u.k. Banking Industry - A Country Report

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U.K. COUNTRY REPORT Banking Industry Retail Banking

Sector

ACKNOWLEDGEMENT

I express my sincere gratitude to my Country guide Prof. Cmde.

Rajan Bhandari, General Manager, AIBS, Noida for his ableguidance, continuous support and cooperation throughout my

project, without which the present work would not have beenpossible.

I would also like to thank the head of organization Prof. (Dr.)Gurinder Singh Sir, Pro Vice Chancellor and Director General,

Amity International Business School, Noida for providing thisopportunity to do this research and also his entire team for theconstant support and help in the successful completion of my

project.

3 CONTINENT MBA (2008 2010) 2


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TABLE OF CONTENTS

3 CONTINENT MBA (2008 2010)

S.No. PARTICULARS Pg. No.

1. Introduction 4

2. Review of the market 17

3. Analysis of the market 19

4. Findings 36

5. Recommendations 39

6. Conclusion 41

7. Bibliography and References 43

3


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INTRODUCTION

INTRODUCTION

U.K. Banking Industry:

The UK is the worlds largest international banking centre, operating some 150 million

accounts and contributing 50 billion annually to the UK economy.



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Holding a quarter of all banking assets across Europe, the UK remains the largest

international centre for cross-border lending, with more than 330 banks generating over

12bn for the UKs balance of payments.

Back in 1991, UK banks had assets and securities worth 1.2 trillion. In the intervening 18

years, the sector has grown by 501 percent. It has averaged a growth rate of almost 2.5

percent a quarter, which is around 10 percent a year.

Total assets of UK banks were 7.4 trillion which is about 5.3 times UK annual output.

That is a consolidated number; which nets out interbank lending.

This unprecedented and dangerous rate of growth was fuelled by bad lending on a massive

scale. There was little effective credit control or appraisal. Behind that 7.4 trillion number,

there is a mountain of bad debts. This is why the UK government was forced to take over

RBS, offer 500 billion of government guarantees.

Indian Banking Industry:

The growth in the Indian Banking Industry has been more qualitative than quantitative and

it is expected to remain the same in the coming years. Based on the projections made in the

India Vision 2020 prepared by the Planning Commission and the Draft 10th Plan, the

report forecasts that the pace of expansion in the balance-sheets of banks is likely to

decelerate.



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The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs

40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as

compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual

composite rate of 13.4 per cent during the rest of the decade as against the growth rate of

16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be

large additions to the capital base and reserves on the liability side.

Some of the Macro-economic indicators about U.K. and there performances are as

follows:-

1) Prices and Inflation:

The Consumer Price Index (CPI) and the Retail Price Index (RPI) as on March

2010 is 112.90% and 219.20% respectively. The Producer Price Index (PPI) being

116.80.

CPI annual inflation the Governments target measure was 3.0 per cent in February,

down from 3.5 per cent in January.

The downward pressures to the change in CPI annual inflation are widespread, the largest



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coming from recreation and culture where prices were largely unchanged between January

and February this year but rose by 1.1 per cent a year ago. Within this group, the largest

downward effect came from games, toys and hobbies, most notably from computer games

and pre-school activity toys. There was also a large downward pressure from books with

the price of non-fiction books in particular rising by less than a year ago.

The only large upward pressure to the change in CPI annual inflation came from clothing

and footwear. Within this group, the most significant upward effect came from womens

outerwear where, overall, prices rose by more than a year ago.

In the year to February, RPI annual inflation was 3.7 per cent, unchanged from January.

The main factors affecting the CPI also affected the RPI. Additionally there was significant

upward pressure to the change in the RPI annual rate from housing. This was driven

mainly by mortgage interest payments which fell by 0.2 per cent this year but by 7.3 per

cent a year ago following January 2009s half point decrease in the Bank rate. Within

housing, there was also a large upward effect from house depreciation, which rose this year

but fell a year ago. This reflects movements in the Department of Communities and Local

Governments smoothed house price index that is used to calculate this component.

RPI inflation the all items RPI excluding mortgage interest payments was 4.2 per cent

in February, down from 4.6 per cent in January.

