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INDIAN BANKING SYSTEM

Submitted To:- Submitted By:-


Mr. Nitin Kumar Jain Pujil Khanna
Pankaj Tiwari
Avinash Jeswani
Robin Choudhary
PHASE I:-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.
PHASE II:- Nationalisation of 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. 14 major commercial banks in the
country was nationalised.
PHASE III:- This phase has introduced many more products and
facilities in the banking sector in its reforms measure. In 1991,
under the chairmanship of M Narasimhama, a committee was set
up by his name which worked for the liberalisation of banking
practices.
“ Bank is an institution which trades in money, an establishment for the
deposits, custody and issue of money, as also for making loans and
discounts and facilitating the transmission of remittances from one place
to another”.
 Savings Bank : Running account for saving with restriction in number of
withdrawal
 Current Account: Running account without restriction on number of
withdrawals
 Term Deposit : Deposit of an amount for a fixed period where interest is
paid monthly/Quarterly.

 Special Term Deposit : Deposit of an amount for a fixed period where


interest is compounded (Capitalized) and paid on maturity.

 Recurring Deposit : Regular (Monthly) deposit of a fixed amount for a


fixed period
A Decade of change and evolution…
Pre-reform The 1990s Today
 Liberalisatio
 Extensive n
 Resilient
regulation industry
Indian  Globalisation
 Focus on  Buoyant
economy  Structural
industrial services
sector change – sector
services
 Opening up  Diversified
 Highly of various financial
Financial segmented sub-sectors groups
sector  Public sector  Private  Globally
dominance sector benchmarke
participation d
..financial sector mirroring macro-economic
change
PRE-GLOBALIZED SCENARIO OF
SERVICE CULTURE IN THE INDIAN BANKS

FORMALIZED

CUSTOMER UNFRIENDLY

NON COMPETETIVE
SERVICE CULTURE ATTITUDE.
WAS EXTREMELY

PRODUCT FOCUSED & NOT


CUSTOMERSERVICE FOCUSED.

DEMOTIVATED & NON INTERESTED


EMPLOYER& EMPLOYEE.
The Banking Sector Today
Depth Diversification
 Countrywide coverage  Emergence of integrated
 Large number of players players
 Increasingly  Diversifying capital
sophisticated financial deployment
markets  Leveraging synergies

Technology Regulation
 Robust regulatory system
 Increasing use of
aligned to international
technology in operations
standards
 Poised to expand and  Efficient monetary
deepen technology usage
management

6
Sector Snapshot

Total

Totalassets
assetsof
ofUS$
US$335
335billion
billion
Size
Total deposits of US$ 279 billion

Total deposits of US$ 279 billion

Over

Over290
290scheduled
scheduledbanks
banks
Public sector: 27

Public sector: 27
Number of Private

Privatesector:
sector:new
new––9;
9;old
old ––24
24
banks Foreign: 37

Foreign: 37
Over

Over190
190regional
regionalrural
ruralbanks
banks
Over

Over66,000
66,000branches
branches
 Public sector:46,000
 Public sector: 46,000
Branch Private

Privatesector:
sector:5,500
5,500
network Foreign:

Foreign:190
190
Regional

Regionalrural:
rural:14,400
14,400

7
A New orientation among banks…
Traditional/ public sector New/ private sector
 Sell products  Meet customers’ needs
 Product research: what  Customer research:
will sell? what does the customer
 Product sales and want?
profitability targets  Customer segment
 Product specialist sales and profitability
groups targets
 Introduce new  Customer owners
offerings every few  Customer specific new
years/months offerings every
 “Branch banking” week/day
 Focus - customer  Customer convenience
acquisition  Deepen relationships

8
Flower of
banking service

Mobile
&
ncy
lta e Internet
u
s vic banking
n r
Co se
A
MT
eN
Financial wt
Change in kr o
service Good Waiting room
Product line

I
O ntro nal
sc f n . io
he ew Low ot nts
m r om cou
es interest P is
d
rates
Technological Innovations
in Banking sector.

Phone Banking
Data Mining.

Mobile Banking
Plastic money.
ATM

Tie up Arrangements Marketing Agents for


Distribution of Products

Virtual banking-
don’t visit the branch Insurance Product
Innovation In Banking Product.

