Banking

Important

banking terminologies? CRR, Bank Rate, Repo,

Reverse Repo, BPLR, SLR, Capital Adequacy Ratio, Yield,

Spread, NPAs (how it is calculated), Net Profit Margins
(How it is calculated)
How

did India manage the global financial downturn of

2008-09?
Trends

in Advances, Deposits, Investments, NPAs and

CDRs, Operational Expenditure and Net Profitability

Margin
Basel
2

3 Norms : Background and Impact

Global Financial Melt-down (2008-09)

and India

Firstly,

India was not greatly affected because our Forex

exposure were low.

Left

parties did not allow financial sector reforms in the

earlier UPA government.

We did not fall into sub-prime crisis
But still we were affected to some extent due to increase in
crude oil prices which increased the inflation.
In summary, when the financial down hit, first
priority was to contain inflation.
Inflation increased from 7.7% in march 2008 to 12.8% in August 2008, highest in the previous 45 years. Crude oil increased close to $150 per barrel.

To reduce the inflationary pressures, the CRR was increased to

9% during the same time almost 8 to 10 times in just 4-5
months.
Repo rate was also increased by 75 bps to 8.5 percent.
Impact of these measures
These measures reduced the inflation which began to drop from
September 2008.
But this also sucked out the liquidity and the credit availability,
investments and growth were severely affected

FISCAL STIMULUS

RBI began to reduce both CRR and Repo beginning from

October 2008.
GOI also announced fiscal stimulus in December 6,
2008 which include:
Low interest loans
Higher spending on infrastructure
Cut in the excise duty
Made home loans below Rs. 2 mn as priority
sector.

Overview of the Banking Sector

How the players are classified in the banking industry?

For all analysis, banking players are classified into 3 categor

Public

sector banks

Private

sector banks

Foreign

banks

OVERALL GROWTH
Overall

banking business (advances + Deposits) grew

at 18% between 2007-08 to 2012-13.

Growth

rate has been the highest for PSBs, followed

by private sector banks and it is the slowest for foreign

banks.

Market share of PSBs has increased from 73% in 2007-08

to 77% in 2012-13, whiles the shares of private and foreign
banks have reduced.

MARKET SHARES
2007-08

10

2012-13

Analysis of Advances

11

KEY POINTERS FOR ANALYSING ADVANCES

Priority sector lending norms

Long-term and short-term trends in advances

Capital expenditure of projects assisted by financial institutions

Reason for the trends in advances

Share of long-term and working capital loans

12

PRIORITY SECTOR LENDING NORMS

The priority sectors comprises of agriculture, small-scale

industries (SSI), education and housing.

PSBs, private sector banks, foreign banks

with more than 20 branches :
For this group, 40% of the advances should be
for priority sector lending.
This category of banks should also adhere to
sectoral targets within the overall priority
sector lending. (like certain % for agriculture,
certain % for small scale industries etc)
Foreign banks with less than 20 branches :
For this group, 32% of the advances should be
for priority sector.
This category of banks are not subjected to
any sectoral targets within the overall priority

13

Advances growth has slowed down significantly from

2006-07 for both public and private sector banks
LONG-TERM AND SHORT-TERM
TREND IN ADVANCES

IIP

New loan sanctions have also decreased significantly over

the past 2 years with companies postponing capital
expansion plans

Capital expenditure of projects assisted by financial institutio

High interest rates, sluggish economy were the main

factors for slow-down in advances.
REASONS FOR SLOW-DOWN IN ADVANCES
The

advances grew by more than 31% in 2006-07

The

growth slowed in the last few years and especially in the

last 1-2 years, the growth-rate of advances has slowed down to

16 to 18%.
Credit
The

growth has strong linkages with the overall economy

slow-down is due to the monetary tightening by RBI and

slow-down in the credit off-take across many sectors like

Agriculture and allied industries, infrastructure (Cement, Iron and
Steel, Telecom), Textiles, Housing, Automobiles and Commercial
Vehicles.
16

Share of long-term loans has come down from 58% of the

total advances in 2007-08 to 54% n 2012-13.
OVERALL BREAK-UP OF ADVANCES

Share of long-term
loan has reduced due
to slow-down in the
economy.
Share of short-term
loans is increasing due
to increase debtor
days leading to long
working capital cycle.

