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Indian banking Industry
The
Road Ahead
Banking in India
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day.
History of Banking in India
The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases
Phase 1 - Early phase from 1786 to 1969 of Indian Banks
Phase 2 - Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
Phase 3 - New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.
Phase 1The 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. These three banks were amalgamated in 1920 and Imperial Bank of India was established.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase 2Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised 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. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised
Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership
Phase 3
This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.
List of Banks in IndiaNationalized Banks
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab & Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
IDBI Bank
SBI & 7 Associates
State Bank of India
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore
Old Private Sector Banks
Bank of Rajasthan
Bharat Overseas Bank
Catholic Syrian Bank
City Union Bank
Dhanalakshmi Bank
Federal Bank
ING Vysya Bank
Jammu and Kashmir Bank
Karnataka Bank
Karur Vysya Bank
Lakshmi Vilas Bank
Lord Krishna Bank
Nainital Bank
Ratnakar Bank
SBI Commercial and International Bank
South Indian Bank
Tamilnad Mercantile Bank
New Private Sector Banks
Axis Bank
Centurion Bank of Punjab
Development Credit Bank
HDFC Bank
ICICI Bank
IndusInd Bank
Kotak Mahindra
Yes bank
IndianIndian EconomyEconomy – FY08– FY08
Economy Continued to register robust growth
High Oil Prices Impacted Inflation
Foreign exchange reserve increasing day by day
Growing Middle & High Income class
FY07FY06FY05GDP Gr
Agriculture
Industry
Manufacturing
Service
FY08
10.2%
8.1%
7.4%
0.7% 2.7%
10.3%
9.1%
8.0%
6.0%
9.9%
9.1%
11.0%
12.3%
11.0%
3.1%
10.4%
Total 7.5% 9.0% 9.4% 8.9%
Economy Continued to register robust growth
FY02FY96
1
33 98
3
50
10
FY10E
Middle Income
High Income
(household in million)
Consumption Drivers
Rising Affluence & Growth of consuming classes
Both Middle & High Class are growing at higher pace
Forex Reserve growing day by day
Macro Economic View Indian Banking sector
Tighter Monetary Stance by RBI to tame Inflation
Higher G- Sec yield
Rising cost of fund
Higher lending yield
Deposit growth stronger
Credit growth is picking up
Tighter Monetary Stance by RBI to tame Inflation
Monetary steps taken by RBI to curb Inflation
Result in rising G-sec Yield
2- yr G-sec yield – 9.15
1- yr G-sec yield – 9.08
10- yr G-sec yield – 8.99
Results in rising cost of fund
Funding cost of the banks will increase
Banks already raise deposit rate by 25-100 bps
Higher lending yield
Banks raises PLR by 50 bps
Likely to keep pressure on margin
Higher interest rate put impact on loan growth
Stronger Deposit Growth
Deposit grew at the rate of 23% YoY to Rs 32570.bn on account of offering higher interest rate.
Credit growth is picking up
Credit growth picks up on back of lower base. It grew at the rate of 26% on YOY
Key Growth Drivers
Low penetration of consumer finance at 13 % of GDP
Retail Loan
Robust industrial and infrastructure investment pipeline estimated at over US $ 500 billion
Internationalization of Indian industry
Low Penetration of Insurance & Asset management
CASA Deposit – Key differentiator in current environment
Retail Banking – Present scenario
>Indian retail banking has been showing phenomenal growth
>Over the last 5 years CAGR has been 35%
Market has now transformed into a buyer’s market from a seller's market
Comprises of multiple products, channel of distribution & multiple costumer group
Economy vs Retail loan
>Retail asset are just 22% of the total banking of India
>Indian population below 35yrs of age – 70%
>Reach of Formal Banking Channels – 20-25% of Indian population
0%
10%
20%
30%
40%
50%
60%
India China Thiland Taiwan
Retail contri
Contribution of Retail Loan to GDP
CHANGING CONSUMER DEMOGRAPHICSCHANGING CONSUMER DEMOGRAPHICSGrowing disposable incomesGrowing disposable incomesYoungest population in the worldYoungest population in the worldIncreasing literacy levels Increasing literacy levels Higher adaptability to technologyHigher adaptability to technologyGrowing consumerismGrowing consumerismFiscal incentives for home loansFiscal incentives for home loansChanging mindsets-willingness to Changing mindsets-willingness to borrow/lendborrow/lendDesire to improve lifestylesDesire to improve lifestylesBanks vying for higher market shareBanks vying for higher market share
Drivers Of Retail GrowthDrivers Of Retail Growth
