INTRODUCTION

1. Industry definition

The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. The commercial banking structure in India consists of: Scheduled Commercial Banks & Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base.

The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). Banks now looking at business process management (BPM) to increase returns on investment, improve customer relationship management (CRM) and employee productivity. For, these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar products. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO. The banking system is, by far, the most dominant segment of the financial sector, accounting for as it does, over 80% of the funds flowing through the financial sector. 2. Industry Segments

y Public Sector Banks: Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines.

y Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are

successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.

y Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organization. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialized skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities. At a time when access to foreign currency funds was a constraint for the Indian companies, the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. Also with the presence of foreign banks, as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market. Now, it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence.

3. Market Overview

The banking industry too has evolved rapidly over the last few years in India due to the availability of cheaper technology and falling communication costs. De-regulation, competition from non-financial players, new compliance requirements, and changing customer expectations has added complexity and challenges to banking systems and processes.

Banks, however, face an uphill task in reaching out to the customers in remote locations such as villages. There is a lower level of literacy and access to Internet. Setting up branch involves higher cost and operating expenses, and lower return on investment. Given the 742-million rural population, the penetration of deposit accounts languishes at a deplorable 18 per cent.

Market potential India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China.

Qualitative growth The growth of banking in the coming years is likely to be more qualitative than quantitative. The total assets of all scheduled commercial banks by end-March 2010 was estimated at Rs 40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent during the rest of the decade against 16.7 per cent between 1994-95 and 2002-03. On the liability side, there is likely to be large additions to capital base and reserves. As the reliance on borrowed funds increases, the pace of deposit growth may slow down. On the asset side, the pace of growth in both advances and investments is forecast to weaken. The high GDP growth in India is creating lots of job opportunities in urban and semi-urban India and it will go further into rural India increasing the potential for rural

entrepreneurships and rural growth with higher per-capita income and savings opportunities.

Investment in Indian market India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No companies, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.

4. Key Drivers of sustainability in the banking industry

Lender's liability Lender's liability is associated with the financial risks banks face when granting or extending loans. Banks and other lenders rely on financial statements of companies when deciding whether to grant or extend credit. Under current reporting requirements, potential environmental liabilities can easily remain undiscovered unless a lender develops its own procedure to assess the environmental risks. Therefore, some banks can end up spending the money on clean-ups of sites contaminated through their clients' activities.

Borrower's ability to meet financial obligations The borrower's obligation to clean up contaminated sites might impair his or her ability to repay a loan. The contamination might also reduce the value of the guarantee. Prudent lenders are following the environmental trends and changes in regulatory framework to assess the possible implications of these changes on their clients' overall financial position.

Growing environmental concerns The last few decades have been marked by numerous changes in the regulatory framework relating to environmental protection. Recent scientific discoveries of environmental and health risks associated with pollution have contributed to an increase in public demand for environmental quality. These growing concerns have contributed to a major shift in public perception of corporate roles in society. Influenced by these trends, some banks have begun looking closely into their own environmental and social performance.

Business opportunities The traditional approach of the banking sector to sustainability is often regarded as reactive and defensive. However, several international banks have recently adopted innovative, proactive strategies to capture the opportunities associated with sustainability. They have developed new products such as ethical funds or loans specifically designed for environmental businesses to capture new market opportunities associated with sustainability.

Risk and reward The ability to gauge the risks and take appropriate position will be the key to successful banking in the emerging scenario. Risk-takers will survive, effective risk managers will prosper and risk-averse are likely to perish, the report asserts. As audit and supervision shifts to a risk-based approach rather than transaction oriented, the risk awareness levels of line functionaries also will have to increase.

5. Issues and Implications

On the growing influence of globalization on the Indian banking industry, the opinion that the financial sector would be opened up for greater international competition under WTO. Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the country. They are expected to bring with them capital, technology, and management skills which would increase the competitive spirit in the system leading to greater efficiency. Government policy to allow greater FDI in banking and the move to amend Banking regulations Act to remove the existing 10% cap on voting rights of shareholders is pointer to these developments. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under the various Free Trade Agreements that India is entering into with other countries, such as Singapore, will also impact on globalization of Indian banking. However, the flow need not be one way. Some of the Indian banks may also emerge as global players. As globalization opens up opportunities for Indian corporate entities to expand their business overseas, banks in India wanting to increase their international presence could naturally be expected to follow these corporate entities and other trade flows out of India. Alongside, the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. In the past mergers were initiated by regulators to protect the interest of depositors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to gain momentum in the coming years, says the report. Mergers between public sector banks or public sector banks and private banks could be the next logical development. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards, insurance etc.

6. SWOT Analysis

Strengths y Indian banks have compared favorably on growth, asset quality 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 percent 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 The vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. y The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of all the major private banks of India. y In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. 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.

Weakness y PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital. y Old private sector banks also have the need to fundamentally strengthen skill levels.

y The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. y Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labor laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. y Impediments in sectoral reforms: 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.