17

TERM LOANS AND SHORT-TERM LOANS

Five

years back, the share of term loans was around 58%

and the remaining 42% was working capital.

But

currently it is 54% and 46% respectively (53% for

term loans, 47% for working capital)

This

is another indicator for the slow-down as the

corporates are curbing their investments.

Also

corporates are looking at other avenues for

investments rather than long-term loans

18

Share of long-term loans for private sector banks is 64%

while that of private sector banks is 52%.
BREAK-UP OF ADVANCES: PUBLIC VS PRIVATE BANKS
PUBLIC SECTOR BANKS

19

PRIVATE SECTOR BANKS

Analysis of Deposits

20

KEY POINTERS FOR ANALYSING DEPOSITS

Long-term and short-term growth in deposits

Overall Share of different type of deposits

Bank group wise share of deposits

Costs of deposits

21

Deposit growth has slowed down from the high of 25% in

2006-07 to about 15% in the last few years.
TRENDS IN DEPOSIT GROWTH

22

DEPOSITS TRENDS

During

the 5 year growth (2006-07 to 2010-11), advances

grew at a healthy rate of about 20%.

But

it has dropped considerably (to about 15%) between

2011-12 and 2013-14.

The

main reason is due to low real interest rates and high

inflation, the customers are looking for other investments

(Gold, Real-estate, stock-markets, mutual funds)

23

Share of current deposits have come down

OVERALL SHARE OF DIFFERENT TYPES OF DEPOSITS

Year
200607

TermDeposi
ts
Savings Deposits
64%

23%

Current
Deposit
s

Tota
l

13%

100
%

Share of current deposits declined as corporates are

2012100
increasingly
preferring to invest
13
67%
23% in money market
10% instruments
%
such as liquid mutual funds that offer attractive returns over
short maturities, instead of parking money in current accounts
of banks which earn no interest.

24

Cost of deposits have increased for the banks due to

reduction in CASA and deregulation of interest for
Savings deposits

COST OF DEPOSITS

25

Private and Foreign banks have higher CASA

deposits compared to PSBs
PLAYER WISE SHARE OF DIFFERENT TYPES OF DEPOSITS
Type of
Banks

TermDeposits

Savings
Deposits

Current
Deposits

PSB

68%

24%

8%

Private
sector banks

63%

23%

14%

Foreign
banks

56%

15%

29%

26

Private and Foreign banks have higher CASA

deposits compared to PSBs
PLAYER WISE SHARE OF DIFFERENT TYPES OF DEPOSITS

Traditionally, PSBs used to have higher proportion of CASA.

But currently, CASA is higher for private and foreign banks.
This can be attributed to following:
Marketing efforts of private banks
some private banks revised their savings bank deposit
rates upward after the deregulation of savings bank
interest rates by RBI in October 2011.
Foreign banks generally prefer to cater to corporate
clients with sound cash management, who maintain
current deposits.
27

Analysis of Investments

28

Investments
Investments by banks fall into two broad categories:
Statutory liquidity ratio (SLR) investments:
Government securities and other government-approved
securities.
Non-SLR investments: Commercial papers, shares,
bonds and debentures issued by companies, units of UTI
and other mutual funds.

29

Though the RBI mandate is 23%, SLR investments

constitute about 77% of the total investments.
SLR NORMS:
The ratio of liquid assets to NDTL is known as SLR.
As part of the financial sector reforms undertaken in the
1990s, the SLR requirement for banks was gradually reduced to
25 per cent in October 1997 from 38.5 per cent in February
1992.
In 2012-13, banks were required to invest around 23 per cent
of their net demand and time liabilities in SLR securities.
As of 2012-13, almost 77 per cent of the banking sector's total
investments were in SLR securities,
30

There is risk aversion in non-SLR investments.

