Indian banking

Industry
The

Road Ahead
 Banking in India
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external and
internal factors.

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 reason of India's growth process.

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 is simple as instant messaging or dial a pizza. Money have
become the order of the day.
 History of Banking in 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

Phase 1 - Early phase from 1786 to 1969 of Indian Banks

Phase 2 - Nationalisation of Indian Banks and up to 1991 prior

to Indian banking sector Reforms.

Phase 3 - New phase of Indian Banking System with the advent

of Indian Financial & Banking Sector Reforms after 1991.
 Phase 1
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank
of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of
India was established.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and
1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During those days public has lesser confidence in the banks. As an aftermath deposit
mobilisation was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
 Phase 2
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalised Imperial Bank of India with extensive banking
facilities on a large scale specially in rural and semi-urban areas. It formed State Bank
of india to act as the principal agent of RBI and to handle banking transactions of the
Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on
19th July, 1969, major process of nationalisation was carried out. It was the effort of
the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the
country was nationalised

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980
with seven more banks. This step brought 80% of the banking segment in India under
Government ownership
 Phase 3

This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was
set up by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put
to give a satisfactory service to customers. Phone banking and net banking is
introduced. The entire system became more convenient and swift. Time is given more
importance than money.
 List of Banks in India
Nationalized Banks SBI & 7 Associates Old Private Sector Banks

Allahabad Bank Bank of Rajasthan

State Bank of India
Andhra Bank Bharat Overseas Bank
State Bank of Bikaner & Jaipur
Bank of Baroda Catholic Syrian Bank
State Bank of Hyderabad
Bank of India City Union Bank
State Bank of Indore
Bank of Maharashtra Dhanalakshmi Bank
State Bank of Mysore
Canara Bank Federal Bank
State Bank of Patiala
Central Bank of India ING Vysya Bank
State Bank of Saurashtra
Corporation Bank Jammu and Kashmir Bank
State Bank of Travancore
Dena Bank Karnataka Bank

Indian Bank Karur Vysya Bank

Indian Overseas Bank New Private Sector Banks Lakshmi Vilas Bank

Oriental Bank of Commerce Lord Krishna Bank

Axis Bank
Punjab & Sind Bank Nainital Bank
Centurion Bank of Punjab
Punjab National Bank Ratnakar Bank
Development Credit Bank
Syndicate Bank SBI Commercial and International
HDFC Bank Bank
UCO Bank
ICICI Bank South Indian Bank
Union Bank of India
IndusInd Bank
United Bank of India Tamilnad Mercantile Bank
Kotak Mahindra
Vijaya Bank
Yes bank
IDBI Bank
 Indian Economy – FY08

Economy Continued to register robust growth

High Oil Prices Impacted Inflation
Foreign exchange reserve increasing day by day
Growing Middle & High Income class
 Economy Continued to register robust growth

GDP Gr FY05 FY06 FY07 FY08

Agriculture 0.7% 6.0% 2.7% 3.1%

Industry 7.4% 8.0% 11.0% 9.1%

Manufacturing 8.1% 9.1% 12.3% 9.9%

Service 10.2% 10.3% 11.0% 10.4%

Total 7.5% 9.0% 9.4% 8.9%
Consumption Drivers
(household in million)
FY96 FY02 FY10E
Middle Income 33 50 98

High Income 1 3 10

Rising Affluence & Growth of consuming classes

 Both Middle & High Class are growing at higher pace
Forex Reserve growing day by day
Macro Economic View Indian Banking sector

Tighter Monetary Stance by RBI to tame Inflation

Higher G- Sec yield
Rising cost of fund
Higher lending yield
Deposit growth stronger
Credit growth is picking up
Tighter Monetary Stance by RBI to tame Inflation
Monetary steps taken by RBI to curb Inflation
Result in rising G-sec Yield

1- yr G-sec 2- yr G-sec 10- yr G-sec

yield – 9.08 yield – 9.15 yield – 8.99
Results in rising cost of fund

Funding cost of the banks will increase

 Banks already raise deposit rate by 25-100 bps

Higher lending yield

Banks raises PLR by 50 bps

Likely to keep pressure on margin

Higher interest rate put impact on loan growth

 Stronger Deposit Growth

Deposit grew at the rate of 23% YoY to Rs 32570.bn on

account of offering higher interest rate.
Credit growth is picking up

Credit growth picks up on back of

lower base. It grew at the rate of 26%
 Key Growth Drivers
Low penetration of consumer finance at 13
% of
GDP
 Retail Loan
 Robust industrial and infrastructure
investment pipeline estimated at over US $
500 billion
 Internationalization of Indian industry
Low Penetration of Insurance & Asset
management
 Retail Banking – Present scenario