As an internationally comparable measure of inflation, the CPI shows that the UK inflation

rate in January was above the provisional figure for the European Union. The UK rate was

3.5 per cent whereas the EUs as a whole was 1.7 per cent.

Output price factory gate annual inflation for all manufactured products rose 4.1 per cent

in February. Input price annual inflation rose 6.9 per cent in February compared to a rise of

7.7 per cent in January.



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Month on month the output prices measure for all manufactured products rose 0.3 per cent

in February, mainly reflecting price rises in chemical products, tobacco and alcohol

products and other manufactured products. The index excluding excise duties rose 0.3 per

cent between January and February.

The narrow output prices measure, which leaves out volatile sectors, showed an annual

increase of 2.9 per cent. Month on month, the input prices measure of UK manufacturers

materials and fuels rose 0.1 per cent.

The rise in the input index between January and February mainly reflected rises in the price

of imported parts and equipment, chemicals, and other imported materials, being largely

offset by falls in the price of fuel (inc CCL), and crude oil. The narrow input prices

measure rose 1.9 per cent in the year to February. In seasonally adjusted terms the index

rose 0.5 per cent between January and February.

2) Labour Market:

The employement rate as on March 2010 is 72.20% and the unemployement rate

being 7.80%.



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The employment rate for the three months to January 2010 was 72.2 per cent. The

rate is down 0.3 per cent on the quarter and it has not been lower since the three

months to November 1996. The number of people in employment fell by 54,000 on

the quarter to reach 28.86 million. The number of people in full-time employment

fell by 54,000 on the quarter to reach 21.16 million but the number of people in

part-time employment was unchanged at 7.70 million. There were 1.04 million

employees and self-employed people working part-time because they could not

find a full-time job, up 20,000 on the quarter.

The unemployment rate fell by 0.1 per cent on the quarter to reach 7.8 per cent for

the three months to January 2010. This was the first quarterly fall in the

unemployment rate since the three months to May 2008. The number of

unemployed people fell by 33,000 over the quarter to reach 2.45 million. There has

not been a larger quarterly fall in the number of unemployed people since the three

months to July 2007. However, the number of people unemployed for more than 12

months increased by 61,000 over the quarter to reach 687,000, the highest figure

since the three months to August 1997.

The number of people claiming Jobseekers Allowance (the claimant count)

decreased by 32,300 between January and February 2010 to reach 1.59 million.

This is the largest monthly fall in the claimant count since November 1997.

The inactivity rate for the three months to January 2010 was 21.5 per cent. The rate

has not been higher since the three months to October 2004 and it is up 0.4 per cent

on the quarter. The number of inactive people of working age increased by 149,000

over the quarter to reach a record high of 8.16 million. This increase in inactivity

was largely driven by the number of students not in the labour market which has

increased by 98,000 on the quarter to reach 2.31 million, the highest since

comparable records began in 1993.



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The number of vacancies in the three months to February 2010 was 480,000, up

39,000 over the quarter. There were increases in vacancies in most industrial

sectors.

The earnings annual growth rate for total pay (including bonuses) was 0.9 per cent

in the three months to January 2010, up from 0.7 per cent in the three months to

December 2009. The earnings annual growth rate for regular pay (excluding

bonuses) increased from 1.2 per cent in the three months to December 2009 to 1.4

per cent in the three months to January 2010.

3) National Accounts:

UK Gross Domestic Product (GDP) is 316.20 billion as on March 2010.

GDP increased by 0.4 per cent in the fourth quarter of 2009, revised up from 0.3

per cent in the previous estimate. GDP in the fourth quarter of 2009 is now 3.1 per

cent lower than the fourth quarter of 2008. For the year 2009 as a whole, GDP

contracted by 4.9 per cent, compared with growth of 0.5 per cent in the previous

year.



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Output of the production industries was unrevised at 0.4 per cent following a fall of

1.0 per cent in 2009 Q3, with manufacturing output growing by 0.8 per cent

compared with a fall of 0.3 per cent in the previous quarter.

Construction output fell by 0.9 per cent, compared with the 1.8 per cent increase in

the previous quarter.

