deposits in the international subsidiaries as well.

In the short term, while theC

sset-quality deteriorationis likely to start plotting only

after a few quarters, the increased focus on Treasury as a profit-centre, as well as the

continued focus on cost controls should provide some support to the BanksE

/F

account.


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44

FUNDAMENTAL ANALYSIS OF SBI

COMPANY PROFILE:

The StateG

ank of IndiaH the countrI s oldestG

ank and a premier in terms of balance

sheet siP eH number of branchesH market capitaliP ation and profits is todaI going

through a momentous phase of Change and Transformations the two hundred I ear

old Public sector behemoth is todaI stirring out of its Public Sector legacI and moving

with an abilitI to give the Private and ForeignG

anks a run for their moneI . The bank is

entering into manI new businesses with strategic tie ups Pension FundsH General

InsuranceH Custodial ServicesH Private EquitI H MobileG

ankingH Point of SaleMerchant

AcquisitionH

AdvisorI

ServicesH

structured products etc each one of these initiatives

having a huge potential for growth.

SHAREHOLDING PATTERN

59.4Q

9Q

5Q

10.8 Q

15.9Q

SHAREHOLDING PATTERN OF SBI LTD

promoters

FIIs

MFs/R

TIG

anks/Fis

others


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46

PROFIT AN LOSS OF SBI

Profit & Loss account -- in Rs. Cr. --

Mar '09 Mar '10

IncomeInterest Earned 63,788.43 70,993.92

Other Income 12,691.35 14,968.15

Total Income 76,479.78 85,962.07

ExpenditureInterest expended 42,915.29 47,322.48

Employee Cost 9,747.31 12,754.65

Selling and Admin Expenses 5,122.06 7,898.23

Depreciation 763.14 932.66

Miscellaneous Expenses 8,810.75 7,888.00

Preoperative Exp Capitalised 0.00 0.00

Operating Expenses 18,123.66 24,941.01

Provisions & Contingencies 6,319.60 4,532.53

Total Expenses 67,358.55 76,796.02

Net Profit for the Year 9,121.23 9,166.05

Extraordinary Items 0.00 0.00

Profit brought forward 0.34 0.34

Total 9,121.57 9,166.39

Preference Dividend 0.00 0.00

Equity Dividend 1,841.15 1,904.65

Corporate Dividend Tax 248.03 236.76

P

er

shar

e data (annu

alised)Earning Per Share (Rs) 143.67 144.37Equity Dividend (%) 290.00 300.00

Book Value (Rs) 912.73 1,038.76

AppropriationsTransfer to Statutory Reserves 6,725.15 6,495.14

Transfer to Other Reserves 306.90 529.50

Proposed Dividend/Transfer to Govt 2,089.18 2,141.41

Balance c/f to Balance Sheet 0.34 0.34

Total 9,121.57 9,166.39


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47

KEY FINANCIAL RATIOS OF ICICI BANK

RATIOS 2009 2010

Dividend Per Share 29.00 30.00

Operating Profit Per Share (Rs) 230.04 229.63

Net Profit Margin 12.03 10.54

Total Assets Turnover Ratios 0.09 0.09

Asset Turnover Ratio 7.20 7.26

Current Ratio 0.04 0.04

Quick Ratio 5.74 9.07Dividend Payout Ratio 22.90 23.36

Return on Net Worth(%) 15.74 13.89

Earnings Per Share 143.67 144.37


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48

OUTLOOK AND VALUAT S ON

With its surplus liquidity and balance sheet size, we believe

T

BI willbe a majorbeneficiary of pickup in credit demand.

T

BIs nonbanking subsidiaries (T

BI U apital

Markets,T

BI Mutual Fund andT

BI Life Insurance) willbenefit from uptick in capital

markets and corporate activity. V t current price of W s 1851 the stock is trading at ~1.7x

FY10X Y /B .We maintain a Buy onT

BI with a target of W s 2054, giving an upside

potential of 12% from the current levels, on account of:

1) Y ickup in credit demand (we estimateT

BIs FY 10 credit growth at 20% and FY 11 at

22%) will allow the bank to redeploy surplus liquidity to advances from investments;

2) W ebound in earnings growth (23 25%U V

G W from FY 10 FY11) onback of higher

credit growth and strong fee income performance;

3)T

harp pickup in margins in FY11 as high cost deposits are reprised and yields

improve;

4) V sset quality headwinds (especially the concerns over the higher proportion of

restructured assets and low loanloss coverage) subsiding as economy returns to a

secular growth path.

Key Risks include:

1)T

harper than expected asset quality deterioration;

2)T

lower credit growth;

3) Margin compression


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49

ANALYSIS

RATIO INTERPRETATION

CURRENTRATIO

This ratioindicates the short term solvencyofthe company.The standard

ratiois 2:1, but the ICICI bankhas the ratioof0.14:1whichis good as

compare to SBI bankwhichhas a ratioof0.04 :1.

LIQUIDRATIO

Thisstatement shows immediate short term solvencyofthe company.The

standardis 1:1.SBIshows 9.70:1 and in the year 2010 andICICI bankhas

respectively andICICI bankhas the ratioof 14.70:1. SoICICI bank is good

andcompany will able to pay allimmediate obligations

DIVIDENDPAYOUT

RATIO

This ratioindicates that companyhas to pay the dividendin each and every

year.The dividend payout ratioofICICIis 37.31 and SBIis 23.36. Which

shows that the dividend policyofICICIis more than the SBI?

FIXEDASSET

TURNOVERRATIO

This ratio establishes a relationship betweennet sales andnet fixed asset.

This ratioshowshow well the fixed asset are utilised.AnICICI bankshows

goodincrease in the ratio ascompare to the SBI.


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sector analysis of banking in india

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