>Indian retail banking has been showing

phenomenal growth
>Over the last 5 years CAGR has been
35%
Market has now transformed into a
buyer’s market from a seller's market
 Comprises of multiple products, channel
of distribution & multiple costumer group
 Economy vs Retail loan

>Retail asset are just 22% of the total

banking of India

>Indian population below 35yrs of age –

70%

>Reach of Formal Banking Channels –

20-25% of Indian population
Contribution of Retail Loan to GDP

60%
50%
40%
Retail contri
30%
20%
10%
0%
India China Thiland Taiwan
 Drivers Of Retail Growth

CHANGING CONSUMER DEMOGRAPHICS

Growing disposable incomes
Youngest population in the world
Increasing literacy levels
Higher adaptability to technology
Growing consumerism
Fiscal incentives for home loans
Changing mindsets-willingness to
borrow/lend
Desire to improve lifestyles
Banks vying for higher market share
How Industry has changes to this
response
“Any where”, “Any time” Banking
Improved processes/Bundled product
offerings
Faster service
Customer specific products/offerings
on a regular basis
‘Bank’ customer has replaced
‘Branch’ customer
Focus on understanding customer
needs/ preferences
Segmentation/Differentiation of
customers
Customer driven strategies
Future of Retail Banking

The accelerated retail growth has been

on a historically low base
Penetration continues to be
significantly low compared to global
bench marks
Share of retail credit expected to grow
from 22% to 36%
Retail credit expected to grow to
Rs.575,000 crs by 2010
Source:at anindustry
Cygnus annual insight
growth rate of 25%
 Future of Retail Banking
contd…
Dramatic changes expected in the
credit portfolio of Banks in the next 5
years

Housing will continue to be the

biggest growth segment, followed by
Auto loans

Banks need to expand and diversify by

focussing on non urban segment as
well as varied income and demographic
groups
Robust industrial and infrastructure investmen

High capacity utilisation & need for building

infrastructure resulting in a large investment
Supported by healthy Balance Sheet
 The “international
Indian” opportunity Area of
large NRI
populatio
n
Canada (
(0.42 mn) UK Areas of
(0.72 mn) large PIO
populatio
US GC Nepal n
(1.2 mn) (4.1 C
West mn) Number
Indies of NRIs
Zimbab Singapore
we/ / Malaysia
Uganda
(0.14 mn NRIs)Australia and
South New Zealand
Africa
(< 0.1
mn)

The emergence of Indian multinationals and

resultant economic flows have created a new
opportunity
Financial services potential: Asset
Management
AUM as % of GDP
100% 87%
80% 72%

60%

40% 30%
23% 21%
20%
6%
0%
Australia US Brazil UK Korea India

By 2012, the total money managed by mutual fund houses

in India will be between $350 billion and $440 billion.
That's a growth of 26-33% every year.
Financial services potential: Insurance

Life insurance premium as % of GDP

12.0%
10.7%

10.0% 8.9% 8.7%

8.0%
5.7%
6.0%
4.4%
4.0% 3.4%
2.3% 2.3%
2.0%

0.0%
UK J apan Korea Austrlia US Malaysia India China

The business of insurance in the country is

expected is expected to be worth about US$
60 billion by 2010.
Financial services potential: Insurance

Non-life insurance premium as % of GDP

5.0% 4.6%

4.0% 3.5% 3.4% 3.4%

3.0%
2.2%
1.8%
2.0%
0.9%
1.0% 0.6%

0.0%
US UK Australia Korea J apan Malaysia China India

Many Indian Banks that are planning to enter the

Insurance sector of the country major of them are
Union Bank, Federal Bank, Allahabad Bank, Bank of
India, Karnataka Bank, Indian Overseas Bank and
Bank of Maharashtra.
CASA deposits - key differentiator in the
current environment

 Greater Importance in rising rate environment

 Key factor to decide margin, growth & quality of
business
Small & mid- sized PSU losing their CASA franchise
to private player
Product and service differentiation, customer
segmentation, intensive marketing, technological
advancements and rapid branch expansion are key
components of strong CASA growth for private banks.
Cost of deposits rising faster for banks
with low CASA
Banks CASA Ratio (%) Cost of Deposit
FY06 FY07 FY08 FY06 FY07 FY08
SBI 42.0 43.6 43.0 4.9 4.6 5.6
PNB 49.0 46.2 43.0 4.1 4.3 5.4
Canara Bank 33.3 31.5 31.5 4.5 5.3 6.7
BOI 42.4 39.0 35.2 4.0 4.3 5.2
BOB 42.0 38.7 35.9 4.0 4.6 5.3
Union Bank 32.4 34.5 34.9 4.6 5.1 6.1
IOB 39.9 34.9 33.5 4.6 4.9 6.2
OBC 32.6 30.3 27.9 4.9 5.8 6.9
ICICI Bank 22.7 21.8 26.1 4.4 5.9 7.1
HDFC Bank 55.4 57.7 54.5 3.4 4.3 5.2
Axis Bank 40.0 39.9 45.7 4.3 5.0 5.1

