Banking Sector and Opportunities in India

March 2004

2

Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

3

Indian economy - Strong fundamentals

GDP growth

Forex reserves

Exports

Ten year average of 6.0%

US$ 90 billion

US$ 50 billion in FY2003

4

Indian economy - Strong fundamentals

Interest rates

Short term debt

External debt

6.5% decline in last five years

0.8% of GDP

20% of GDP

5

Diversified composition, robust growth

Sectoral share of GDPSector

22.1Agriculture

21.8Industry

56.1Services

Projected growth FY2004

(%)

10.7

5.0

7.3

GDP 7.4

6

Strong growth drivers…

Services Information technology Business process outsourcing Financial services Entertainment, media, travel & tourism

Information technology Business process outsourcing Financial services Entertainment, media, travel & tourism

Industry

Strong domestic demand Improving competitiveness – lower

interest rates, increased productivity, better working capital management, deleveraging

Export thrust

Strong domestic demand Improving competitiveness – lower

interest rates, increased productivity, better working capital management, deleveraging

Export thrust

Agriculture Favourable climatic conditions with

good monsoon Modernisation of agriculture – scale

and farming methods

Favourable climatic conditions with good monsoon

Modernisation of agriculture – scale and farming methods

7

…underpinned by strong infrastructure growth…

Roads

Construction of Golden Quadrilateral and North-South, East-West corridors

13,000 km long - world’s largest single highway project

Boosting demand for steel, cement, commercial vehicles

Construction of Golden Quadrilateral and North-South, East-West corridors

13,000 km long - world’s largest single highway project

Boosting demand for steel, cement, commercial vehicles

Industry

Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years

Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years

Positive impact on efficiency of firms and services exports

Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years

Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years

Positive impact on efficiency of firms and services exports

8

…though certain areas require close attention

Certain mis-steps have constrained development in this sector

Now being corrected through policy initiatives

Electricity Act passed by Parliament New focus on creating capacities as

well as enhancing transmission and distribution efficiency

Certain mis-steps have constrained development in this sector

Now being corrected through policy initiatives

Electricity Act passed by Parliament New focus on creating capacities as

well as enhancing transmission and distribution efficiency

Need for urban rejuvenation – housing, roads, utilities

Local bodies in several cities taking initiatives in this area

Need for urban rejuvenation – housing, roads, utilities

Local bodies in several cities taking initiatives in this area

Power

Urban infrastructure

9

Changing demographic profile

…high proportion of younger, working population driving growth

15 - 35 years35%

< 14 years34%

> 50 years14%

35 - 49 years17%

Source: Ministry of Home Affairs, Government of India

10

Robust household savings pattern

Source: Economic Survey 2002-2003, Ministry of Finance

5%

11%

17%

23%

1970-71 1985-86 2000-01

10.1%

22.5%Household savings as a % of GDP

2001-02

11

-

25

50

75

100

1990-91 1997-98 1999-00 2001-02 2002-03

Merchandize exports Services exports NRI remittances etc

Large inflows of foreign currency

Gross forex inflows (US$ billion)

58.25

67.13

79.44

25.60

~~

Source: Economic Survey 2002-2003, Ministry of Finance; RBI

95.23

12

83.80104.23

5.80

74.81

29.42

78.00

0

25

50

75

100

1990-91 1999-00 2002-03

External debt

Forex reserves

Gap

Strong external position

Forex reserves & external debt (US$ billion)

~~

Source: RBI

13

0.2

0.6

0.9

1.3

1.6

1997-98 1998-99 1999-00 2000-01

Enhanced corporate competitiveness

Return on Equity (PAT / Equity)

Asset turnover (Revenue / Assets)

Source: Deutsche Bank

India

0%

7%

14%

21%

1997-98 1998-99 1999-00 2000-01

Shanghai A (Chinese cos. listed in Shanghai SE)H-shares (Chinese cos. listed in HK SE)Red chips (Chinese Govt. controlled cos. listed in HK SE)

14

The above developments are the result of a decade of reform… Focus on globalisation

Opening up of the economy Thrust on export led growth Deregulation to encourage technology & capital

flows Integration with international financial markets

Key reform measures Lowering of tariff barriers and liberalised imports

Average tariff reduced from 53% to 18% in last 5 years Full convertibility of the rupee on current account Permitting domestic companies to access foreign

capital markets Substantial liberalisation of restrictions on foreign

investment

15

..driving transformational change Dramatic growth of services sector

Over 50% of GDP Significant contributor to exports

Restructuring of manufacturing sector over the past decade Early 1990s: capitalising on domestic demand Mid- to late 1990s: restructuring to achieve

world-class efficiency 2000: Articulation of international

competitiveness

16

The underlying fundamentals are based on a deep structural change in the economy and provide a sustainable platform for continued growth. The opportunities in the banking sector have to be viewed in this context.