Output in the service industries remained unrevised at 0.5 per cent in the fourth

quarter, up from a fall of 0.2 per cent in the previous quarter. Growth was stronger

for distribution, transport and business services.

Household expenditure rose 0.4 per cent although remains 2.1 per cent lower than

the fourth quarter of 2008.

Government final consumption expenditure rose by 1.0 per cent and is now 2.2 per

cent higher than the fourth quarter of 2008.

Gross fixed capital formation fell 2.7 per cent and is now 14.0 per cent lower than

the fourth quarter of 2008.

Inventories continued to decline, down 2.6 billion on the quarter.

The trade deficit in real terms increased to 8.3 billion in the fourth quarter of

2009. Exports of goods and services rose 3.8 per cent whilst imports rose 4.7 per

cent.

The GDP expenditure deflator rose by 1.4 per cent compared with the fourth

quarter of 2008, down from 1.9 per cent in the previous quarter.

Compensation of employees at current prices rose by 0.2 per cent and also rose 0.2

per cent above the level seen a year ago.



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Total gross operating surplus of corporations rose by 2.2 per cent and remains 8.2

per cent lower than the same period last year.

The Private Non-Financial Corporations Net Lending is 26 billion. The household

saving ratio is 7%. The public sector current budget is -6 billion.



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The public sector showed a deficit on current budget of 6.0 billion in February 2010,

compared with a deficit of 2.5 billion in February 2009.

More generally, the public sector recorded deficits between 1991/92 and 1997/98 before

moving into surplus in 1998/99. Deficits have been recorded since 2002/03.

An alternative measure of the public sector fiscal position is public sector net borrowing.

This additionally takes account of capital investment. In February 2010, there was net

borrowing of 12.4 billion, which compares with borrowing of 8.8 billion in February

2009. The PBR forecast for 2009/10 is net borrowing of 178 billion.

Public sector net debt, expressed as a percentage of gross domestic product (GDP), was

60.3 per cent at the end of February 2010 compared with 50.5 per cent at end of February

2009. Net debt was 857.5 billion at the end of February compared with 712.4 billion a

year earlier.

Public sector net borrowing (excluding financial interventions) was 49.4 billion in the

third quarter of 2009-10, up from 32.4 billion in the third quarter of 2008-9.

Public sector net debt (excluding financial interventions) was 741.6 billion (equivalent to

52.6 per cent of GDP) at the end of February 2010. This compares to 596.9 billion (42.1per cent of GDP) as at the end of February 2009.

4) Balance of Payments and Trade:

The U.K.s trade balance is -3.80 billion. Goods export volumes was 89 as compared to

97.60 of imports.



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The UKs deficit on trade in goods and services was 3.8 billion in January, compared with

a deficit of 2.6 billion in December (originally published as a deficit of 3.3 billion).

The surplus on trade in services was 4.2 billion in January, compared with a surplus of

4.4 billion in December.

The deficit on trade in goods was 8.0 billion in January, compared with a deficit of 7.0

billion in December (originally published as a deficit of 7.3 billion). Exports fell by 1.4

billion and imports fell by 0.5 billion.

The deficit with EU countries was 3.2 billion in January, compared with a deficit of 3.6

billion in December. Exports fell by 0.2 billion and imports fell by 0.7 billion. There was

a fall in imports of cars, and consumer goods other than cars.

The deficit with non-EU countries widened to 4.8 billion in January, compared with a

deficit of 3.4 billion in December. Exports fell by 1.2 billion but imports rose by 0.2

billion. There was a fall in exports of oil, and chemicals. There was a rise in imports of

semi manufactured goods other than chemicals, but a fall in imports of oil, and aircraft.



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Excluding oil and erratic items, the volume of exports fell by 6.0 per cent and the volume

of imports fell by 1.2 per cent, compared with December.

Export prices fell by 0.6 per cent but import prices rose by 0.6 per cent, compared with

December.

* * *



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REVIEWof

MARKET



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MARKET REVIEW

Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008-2009 financial

year to a record $96.4 trillion while profits declined by 85% to $115bn.