From the chart we can find that Banks which have

lower CASA ratio significantly have higher Cost of
deposits.
Higher CASA ratio would mean higher
margins

Irrespective of interest rate movements, banks with

higher CASA ratio would stand to benefit. Their cost of
funds would be significantly lower versus peers and
they can grow volumes as well as sustain higher
margins.
Private banks increasing share in CASA
deposits CASA & Total Deposit Grow th

60
50
50
39.7
40
Growth %

CASA Deposit
30
20 Total Deposit
17.1 16.9 16.8 14.1 16.3 17.4
20 12.1
10
0
Private Bank Private Bank ( SBI ( Stand SBI Group PSU Bank
(new ) old ) alone)
Banks

Small and mid-sized PSU banks are fast losing their

CASA franchise to private players. Product and
service differentiation, customer segmentation,
intensive marketing, technological advancements
and rapid branch expansion are key components of
Huge scope for New private banks to
sustain current traction:

 New private banks' aggregate CASA deposits are

1/5th of all PSU banks‘

Continued branch/ATM expansion and deeper

geographic penetration would ensure that CASA
growth for the new private banks remains strong
even going forward.

Structurally New private banks are best equipped

to gain market share in CASA deposits from PSU
banks.
Key Player to watch out in the Industry
 AXIS Bank

 HDFC Bank

 ICICI Bank

 YES Bank
 AXIS Bank
About the Company

 Third-largest private sector bank in India in terms of asset size.

 A very wide network of more than 701 branch offices and

Extension Counters.

 A network of over 2854 ATMs providing 24 hrs a day banking

convenience to its customers.
Business overview

Corporate Banking Capital Market

Treasury Agri & Micro- Financing

Business Banking International Banking

Investment Argument & New initiatives
Witnessed a massive surge in advances growth in FY08

Deliver high growth even when the industry is witnessing

slowdown

Ability to tap opportunities available in fee-based income and

witness strong banking business due to strong network

Has tie up with Rothschild group for wealth management providing

the bank access to various products globally

Is likely to launch its own AMC business and in another initiative it
has
entered into the private equity space with a USD500mn fund

Online trading accounts with Geojit Securities, partnership with

Metlife and Bajaj Allianz Insurance for life and non life insurance
would keep the revenue stream from non fund business intact in the
future
Financial Performance
 HDFC Bank
About the company

Is the second largest private sector bank in India (after ICICI
Bank).

Is among the top three players in auto loans, personal loans,
commercial vehicles, cash management, and supply chain
management.

Its strengths include its brand equity, professional management,

reach, high CASA(53%), clean book, and focus on profitability.
Business overview

>Retail Banking

>Treasury

>Wholesale Banking
 Merger with CBoP

Merger should be considerably value-accretive as it provides the

bank with a materially expanded branch/customer franchise.

It adds 400 branches to HDFC Bank and would potentially enable

the bank to double its balance sheet size in the next 24 months.

HDFC Bank expects CBoP’s branches to scale up to the efficiency

and productivity levels of HDFC Bank.
Financial Performance
 ICICI Bank
About the company

Is the India’s second largest bank in terms of asset size, profits and
total revenues.

Has a network of about 1,308 branches and 3,950 ATMs in India and
presence in 18 countries.

It holds market leadership in almost all its businesses including

mortgages, auto loans, commercial vehicle loans, life insurance,
general insurance, and asset management.

Business overview

Retail Banking Wholesale Banking

International Government Banking

Banking

Agri & Micro-

Banking
Financial Performance
 YES Bank
About the company

The only ‘Greenfield’ private sector bank to be set up in the last decade

Professional management team with the highest ownership levels

among all banks

Ranked Second among Medium Size Banks and the Fastest Growing
Bank in its category, in the Business Today-KPMG Survey of India’s Best
Banks of 2007.

Ranked Third among New Private Sector Banks and Overall #1 in Credit
Quality in the Financial Express –E&Y Survey of India’s Best Banks of
2007
Business overview

Corporate & Institutional Business banking

banking
Retail banking & wealth
management
Financial performance
 Winning Strategy

The bank that best addresses and

anticipates customers needs,
delivers consistently higher
quality service and connects to
the customer via their channel of
choice wins
Thank You !