How Industry has changes to this response““Any where”, “Any time” BankingAny where”, “Any time” BankingImproved processes/Bundled product Improved processes/Bundled product offeringsofferingsFaster serviceFaster serviceCustomer specific products/offerings Customer specific products/offerings on a regular basison a regular basis‘‘Bank’ customer has replaced Bank’ customer has replaced ‘Branch’ customer‘Branch’ customerFocus on understanding customer Focus on understanding customer needs/ preferencesneeds/ preferencesSegmentation/Differentiation of Segmentation/Differentiation of customerscustomersCustomer driven strategiesCustomer driven strategiesBuilding relationshipsBuilding relationships
Future of Retail Banking
The accelerated retail growth has been The accelerated retail growth has been on a historically low baseon a historically low base
Penetration continues to be Penetration continues to be significantly low compared to global significantly low compared to global bench marksbench marks
Share of retail credit expected to grow Share of retail credit expected to grow from 22% to 36%from 22% to 36%
Retail credit expected to grow to Retail credit expected to grow to Rs.575,000 crs by 2010 at an annual Rs.575,000 crs by 2010 at an annual growth rate of 25%growth rate of 25%
Source: Cygnus industry insightSource: Cygnus industry insight
Dramatic changes expected in the Dramatic changes expected in the credit portfolio of Banks in the next 5 credit portfolio of Banks in the next 5 yearsyears
Housing will continue to be the Housing will continue to be the biggest growth segment, followed by biggest growth segment, followed by Auto loansAuto loans
Banks need to expand and diversify by Banks need to expand and diversify by focussing on non urban segment as well focussing on non urban segment as well as varied income and demographic as varied income and demographic groupsgroups
Rural areas offer tremendous potential Rural areas offer tremendous potential too which needs to be exploitedtoo which needs to be exploited
Future of Retail Banking contd…
Robust industrial and infrastructure investment
High capacity utilisation & need for building infrastructure resulting in a large investment pipeline
Supported by healthy Balance Sheet
The “international The “international Indian” opportunityIndian” opportunity
CanadaCanada(0.42 mn)(0.42 mn)
USUS(1.2 mn)(1.2 mn)
West West IndiesIndies
UKUK(0.72 mn)(0.72 mn)
GCGCCC(4.1 (4.1
mn)mn)
NepalNepal
SingaporeSingapore/ Malaysia/ Malaysia
(0.14 mn NRIs)(0.14 mn NRIs)
ZimbabZimbabwe/ we/ UgandaUganda
South South AfricaAfrica
Area of Area of large NRI large NRI populatiopopulationn
Areas of Areas of large PIO large PIO populatiopopulationn
Number Number of NRIsof NRIs
(())
Australia and Australia and New ZealandNew Zealand
(< 0.1 (< 0.1 mn)mn)
The emergence of Indian multinationals and resultant economic flows have created a new opportunity
Financial services potential: Asset Management
AUM as % of GDP
87%
72%
30%23% 21%
6%
0%
20%
40%
60%
80%
100%
Australia US Brazil UK Korea India
By 2012, the total money managed by mutual fund houses in India will be between $350 billion and $440 billion. That's a growth of 26-33% every year.
Financial services potential: Insurance
Life insurance premium as % of GDP
10.7%
8.9% 8.7%
5.7%
4.4%3.4%
2.3% 2.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
UK J apan Korea Austrlia US Malaysia India China
The business of insurance in the country is expected is expected to be worth about US$ 60 billion by 2010.
Non-life insurance premium as % of GDP
4.6%
3.5% 3.4% 3.4%
2.2%1.8%
0.9%0.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
US UK Australia Korea J apan Malaysia China India
Financial services potential: Insurance
Many Indian Banks that are planning to enter the Insurance sector of the country major of them are Union Bank, Federal Bank, Allahabad Bank, Bank of India, Karnataka Bank, Indian Overseas Bank and Bank of Maharashtra.
CASA deposits - key differentiator in the current environment
Greater Importance in rising rate environment
Key factor to decide margin, growth & quality of business
Small & mid- sized PSU losing their CASA franchise to private player
Product and service differentiation, customer segmentation, intensive marketing, technological advancements and rapid branch expansion are key components of strong CASA growth for private banks.
Cost of deposits rising faster for banks with low CASA
BanksBanks CASA Ratio (%)CASA Ratio (%) Cost of DepositCost of Deposit
FY06FY06 FY07FY07 FY08FY08 FY06FY06 FY07FY07 FY08FY08
SBISBI 42.042.0 43.643.6 43.043.0 4.94.9 4.64.6 5.65.6
PNBPNB 49.049.0 46.246.2 43.043.0 4.14.1 4.34.3 5.45.4
Canara BankCanara Bank 33.333.3 31.531.5 31.531.5 4.54.5 5.35.3 6.76.7
BOIBOI 42.442.4 39.039.0 35.235.2 4.04.0 4.34.3 5.25.2
BOBBOB 42.042.0 38.738.7 35.935.9 4.04.0 4.64.6 5.35.3
Union BankUnion Bank 32.432.4 34.534.5 34.934.9 4.64.6 5.15.1 6.16.1
IOBIOB 39.939.9 34.934.9 33.533.5 4.64.6 4.94.9 6.26.2
OBCOBC 32.632.6 30.330.3 27.927.9 4.94.9 5.85.8 6.96.9
ICICI BankICICI Bank 22.722.7 21.821.8 26.126.1 4.44.4 5.95.9 7.17.1
HDFC BankHDFC Bank 55.455.4 57.757.7 54.554.5 3.43.4 4.34.3 5.25.2
Axis BankAxis Bank 40.040.0 39.939.9 45.745.7 4.34.3 5.05.0 5.15.1
From the chart we can find that Banks which have lower CASA ratio significantly have higher Cost of deposits.