EU banks held the largest share of the total, 56% in 2008-2009, down from 61% in the

previous year. Asian banks share increased from 12% to 14% during the year, while the

share of US banks increased from 11% to 13%. Fee revenue generated by global

investment banking was $66.3bn in 2009, up 12% on the previous year.

The banking industry in U.K. has seen increased pessimism of late because of rising short

and long-term interest rates. The banking industrys market capitalization has also made a

substantial decline. Nowadays, the banks are diversifying away from interest sensitive

products and services and concentrating more on value add services like offering market

solutions.

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ANALYSISof the

MARKET



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MARKET ANALYSIS

The table below shows the main independent British banks, in order of market

securitization. The list is quite short as British banking has been highly consolidated since

the early 20th century. Unlike some other major economies, the UK does not have a major

stratum of independent local banks. The list has shrunk further during 2008: Northern

Rock was taken over by the UK Government, followed by Bradford & Bingley; Alliance &

Leicester has been acquired by Santander, who own Abbey.

INDEPENDENT PRIVATE BANKS IN UK

BANK HEADQUARTERS MARKETVALUE

(bn)

ASSETS

(bn)

HSBC Canary Wharf 121.25 1736

BARCLAYS Canary wharf 40.41 2320

LLYODS

BANKINGGROUP

City of London 35.84 1195

STANDARDCHARTERED

City of London 34.27 299

RBS Edinburgh 22.21 2508



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Series 1: All SMEs.

Series 2: Small SMEs. (Billion $)



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CONSUMER CREDIT

Series 1: Unsecured Loans

Series 2: Credit Cards (Billion $)



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INTEREST RATES

BRITISH BANKERS ASSOCIATION (BBA)

The BBA is the leading association for the UK banking and financial services sector,

speaking for 223 banking members from 60 countries on the full range of UK or

international banking issues and engaging with 37 associated professional firms.

Collectively providing the full range of services, the member banks make up the worlds

largest international banking centre, operating some 150 million accounts and contributing

50 billion annually to the UK economy.

BANK RISKS

Banks are susceptible to many forms of risk which have triggered occasional systemic

crises. These include liquidity risk (where many depositors may request withdrawals

beyond available funds), credit risk (the chance that those who owe money to the bank will

not repay it), and interest rate risk (the possibility that the bank will become unprofitable, if



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rising interest rates force it to pay relatively more on its deposits than it receives on its

loans).

Banking crises have developed many times throughout history, when one or more risks

have materialized for a banking sector as a whole. Prominent examples include the bank

run that occurred during the Great Depression, the U.S. Savings and Loan crisis in the

1980s and early 1990s, the Japanese banking crisis during the 1990s, and the subprime

mortgage crisis in the 2000s. Usually, the governments bail out the bank through rescue

plan or individual public intervention.

TYPES OF BANKS IN UK

1) High Street Banks:The main banks, such as Royal Bank of Scotland, HSBC, NatWest, Citibank, and Barclays.

2) Building Societies:

Woolich, Abbey National, and Halifax were created for those who wanted to save in order

to buy a house and offer pretty much the same services as the other banks.

3) Direct Banks:

Direct Banks such as Co-op (Smile.co.uk) and First Direct dont have branches. They are

telephone banks which have grown in popularity over the last few years. Safety deposit

boxes are also not available at these banks.

TYPES OF BANKS IN INDIA



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The Indian Banking Industry can be categorized into non-scheduled banks and scheduled

banks. Scheduled banks constitute of commercial banks and co-operative banks. There are

about 67,000 branches of Scheduled banks spread across India. As far as the present

scenario is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks (PSBs), which are the base of the Banking sector in India account

for more than 78 per cent of the total banking industry assets. Unfortunately they are

burdened with excessive Non Performing assets (NPAs), massive manpower and lack of

modern technology. On the other hand the Private Sector Banks are making tremendous

progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As

far as foreign banks are concerned they are likely to succeed in the Indian Banking

Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank,

ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd.

And banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank,

Oriental Bank, Allahabad Bankamong others. ANZ Grindlays Bank, ABN-AMRO Bank,

American Express Bank Ltd, Citibank are some of the foreign banks operating in theIndian Banking Industry.