Non-SLR Investments
Traditionally, bonds and debentures used to have a larger
proportion of non-SLR investments but this has been changing
over 5 to 7 years, since 2005.
Banks have been increasingly investing in Shares and mutual
funds.
But since 2011-12, the trend is reversed.
This is partly due to banks turning risk averse and partly due to
policy tightening by RBI in order to curb banks exposure to short
term debt schemes of mutual funds.
31

Analysis of NPAs

32

How NPAs are classified?

RBI classify loans into 4 categories:
Standard assets
Substandard assets
Doubtful assets
Loss assets
The central bank has prescribed appropriate provisioning
requirements for each of these categories.
Of the above, sub-standard assets, doubtful assets and loss
assets together comprise non-performing assets (NPAs). An NPA
is a loan or an advance where the interest and/or installment of
principal remains overdue for a period of more than 90 days.
33

GROSS NPA TRENDS

34

GROSS NPA TRENDS

Rapid economic expansion led to a steady decline in gross
NPA ratio between 2004-05 and 2008-09.
Post 2008-09, NPAs started rising again, as asset quality of
banks deteriorated.
In 2011-12, the gross NPA has increased to 3.1% from 2.4%
and net NPAs from 1.4% to 1.1% overall.
In the past, stringent risk management practices have
helped foreign banks maintain the lowest NPA levels.
Since 2008-09, various other factors contributed to the
deterioration of asset quality:
a worsening macro-economic scenario,
sharp rise in interest rates,
volatile currency and commodity markets
35

PSBs have shown the largest increase in the NPAs and

currently more than the double of private and foreign
banks.

GROSS NPA TRENDS: PUBLIC SECTOR VS PRIVATE SECTOR BAN

36

Public Sector Banks asset quality is further deteriorated by

restructured assets.
ASSET RESTRUCTURING
Post the subprime crisis in
2008, the RBI allowed banks to
restructure stressed assets.
PSBs accounted for almost 95
per cent of scheduled
commercial banks' total
standard restructured assets
(Rs373,100 billion)

RESTRUCTURED ASSETS AS
% OF TOTAL ADVANCES

It is not the priority sector alone but non-priority sector

too significantly contribute to NPAs .
NPAS : SECTOR-WISE

Sector
Priority Sector
Public Sector
Non-priority
Sector

38

200708

201213

54%

46%

1%

2%

45%

52%

STEPS TO RECOVER BAD LOANS

The government created different mechanisms and institutions:

Lok Adalats (Fast track courts)
DRTs (Debt Recovery Tribunals)
ARCs
CDRs
SARFAESI (for enforcement of security interest without the
intervention of courts, which has provided more negotiating
power to the banks for resolving bad debts)
Of all the above, SARFAESI and DRTs have been most effective
in-terms of money recovered.
SARFAESI and DRTs constitute 70% and 28% of the recoveries
respectively.
39

PSBs accounted for more than 95 per cent of scheduled

commercial banks' total standard restructured assets

CORPORATE DEBT RESTRUCTURING

Post the subprime crisis in 2008, the RBI allowed banks to restructure
stressed assets
The special regulatory treatment allowed for standard accounts
helped banks limit growth in GNPAs.
PSBs accounted for more than 95 per cent of scheduled
commercial banks' total standard restructured assets

40

Large corporate loans form a sizeable portion of

restructured assets
The current nature of restructuring is qualitatively different from

CORPORATE DEBT RESTRUCTURING : CLIENT PROFILE

that in 2008-09 and 2009-10. Loans restructured earlier were
smaller and represented small and medium enterprises (SME)
accounts.

However, currently, banks are increasingly restructuring large

corporate exposures. The bulk of assets restructured in the current
economic downturn have a ticket size of more than Rs 10 billion.
The increase in average ticket size for loans referred to the
Corporate Debt Restructuring (CDR) cell indicates that not only
small borrowers but large corporates are also finding it difficult to

41

CDRs are spread across different industries and not specific to

any particular industry

INDUSTRY WISE CDR

42

OPERATIONAL EXPENDITURE

43

are the major operational metrics to measure efficiency?