Core Product Basic Product Expected Product Augmented Potential Product


Product

The basic necessity Safety of deposits Timely service Good waitingOccasional


to use banking Loanable fundsLong banking hours. rooms greeting at home
services in order to etc. Low interest friendly
handle finance Rate. employees Surprise gifts.
more efficiently Welcome note.
Additional Banking Services

Factoring.
Merchant Banking

Loan Syndication. Forfeiting.

Mutual Fund
Venture Capital.
Major drivers for Banking Sector, world wide
Technology- leads the Winning Combination
“The winners will be those institutions that tie their technology to their
strategies in order to meet their challenges.”

Cost
• Cutting Cost through Integration
• Better Information Management
Customer
• Reaching Customers Faster
• Managing Diverse Needs
Competition
Key Banking • Competitive Edge in
Technology Aspects its Strategic Group

Performance & Evaluation


• Better Metrics to Benchmark
Risk Management
Against Complexities
• Objective Evaluation Process •Easier Risk Identification
•Easier to Assess Risks
Importance of Core Banking Solution
Benefits of CBS
 Faster Response to Customer Demands

 Allows Faster New Product Developments

 CBS Architecture Allows for Existing Products to be


Quickly Customized

 Online Validation of Data – at the Time of Entry

 Independent from the Organization Structure and


Supports the four Primary Entities – Customer,
Account, Product and Business Organization

 Runs in Real Time Update Mode


History:- Become operational on April 1,1935
Nationalized in the year 1949
Major objectives:-
Regulate the issue of banknote
Maintain reserve with a view to securing monetary stability
To operate the credit and currency system of the country to
its advantage
Functions of RBI
The function are classified into three heads;-
1.Traditional functions
2.Promotional functions
3.Supervisory functions
How it controls banks & economy :-
Tools-(as on 28th nov,2009)
CRR- 5.00%
REPO RATE- 4.75%
REVERSE REPO RATE- 3.25%
STATUTORY LIQUIDITY RATIO(SLR)- 25%
BANK RATE- 6.00%
 Government equity in banks has been reduced and
strong banks have been allowed to access the
capital market raising additional capital.
 Bank now enjoying the operational freedom in terms
of opening of new branches and bank having good
track record of profitability given flexibility in
recruitment.
 New private sector banks have been set up and
foreign banks are allowed to expand their function in
India including through subsidiaries.
 Banks are also allowed to set up off shore banking
units in SEZ.

 New instrument have been introduced for better


flexibility and better risk management like interest
rate exchange, cross currency forward contract.
Private Sector Banks
Investment rationale
• Private sector banks are better capitalized compared to PSU Banks in case of rising
NPLs
• More seasoned loan book resulting in less incremental NPLs
• NIM are stable as the PLR cut is not much compared to PSU banks
• Pvt Sector banks to improve margins due to steep decline in deposit cost (decline in
wholesale deposit cost by 400-500 bps point)
• Top 3 pvt banks has a significant portion of their revenue coming from capital market
linked business. While the capital markets are expected do well in the near future it
bodes well for the private sector banks
• Majority of the top private banks (except AXIS bank) are in a process to consolidate
their balance sheet, to restructure their balance sheet, reduced NPLs, restructured
loans and slippages which is good in the long term
• Increased thrust on the CASA deposit i.e., primarily focusing on the low cost deposit
• Private banks have been historically innovative and technologically superior
• Best Picks: Axis Bank, HDFC Bank, Yes Bank, Jammu and Kashmir Bank
Private Sector Banks
Things to watch for:

• Private sector banks have been conservative in last few quarters,


restructuring there balance sheet which will have a negative impact
on the NIMs, profitability, ROE in the coming quarters
• Private sector banks have relied heavily on capital market linked
activity, approximately 30-40% of their revenue and net worth is
relied on third party distribution products. Any downfall in the
capital market will have a significant impact on the bottom line of
the company
• Private sector banks trades at a lower ROE (13-14%) compared to
public sector banks (17-18%)
• Cost of funding at 6.5% is higher in comparison to Public sector
banks (6%)
• Private sector banks might need to account for MTM losses,
provisions etc due to its presence in uncertain international markets
Public Sector Banks
Investment Rationale

