Banking Sector and Opportunities in India

March 2004

2

Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

3

Indian economy - Strong fundamentals

G D P g r o w t h

F o r e x

r e s e r v e s

E x p o r t s

Ten year average of 6.0%

US$ 90 billion

US$ 50 billion in FY2003

4

Indian economy - Strong fundamentals

In t e r e s t

r a t e sS h o r t

t e r m

d e b tE x t e r n a l

d e b t

6.5% decline in last five years

0.8% of GDP

20% of GDP

5

D iv e r s if ie d c o m p o s it io n , r o b u s t

g r o w t h

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

Industry 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

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

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

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

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 Ind ia

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

Merc hand ize exp o rts S ervic es exp o rts NRI remittanc es etc

Large inflows of foreign currency

Gross forex inflows ( US$ billion)

58.2567.13

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

F orex res erves

G ap

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

E n h a n c e d c o r p o r a t e

c o m p e t it iv e n e s s

Return on Equity (PAT / Equity) Asset turnover ( Revenue / Assets)

Source: D eutsche Bank

India

0%

7%

14%

21%

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

S hanghai A ( Chinese cos . lis ted in S hanghai S E)H-shares ( Chinese cos . lis ted in HK S E)Red chips (Chinese Govt. controlled cos . lis ted in HK S E)

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

Number of 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

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 n e w o r ie n t a t io n a m o n g

b a n k s …

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

T e c h n o l o g y - t h e IC IC I B a n k

e x p e r ie n c e

Share of transactions in

March 2000Channel

2%Internet

3%ATMs

94%Branches

Share of transactions in

July 2003

10%

51%

28%

Call centre 11%1%

26

R e t a il c r e d it o p p o r t u n it y …

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 s trong 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

Increasing availability

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

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

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

7.3

9.4

12.9

16.5

CAGR 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 lending

Sophisticated banking services Scientific 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%

1 0.0%

1 2.0%

1 4.0%

1 6.0%

U nite d

King d o m

S o uth

Ko re a

U nite d

S tate s

M alaysia Thailand Ind ia 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

C a n a d a

(0.42 mn)

U S

(1 .2 mn)

We s t

In d ie s

U K

(0.72 mn)

G C C

(4.1 mn)

N e p a l

S in g a p o r

e /

M a l a y s ia(0.1 4 mn NRIs)F ij i

Z im b a b w

e /

U g a n d a

S o u t h

Af r ic a

Ar e a o f

l a r g e N R I

p o p u l a t io n

Ar e a s o f

l a r g e P IO

p o p u l a t io n

N u m b e r o f

N R Is

()

Au s t r a l ia a n d

N e w Z e a l a n d

(< 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 s u m m a r y

T h e r e f o r m a n d l ib e r a l is a t io n p r o c e s s

h a s t r a n s f o r m e d t h e In d ia n e c o n o m y

S t r u c t u r a l s h if t w it h s e r v ic e s e c t o r

g r o w t h

Im m e n s e p o t e n t ia l t o l e v e r a g e

t e c h n o l o g y a n d k n o w l e d g e c a p it a l

Im p r o v e d c o m p e t it iv e n e s s in

m a n u f a c t u r in g a f t e r in t e r m e d ia t e

p e r io d o f r e s t r u c t u r in g &

r a t io n a l is a t io n

G r o w in g in t e r n a t io n a l l in k a g e s

E x p o r t s , m a n u f a c t u r in g a n d d is t r ib u t io n

o v e r s e a s

In d ia a s a m a n u f a c t u r in g b a s e

G l o b a l l y b e n c h m a r k e d b u s in e s s e s ,

c a p a b l e o f c o m p e t in g in t e r n a t io n a l l y

34

In s u m m a r y (c o n t d ).

T h e b a n k in g s e c t o r h a s a c h ie v e d

s ig n if ic a n t s u c c e s s in a d d r e s s in g

l e g a c y c o n c e r n s

R e s o l u t io n o f a s s e t q u a l it y c o n c e r n s

t h r o u g h r e c o v e r y , r e s t r u c t u r in g a n d

p r o v is io n in g

F o c u s o n t e c h n o l o g y a n d c u s t o m e r

o r ie n t a t io n

T h e e c o n o m ic t r a n s f o r m a t io n

p r o v id e s m a j o r o p p o r t u n it ie s f o r t h e

b a n k in g s e c t o r

R e t a il f in a n c e – c r e d it a n d b a n k in g

s e r v ic e s

C o r p o r a t e f in a n c e - b a n k in g s e r v ic e s

a n d s t r u c t u r e d f in a n c e

T h e s e c t o r is p o is e d t o c a p it a l is e o n

t h e s e o p p o r t u n it ie s

35

Thank you