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 profitably serve segments 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. At the same time, they should 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 private sector 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 are expected to be strong. y The Reserve Bank 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 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 of stability of the system: failure of some weak banks has often threatened the stability of the system. 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.

7. PEST Analysis

PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. PEST stands for Political, Economic, Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry.

Political Factors Government and RBI policies affect the banking sector. y Focus on regulations of government Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework, stricter prudential regulations with respect to capital and liquidity. This gives India an

advantage in terms of credibility over other countries. Government affects the performance of banking sector most by legislature and framing policy government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers. y FDI Limit The move to increase Foreign Direct Investment FDI limits to 49% from 20% during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment. y Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year. y Other provisions o The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner. o To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting. o To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same. y Budget impact The Union Budget 2008-09 has focused on farm credit. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. The Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of

land. With Government bearing this burden, banks would not be affected much. Moreover the emphasize on hiking promoter shareholding in Public sector banks, expanding network with ATM's, opening of banking centre in un-banked blocks are some of the positive moves for the sector. On the flipside, the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular, through rise in yields on government securities.

Economic Factors Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. In India, banking has existed in one form or the other from time to time. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget savings are encouraged, then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through banking channels y Growing economy / GDP Indian economy has registered a growth of more that 9% for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. Banking Industry is directly related to the growth of the economy. It is great news that today the service sector is contributing more than half of the Indian GDP. Earlier it was agriculture which mainly contributed to the Indian GDP. The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and hence the GDP. y Low interest rates

Reserve Bank of India controls the Interest rate, which is based on several monetary policies. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. y Inflation rates Inflation represents a rise in general level of prices of goods and services over a period of time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.63 per cent to 3.92 per cent. To fight against the slowdown of the Economy, Government of India & Reserve Bank of India took many fiscal as well as monetary actions. y Agriculture credit Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. In the recent past, the sector has recorded a growth of about 5% per annum with substantial increase in plan allocations and capital formation in the sector.

Socio Cultural Factors Socio culture factors also affect the business. They show in which people behave in country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. y Traditional Mahajan Pratha Before the birth of the banks, people of India were used to borrow money local moneylenders, shahukars, shroffs. They were used to charge higher interest and also mortgage land and house. Farmers need money so, they had to go to shahukar and borrow money from them. But after emergence of banks attitude of

people was changed. Traditional mahajan pratha still exist in India specially in rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they have relationships from the time of their fore fathers. Banking infrastructure is also week in some interior areas of India. So, this is reason it still exist. y Shift Towards Nuclear Family The younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. But banking sector is positively affected by this trend. A family need home consumer durables like freeze, tv, bike, car, etc. so, they demand for these products and borrow from banks. Recently there is boost in housing finance and vehicle loans. As they dont have money they go for installment and banks satisfy nuclear family needs. y Change In Life Style Life style of India is changing rapidly. They are demanding high class products. They have become more advanced. People want everything car, mobile, etc. Now teenagers also have mobile and vehicle. Even middle class people also want to have well furnished home, television, mobile, vehicle and this has opened opportunities for banking sector to tap this change. Everything is available so it has become easy to purchase anything if you do not have lump sum. y Population Increase in population is one of the important factors, which affect the private sector banks. Banks would open their branches after looking into the population demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. Income distributions also affect the operations and overall business of private sector banks. y Literacy Rate Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e. illiterate people trust more on

banks to deposit their money, they do not have market information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative.

Technological Factors y Technology in banks Technology plays a very important role in banks internal control mechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services. y ATM The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed anytime, anywhere banking facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and selfservice counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking. y It services & mobile banking Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers to adopt customer-based approach instead of product-based approach Technology

8. Porters Five Force Analysis y Threat of New Entrants. The average person can't come along and start up a bank, but there are services, such as internet bill payment, on which entrepreneurs can capitalize. Banks are fearful of being squeezed out of the payments business, because it is a good source of fee-based revenue. Another trend that poses a threat is companies offering other financial services. Also, when analyzing a regional bank, remember that the possibility of a mega bank entering into the market poses a real threat. y Power of Suppliers. The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented individual is working in a smaller regional bank, there is the chance that person will be enticed away by bigger banks, investment firms, etc. y Power of Buyers. The individual doesn't pose much of a threat to the banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure in customers, banks try to lower the price of switching, but many people would still rather stick with their current bank. On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions - by offering better exchange rates, more services, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients. y Availability of Substitutes. As you can probably imagine, there are plenty of substitutes in the banking industry. Banks offer a suite of services over and above taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities, chances are there is a non-banking financial services company that can

offer similar services. On the lending side of the business, banks are seeing competition rise from unconventional companies. y Competitive Rivalry. The banking industry is highly competitive. The financial services industry has been around for hundreds of years and just about everyone who needs banking services already has them. Because of this, banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates and investment services. The banking sector is in a race to see who can offer both the best and fastest services, but this also causes banks to experience a lower ROA. They then have an incentive to take on high-risk projects. In the long run, we're likely to see more consolidation in the banking industry. Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people.