• Despite higher ROE, PSU banks are trading at a lower P/BV


• Strong operating performance and profitability
• Strong Earnings growth
• Improving Quality of earnings
• No MTM losses
• Banks have significant franchise value
• Improving quality of earnings
• PSU banks have been more aggressive in lending which will help it to
increase its profitability, NIMs, ROE
• Increased focus on low cost deposit by rapidly increasing the branches
leading to a decline in the funding cost
• Improved focus on non-banking revenues (Asset Management, Private
Equity, IB etc), leveraging on its existing branch network
• Best Picks: BOB, Corporation Bank
Public Sector Banks
Things to watch for:

• PSU Banks are likely to face more margin pressure compared to private sector banks:
– Lending rates have been cut much more then private sector banks
– Lending in a weak corporate environment
– High cost deposit mobilized during the second half of 2009
– Excess investment in government securities and parking of excess funds with RBI carry's a
negative yield on investment portfolio
• PSU banks are more likely to be persuaded by Government to reduce the lending rates
• Operating expenses for the PSU banks are likely to go up due to higher wage increase and transfer from
PF to pensions
• Restructuring has been high in PSU banks resulting in a increase in NPLs
• Cautious on fundamentals due to slowing loan growth, declining margins (NIMs) and rising credit costs
• Employee productivity and profit per branch have always been a concern in compare to private sector
banks
• Traditionally, PSU banks have been laggard in technology
• Asset quality will be a concern in a long run due to aggressive lending in a weak corporate environment
• Yield on advances at 9.5% is lower compared to private banks (11%)
Public Sector v/s Private sector Banks

Pvt Banks Public Banks

C/D 77% 73%


Inv/Dep 41% 33%
Asset/Equity 10.3 17.3
Cost of Dep 6.5 6.0
Yield on Dep 7.3 7.4
Yield on Inv 11 9.5
NIM 2.7 2.4
NII/Total Inc 57.3 67.1
RoE 13.4 17.2
RoA 1.0 1.0
Future Outlook
• Strong re-bound in the economic activity should drive a significant loan growth in
the second half of the fiscal
• Historically, loan growth to real GDP multiplier has been 3.3x in the past 25
years. Based on the GDP projection of 6%+, I except loan growth at 20%+ for the
entire fiscal
• Decline in the cost of funding as the high cost term deposit mobilized in Q3 and
Q4 of FY09 is likely to mature in the coming quarters
• The deposit rate is unlikely to fall below 7.5% in the recent time as the small
saving scheme offers 8% interest rate. A fall below 7.5% interest rates is unlikely
as it will disturb banking system
• Interest rates are likely to go up in Q4FY10 due to high fiscal deficit and monsoon
failure
• Increase in the interest rates has a inverse relationship with the banking stock
• Bond yields are expected to harden up in the coming quarters due to high
government borrowings which will lead to a increase in MTM provisions in the
bank portfolio, having an negative impact on the bottom line
Future Outlook…Cont
• PSU banks to remain under pressure as they can be pressurized by the
government to lower their lending rates
• Gross NPLs and restructured loans are likely to stable or go down as they are
most likely to get peaked in 2Q2010 and due to lower provisions on account of
improving loan growth and economic activity
• Non Interest revenue is likely to be the flavor of the time in the near future.
Improved economic and capital market activity should drive a rebound in non-
interest revenue
• CASA ratio is likely to improve due to narrowing of the differences between
term deposits and saving deposits. Also, managements across the board have
placed more emphasis on low cost deposit
• PSU banks are expected to get more aggressive in loan growth to spurt growth
in the economy and private banks are more likely to consolidate their balance
sheet in the near term
• Trading income is likely to come down due to hardening of bold yields
• NIM is likely to go up in the second half of the fiscal due to decline in the
funding cost, increase in credit off take, strong domestic demand
Important numbers
• Highest credit Growth
– PSU Banks: PNB(38%)
– Pvt Banks: Axis(28%)
• Highest Deposit Growth
– PSU Banks: SBI(36%)
– Pvt Banks: Axis(24%)
• NIM
– PSU Banks: PNB(3.4%)
– Kotak Mahindra Bank(6%), HDFC BK(4.1%)
• CASA
– PSU Banks: PNB(38%), SBI(38%)
– Pvt Banks: HDFC BK(45%), Axis Bank (40%)
• Provision
– PSU Banks: PNB(89%), BoB(81%)
– Pvt Banks: HDFC Bk(71%), Axis Bank(59%)
• Credit Spread
– PSU Banks: PNB(4.9)
– Pvt Banks: Yes Bank(4.4)
NEW INITIATIVES TAKEN BY
PSBs
• Technology savvy: SBG daily 11 lakh ATM transactions amounting
to
• Rs 140 crore per day
•  Specialized branches
•  New products targeted at specific groups
•  Change in structure, systems and procedures involving quick
• turnaround time to meet world standards
•  Marketing orientation
•  Change in ambience
•  Recruitment of specialists
•  Tie-ups, sharing networks, and strategic alliances
Structural Issues