Employee costs is the biggest chunk of the operating costs which form
55 to 60% of the total operating costs
Following measures are used to measure efficiency
Average advances /Staff costs
Average Funds Deployed / Staff Costs

44

different banks have performed in terms of these operating metrics?

Traditionally, staff costs as a percentage of total operating

expenditure have been significantly higher for public-sector banks

(PSBs).
Benefits from the VRS, technology up-gradation and focus on
computerisation of all branches have helped banks become
more cost-efficient in recent years.
Currently Nationalized banks are more efficient than the private
sector banks
45

Nationalized banks are more efficient than the private

sector and foreign banks.

different banks have performed in terms of these operating metrics?

Type of Bank

Average
Average Funds
advances /Staff Deployed / Staff
costs
Costs

SBI & Associates

54

76

Nationalized
Banks

71

107

Private Sector
Banks

62

98

Foreign Banks

41

78

46

NET PROFITABILITY MARGIN

47

How the net profitability margin for the bank is calculates?

Spreads (Inteterest yield Interest cost) (Operating expenses
/AFD) +(core fee-based income /AFD)

48

NPM has been reducing for the bank since 2010-11

due to competitive pressure, declining spreads and
sluggish credit off-take.
NET PROFIT MARGIN TRENDS: OVERALL

49

erall NPM : 1.52% and it is the lowest for Nationalized banks.

How different banks fare on NPM?

Overall

SBI &
Associat
es

Nationali Private
zed
Sector
Banks
Banks

Foreign
Banks

2.35

2.96

2.40

3.56

4.71

Operating 1.90
Expenses
/ AFD

2.01

1.45

2.32

2.77

Core Feebased
Income /
AFD

1.06

0.93

0.56

1.49

1.98

NPM

1.52

1.88

1.51

2.73

3.92

Spreads

50

NPM is highest for private and foreign banks primarily

because of core fee-based income
Private
sectorbanks
and Foreign
banks
have much higher core fee-based
How
different
fare on
NPM?
income which enhances their profitability.
Foreign banks also have very high spreads. This is because
they have high share of low cost deposits (CASA). They
generally cater to corporates who keep higher current deposits.
Their cost of deposits was about 200 bps lower than that of
nationalized banks.
Core Fee based income include: Fees (Commissions or
brokerage income) for letter of credit, providing guarantees
etc, Fees from credit cards, Fees from forex transactions
and Profit on sale of investments
In continuation of past trends, foreign banks had the highest
proportion of other income in total income.
A global presence has enabled foreign banks to dominate the
market for forex and trade finance transactions. Syndication/
processing fees earned on foreign currency loans also helps
foreign banks boost their core fee income.
On the other hand, for nationalised banks, the share of other
51

ROA has been reducing for Public Sector Banks primarily

due to rising NPAs and restructured assets.
RETURN ON ASSETS

52

Basel 3 Norms

53

Basel 3 norms has been developed to avoid 2008 like financial

BACKGROUND
breakdown in the future. It is a safeguards / backup plan for the
banking sector.
It provides internationally accepted detailed guidelines about
how much money should a bank keep aside, to deal with
financial crisis.
The objective is even if there is lot of defaulters, Bank should
have money to give back to depositors.
The major problems that led to 2008 crisis were
High debt
Low quality of capital base
Insufficient liquidity
Basel III proposes many new capital, leverage, and liquidity
standards
Implementation of Basel 3 norms will be from
2013 to 2019. (though in India, RBI has given a
54

Tier 1 capital (Core capital): More liquid (for example, paid up

CAR = (Tier 1 capital + Tier 2 capital)/(Risk weighted assets)
capital, free reserves, statutory reserves, currency notes, stocks
etc)
oTier

2 capital (subordinate capital): less liquid (building or

land owned by the bank, NPAs, Long-term unsecured loans etc)

Risk weighted assets :
They are used to calculate a banks minimum capital
requirements.
For banks, risk-weighted assets are assets with special
risks.
For example, a loan secured by a letter of credit would be
weighted as riskier than a mortgage loan that is secured
with collateral
A government bonds with higher rating (over AA-) are
55

weighted as zero percent, whereas corporate loans with the

Key Basel 3 norms are higher capital, higher Tier 1 capital and
additional equity in the form CCB
KEY BASEL 3 NORMS

56

Basel 3 norms will primarily impact PSBs as they will have to

bring in more capital and hence their ROE will come down by
about 300 to 400 bps.
IMPACT OF BASEL 3 NORMS
Banks

will have to raise significant additional capital (Rs. 2.7 tn) of

Tier 1 capital to meet the new norms.