BANKING IN UK

1) Terrific tightening of the banking laws - A bank account cannot be opened without

the original copy of the signed lease of the property in which one resides. This law is very

strictan anti-money laundering measureand has quite an impact because, it is difficult

to rent an apartment or house without a bank account to which you can be traced. Expats

are advised to have a sufficient source of funds to pay the equivalent of three-months rent

in order to nail down a lease.

http://business.mapsofindia.com/banks-in-india/idbi-bank-ltd.htmlhttp://business.mapsofindia.com/banks-in-india/ing-vysya-bank-ltd.htmlhttp://business.mapsofindia.com/banks-in-india/state-bank-of-india.htmlhttp://business.mapsofindia.com/banks-in-india/allahabad-bank.htmlhttp://business.mapsofindia.com/banks-in-india/idbi-bank-ltd.htmlhttp://business.mapsofindia.com/banks-in-india/ing-vysya-bank-ltd.htmlhttp://business.mapsofindia.com/banks-in-india/state-bank-of-india.htmlhttp://business.mapsofindia.com/banks-in-india/allahabad-bank.html


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2) Everything thrives on a plastic card The Credit Card which wont be issued until

one have resided here for six months.

3) To pay a month-by-month, a bank account is compulsory.

Writing Cheques

1. The pounds and pence are both written out and ended with only. With some

cheques, there is no line for the signature, but it still goes there.

2. Any account or other reference numbers are written on the back, or sometimes

following the payee name, and generally are not endorsed (signed on back) as was in

the US.

3. Pounds and pence are both written out, finishing with only or exactly. Most

cheques these days are pre-printed with Crossed Account Payee Only, with vertical

lines across the face. It only means that an cheque can only be paid into the bankaccount of the Payee and not cashed.

Credit

U.K. banks dont use an equivalent of a Social Security number here, part of the

information that they use to evaluate the credit applications is the address.

BANKING IN INDIA



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RETAIL BANKING

The traditional business of banking involves taking in deposits which are then packaged

and on-lent as loans. Retail banking refers to the large volume, low-value end of thisbusiness, where deposits are typically attracted from individuals and small businesses and

loans are made to the same groups. This is in contrast to wholesale banking, where

transactions are typically small in volume but large in value and customers are mainly

medium or large companies and large organizations.

RETAIL BANKING IN U.K.

In practice it is difficult to distuinguish between retail and wholesale banks in U.K. as

many of the banks operating in the retail markets also operate , to some degree, in the

wholesale markets. To operate as a bank and to be able to accept deposits in the UK, a firm

must seek permission from the Financial Services Authority (FSA).



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Cash is still the dominant payment method in volume terms, with over 2/3rds of all

personal payments made in cash. So the much talked about cashless society is still some

way off.

Smart cards or stored-value cards, are prepaid cards the size of a debit or credit card. They

contain an electronic chip which allows a customer to transfer money from an account on

to the card.

Payment services are generally provided together with portfolio services by an institution

as the funds are available with the bank before the customer uses to finance purchases.

FEW MORE CONCEPTS IN RETAIL BANKING IN U.K.

Reserve Asset Management:

Inflows in the form of new deposits and loan repayments are added to the holdings of cash

and liquid assets. The outflows, in the form of deposit withdrawals and new loans made ,

will deplete the holdings of cash and liquid assets. The illiquid loan portfolio is protected

from an unexpectedly large net outflow of funds by the holding of a buffer stock of cash

and liquid assets. The bank will hold cash and liquid assets at a level above that which is

required to meet the expected volatility of cash flows.

Liability Management:

Liability Management involves relying on instruments bearing market rates of interest to

fund activity. It involves determining a desired quantity of assets and then adjusting



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interest rates to attract in the desired level of deposits to fund this. This is in contrast to

Reserve Asset Management, where interest rates are held constant, at least in the short

term, and the scale of the asset portfolio is adjusted in line with the quantity of deposits

attracted at that rate. The form that liability management takes depends on the market for

funds where existing deposits are drawn.