Higher CASA ratio would mean higher margins
Irrespective of interest rate movements, banks with higher CASA ratio would stand to benefit. Their cost of funds would be significantly lower versus peers and they can grow volumes as well as sustain higher margins.
Private banks increasing share in CASA deposits
CASA & Total Deposit Growth
50
2016.9 16.8 16.3
39.7
17.112.1 14.1 17.4
0
10
20
30
40
50
60
Private Bank(new )
Private Bank (old )
SBI ( Standalone)
SBI Group PSU Bank
Banks
Gro
wth
% CASA Deposit
Total Deposit
Small and mid-sized PSU banks are fast losing their CASA franchise to private players. Product and service differentiation, customer segmentation, intensive marketing, technological advancements and rapid branch expansion are key components of strong CASA growth for private banks.
Huge scope for New private banks to sustain current traction:
New private banks' aggregate CASA deposits are 1/5th of all PSU banks‘
Continued branch/ATM expansion and deeper geographic penetration would ensure that CASA growth for the new private banks remains strong even going forward.
Structurally New private banks are best equipped to gain market share in CASA deposits from PSU banks.
Key Player to watch out in the Industry AXIS Bank
HDFC Bank
ICICI Bank
YES Bank
AXIS BankAbout the Company
Third-largest private sector bank in India in terms of asset size. A very wide network of more than 701 branch offices and Extension Counters.
A network of over 2854 ATMs providing 24 hrs a day banking convenience to its customers.
Corporate Banking
Treasury
Business Banking
Business overview
Capital Market
Agri & Micro- Financing
International Banking
Investment Argument & New initiatives
Witnessed a massive surge in advances growth in FY08
Deliver high growth even when the industry is witnessing slowdown
Ability to tap opportunities available in fee-based income and witness strong banking business due to strong network
Has tie up with Rothschild group for wealth management providing the bank access to various products globally
Is likely to launch its own AMC business and in another initiative it hasentered into the private equity space with a USD500mn fund
Online trading accounts with Geojit Securities, partnership with Metlife and Bajaj Allianz Insurance for life and non life insurance would keep the revenue stream from non fund business intact in the future
Financial Performance
HDFC BankAbout the company
Is the second largest private sector bank in India (after ICICI Bank).
Is among the top three players in auto loans, personal loans, commercial vehicles, cash management, and supply chain management.
Its strengths include its brand equity, professional management, reach, high CASA(53%), clean book, and focus on profitability.Business overview
>Retail Banking
>Wholesale Banking
>Treasury
Merger with CBoP
Merger should be considerably value-accretive as it provides the bank with a materially expanded branch/customer franchise.
It adds 400 branches to HDFC Bank and would potentially enable the bank to double its balance sheet size in the next 24 months.
HDFC Bank expects CBoP’s branches to scale up to the efficiency and productivity levels of HDFC Bank.
Financial Performance
ICICI BankAbout the company
Is the India’s second largest bank in terms of asset size, profits and total revenues.
Has a network of about 1,308 branches and 3,950 ATMs in India and presence in 18 countries.
It holds market leadership in almost all its businesses including mortgages, auto loans, commercial vehicle loans, life insurance, general insurance, and asset management.
Business overview
Wholesale BankingRetail Banking
International Banking
Agri & Micro- Banking
Government Banking
Financial Performance
YES BankAbout the company
The only ‘Greenfield’ private sector bank to be set up in the last decade
Professional management team with the highest ownership levels among all banks
Ranked Second among Medium Size Banks and the Fastest Growing Bank in its category, in the Business Today-KPMG Survey of India’s Best Banks of 2007.
Ranked Third among New Private Sector Banks and Overall #1 in Credit Quality in the Financial Express –E&Y Survey of India’s Best Banks of 2007
Business overview
Corporate & Institutional banking
Business banking
Retail banking & wealth management
Financial performance
The bank that best addresses and The bank that best addresses and
anticipates customers needs, anticipates customers needs,
delivers consistently higher delivers consistently higher
quality service and connects to quality service and connects to
the customer via their channel of the customer via their channel of
choice winschoice wins
Y.Y.Chin, OCBC BankY.Y.Chin, OCBC Bank
Winning StrategyWinning Strategy
Thank You !Thank You !