PSBs

will have to raise 90% of it as private banks are having

comfortable levels of tier-1 capital.

The

stipulated norms can be met only with the support of the

Government of India (GoI) through capital infusion.

Capital
As

expansion to affect RoE of PSBs

a major portion of the additional Tier-I capital will be raised by

public sector banks in the form of equity, their average return on

equity (RoE) is expected to fall by 300-400 bps
57

New Banking Licenses

58

BACKGROUND
RBI announced that it will issue new banking licenses and

invited applications.
Overall
The

it received 26 applications for new banking license.

new licenses will be issued after a big gap.

Nine
In

licences were issued in 1993-94

the early 2000s, 2 banks were given licences (Kotak

Mahindra Bank and Yes Bank)

The

applicants include Birla, Reliance, Shriram, India Post

etc.
RBI
59

has so far given licences to 2 entities- IDFC and Bandhan

Financial Services.

What happened to banks which got licences in the last 2 dec

ICICI Bank : Operating independently
HDFC Bank: Operating independently
Indus Ind Bank: Operating independently
Kotak Mahindra Bank : Operating independently
Yes Bank: Operating independently
Global Trust Bank: Acquired by Oriental Bank of Commerce
Centurion Bank: Acquired by HDFC
Bank of Punjab : Acquired by HDFC
Times Bank: Acquired by HDFC

60

Key Norms for new banks

Minimum
25%

branches in rural areas and un-banked centers

40%

advances to priority sector

Maintain
Specific

61

Capital : Rs. 500 crores

CRR/SLR norms from day 1

corporate governance norms

The
abovefor
norms
arebanks
stringent especially 25% branches in
Key
Norms
new

rural areas and unbanked centers as:

Even existing private sector banks are struggling to

expand their footprint in such areas
Many NBFCs do not have branches in rural areas. They
service them through agents or Customer relationship
associates:
LIC Housing finance services its rural customers
through 7000 home loan agents and customerrelationship associates
Shriram Transport Finance has 530 branches and 350
rural touchpoints. These touch-points are with one or
two people working from home or one-room office.

It
62

is also a huge cost disadvantage as banks can use technology

consistent growth
even during
the
Why High
lot ofand
applications
despite(17-18%
the stringent
norms?

slowdown)
Long-term

potential: Large population is underbanked or

unbanked
Customer

stickiness: Most customers stay with the particular

bank for a long time

High

entry barrier: RBI has given licences only twice in the

last 20 years
Consistent
HDFC

profitability potential:

bank reported 30% growth in net profits for

continuous quarters.
Not
63

just HDFC bank but most of the private sector bank has

New banking applicants differ in their objectives

Big

corporates (Birlas, Ambanis, L&T) are in it because its

an important business to ignore.

Many

NBFCs like LIC Housing, IDFC etc want to access

cheaper public deposits and expand its product offering.

India

Post has 1.55 lakh post offices and 5 lakh employees.

If all the branches become a mini-bank, it would have

branches than the rest of the banking system put together.

64

NEW
PLAYERS
STRATEGIES
Focus
away from
Metros and cities
In urban areas, there are 348 million banking accounts
for 377 million population (saturated)
In rural and semi-urban areas, there are only 344 million
accounts for 833 million people
Use technology as a key differentiator
Cost of one physical transaction is Rs. 40-Rs. 60, through
ATM it is Rs. 15-20 and through a mobile, it is Rs. 1 to
Rs. 1.50
Identify and fill the gaps in the market with
innovative products
Become successful like ICICI Bank and HDFC bank
65