• Non-performing assets
• Legacy systems
– Low levels of technology
• Seller’s market mindset
– Low level of innovation in products and
services
– Limited responsiveness to customers’ needs

The Indian banking sector has responded to


these structural issues by adopting certain
strategic imperatives
Legacy Issues addressed…
• Challenges of a changing competitive environment
– Small and unviable pre-liberalization units
– Large investments post-liberalization impacted by global
commodity cycles and high interest rates
• Supportive legal and regulatory changes
– Setting up of Debt Recovery Tribunals and enactment of
SARFAESI Act, reducing delays in enforcement of
security and creating effective legal deterrent
– Corporate Debt Restructuring Forum for restructuring
viable companies
– Enabling framework for asset reconstruction companies
• Proactive approach to resolution and increase in
provisioning levels in the system
With significant success in resolution
(% ) Gross NPAs as % of GDP
50.0%
43% 43%
40%
40.0%
30%
30.0%
 Position much
20.0% 15%
stronger than other
10.0%
Asian economies 4%
0.0%

India
China

J apan

S. Korea
Malaysia
Thailand
 Net NPL accretion
tapering off with
progress in asset
US$ bn Net NPAs of banks & FIs
resolution and 1 2 .0
increase in 1 0 .0
provisioning levels 8 .0
6 .0
4 .0
2 .0
0 .0
1997 1998 1999 2000 2001 2002

Source: E&Y, RBI


Bank Lending as percentage of
Deposits
(2004)
Country Lending as percent of
Deposits
China 130
UK 114
Malaysia 101
USA 92
India 61
Raghuram Rajan on Rewriting the
Rules for India's Banks
Rajan said he sees the challenges facing India's
banking industry against the backdrop of three forces,
or "tensions," in its socio-economic setting. The first
tension is between the "haves" and the
"have-nots." This is not so much an urban-rural
divide, he noted, but one that plays out as high
income
vs. low income; well managed states vs. poorly
managed states; good institutions vs. bad institutions;
and upper castes vs. lower castes. "There are lots of
cleavages which reflect this [tension], but
fundamentally it's an economic divide," he said.
Continued
The second tension "is between the private sector
and the public sector, or between the markets and the
state," Rajan continued. He pointed
out that a common reading of this "clash" is that it
represents the rich-poor divide, where the markets
are seen as favoring the rich and the
state as fighting on behalf of the poor. "This is where
the wires get crossed in India," he said. "It is not
necessarily [true] that currently or
going forward, the state is doing the right thing by
the poor. In fact, what is happening is the state is
treating the poor miserably."
Continued

Rajan said the third clash is one "between the


foreign and the domestic sectors," and that this
is compounded by the first two tensions. “
Summary
 The reform and liberalization process has transformed the
Indian economy
 Structural shift with service sector growth
 Immense potential to leverage technology and
knowledge capital
 Improved competitiveness in manufacturing
after intermediate period of restructuring &
rationalization
 Growing international linkages
 Exports, manufacturing and distribution
overseas
 India as a manufacturing base
 Globallybenchmarked businesses, capable of
competing internationally
Summary (contd).

 The banking sector has achieved significant success in


addressing legacy concerns
 Resolution of asset quality concerns through
recovery, restructuring and provisioning
 Focus on technology and customer orientation
 The economic transformation provides major opportunities
for the banking sector
 Retail finance – credit and banking services
 Corporate finance - banking services and
structured finance
 The sector is poised to capitalize on these opportunities