17

Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

18

A decade of change and evolution…

Pre-reform

Extensive regulation

Focus on industrial sector

The 1990s Today

Indian economy

Financial sector

..financial sector mirroring macro-economic change

Liberalisation

Globalisation

Structural change – services

Resilient industry

Buoyant services sector

Highly segmented

Public sector dominance

Opening up of various sub-sectors

Private sector participation

Diversified financial groups

Globally benchmarked

19

The banking sector today

Depth Countrywide coverage

Large number of players

Increasingly sophisticated financial markets

Technology Increasing use of

technology in operations

Poised to expand and deepen technology usage

Diversification

Emergence of integrated players

Diversifying capital deployment

Leveraging synergies

Regulation Robust regulatory

system aligned to international standards

Efficient monetary management

20

Sector snapshot

Size Total assets of US$ 335 billion Total deposits of US$ 279 billion

Total assets of US$ 335 billion Total deposits of US$ 279 billion

Number of banks

Over 290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks

Over 290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks

Branch network

Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400

Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400

21

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

22

Legacy issues addressed… Challenges of a changing competitive

environment Small and unviable pre-liberalisation units Large investments post-liberalisation 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

23

…with significant success in resolution

0.02.04.06.08.0

10.012.0

1997 1998 1999 2000 2001 2002

4%

15%

43% 43%40%

30%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Chin

a

Thai

land

Mal

aysi

a

Japa

n

S. K

orea

Indi

a

(%)

Position much stronger than other Asian economies

Net NPL accretion tapering off with progress in asset resolution and increase in provisioning levels Source: E&Y, RBI

US$ bn Net NPAs of banks & FIs

Gross NPAs as % of GDP

24

A new orientation among banks…

Sell products Product research:

what will sell? Product sales and

profitability targets Product specialist

groups Introduce new

offerings every few years/months

“Branch banking” Focus - customer

acquisition

Meet customers’ needs

Customer research: what does the customer want?

Customer segment sales and profitability targets

Customer owners Customer specific

new offerings every week/day

Customer convenience

Deepen relationships

Traditional/ public sector New/ private sector

25

Technology- the ICICI Bank experience

Share of transactions

in March 2000

Channel

2%Internet

3%ATMs

94%Branches

Share of transactions in July 2003

10%

51%

28%

Call centre 11%1%

26

Retail credit opportunity…

18

33

52

4

55

0

10

20

30

40

50

60

70

Korea Taiwan Malaysia Thailand India

Consumer loans / GDP (%) Consumer loans / Total loans (%)

%

Source: SSKI, CLSA

..penetration currently low, with growth driven by strong fundamentals…

60

36

27

14

27

Retail credit drivers

Declining retail loan

interest rates

Interest rates on residential mortgages have reduced by 7% over last 4 years

Interest rates on residential mortgages have reduced by 7% over last 4 years

Increasing

availability

Entry of banks has led to increased competition and coverage

Increasing use of technology further enhancing reach and accessibility

Entry of banks has led to increased competition and coverage

Increasing use of technology further enhancing reach and accessibility

Changing demographic

profile

Middle & high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002

Middle & high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002

28

Retail market size

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1999-00 2000-01 2001-02 2002-03

Housing finance Car finance Credit card spendCommercial vehicle finance 2-wheeler finance Personal loansConsumer durable finance

7.3

9.4

12.9

16.5CAGR of

31%

Annual disbursement (US$ billion)

29

Changing profile of corporate banking… Change in corporate focus - improving

efficiency Better asset utilisation and financial

management Limited new capacity creation

Increasing disintermediation in top tier segment

However, several opportunities for banks Technology-driven fee-based services Treasury and risk management products Facilitating resource raising by corporates

through syndication, securitisation and market-making

New approach to SME lendingSophisticated banking servicesScientific portfolio construction and management

30

Financial services potential: insurance

Source: Swiss Re, Economic Research & Consulting (June 2002)

14.2%

12.1%

9.0%

5.2%

2.9% 2.7% 2.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

UnitedKingdom

SouthKorea

UnitedStates

Malaysia Thailand India China

Life insurance General insurance

Premium as a % of GDP

…the opening up of the sector provides a major opportunity for financial services players

31

The “international Indian” opportunity

Canada(0.42 mn)

US(1.2 mn)

West Indies

UK(0.72 mn)

GCC

(4.1 mn)

Nepal

Singapore/ Malaysia(0.14 mn NRIs)

Fiji Zimbabwe/ Uganda

South Africa

Area of large NRI population

Areas of large PIO population

Number of NRIs

()

Australia and New Zealand

(< 0.1 mn)

…the Indian diaspora, the emergence of Indian multinationals and resultant economic flows have created a new opportunity

32

Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

33

In summary The reform and liberalisation 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 & rationalisation

Growing international linkagesExports, manufacturing and distribution overseasIndia as a manufacturing base

Globally benchmarked businesses, capable of competing internationally

34

In 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 capitalise on these

opportunities

35

Thank you