RETAIL BANKING IN INDIA

With a jump in the Indian economy from a manufacturing sector, that never really took off,to a nascent service sector, Banking as a whole is undergoing a change. A larger option for

the consumer is getting translated into a larger demand for financial products and

securitization of services is fast becoming the norm than a competitive advantage.

With the Retail banking sector expected to grow at a rate of 30%, players are focusing

more and more on the Retail and are waking up to the potential of this sector of banking.

At the same time, the banking sector as a whole is seeing structural changes in regulatory

frameworks, securitization and stringent NPA norms which means the faster one adapts to

these changing dynamics, the faster is one expected to gain the advantage.

The Indian players are bullish on the Retail business and this is not totally unfounded.

There are two main reasons behind this. Firstly, it is now undeniable that the faceof the



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Indian consumer is changing. This is reflected in a change in the urban household income

pattern. The direct fallout of such a change will be the consumption patterns and hence the

banking habits of Indians, which will now be skewed towards Retail products.

India compares pretty poorly with the other economies of the world that are now becoming

comparable in terms of spending patterns with the opening up of our economy. For

instance, while the total outstanding Retail loans in Taiwan is around 41% of GDP, the

figure in India stands at less than 5%. The comparison with the West is even more

staggering.

Another comparison that is natural when comparing Retail sectors is the use of credit

cards. Here also, the potential lies in the fact that of all the consumer expenditure in India

in 2001, less than 1% was through plastic, the corresponding US figure standing at 18%.

S.W.O.T. ANALYSIS of U.K. BANKS

STRENGTHS:

1. Most banks in U.K. are global banks operating in almost all the continent across

different countries.

2. Still today they are the primary source for funds for corporate houses as it was ages ago.

WEAKNESSES:

1. If there is one industry that has the stigma of being old and boring, it would have to be

banking; however, a global trend of deregulation has opened up many new businesses to

the banks. Coupling that with technological developments like internet banking and ATMs,

the banking industry is obviously trying its hardest to shed its lackluster image.



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2. The biggest distinction that sets the banking industry apart from others is the

governments heavy involvement in it. Besides setting restrictions on borrowing limits and

the amount of deposits that a bank must hold in the vault, the government (mainly the

Federal Reserve) has a huge influence on a banks profitability.

OPPORTUNITIES:

1. Because of the increasing amount of technology Internet banking will begin to replace

traditional banking, thus cutting personnel costs.

2. Incorporating investment banking into the banking industry, as some major companies

are doing, lets the bank increase profits and promote economic growth while improving

company image.

THREATS:

1. Fluctuations in interest rates causing a too much unpredictability.

2. A collapse of the Fed leading to bank failures, a repeat of the crash of 1929.3. A decline in the US economy leading to a fall in the value of the dollar, thus causing an

instable economy.

Key Ratios/Terms

1) Interest rates:

Interest rates directly affect the credit market (loans), banks constantly try to predict the

next interest rate moves, so they can adjust their own rates. A bad prediction on the

movement of interest rates can cost millions.

2) Gap:



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This refers to the difference, over time, between the assets and liabilities of a financial

institution. A negative gap occurs when liabilities are higher than assets. Conversely,

when there are more assets than liabilities, there is a positive gap. When interest rates are

going up, banks with a positive gap will profit. The opposite is true when interest rates are

falling.

3) Capital Adequacy:

A banks capital, or equity, is the margin by which creditors are covered if the bank has to

liquidate assets. A good measure of a banks health is its capital/asset ratio, which, by law,

is required to be above a prescribed minimum.

KEY SUCCESS FACTORS

1) Capability to use the internet for banking, investing, and general e-commerce.

2) Size of company, name recognition, innovative local marketing.3) Best rates (loans, checking, savings, etc.)

4) The capability to have the fastest and simplest banking through design, innovation,

and location.

PORTERS 5 FORCES ANALYSIS

1) Threat of New Entrants:

The average person cant come along and start up a bank, but there are services, such as

internet bill payment, on which entrepreneurs can capitalize. Banks are fearful of being

squeezed out of the payments business, because it is a good source of fee-based revenue.

Another trend that poses a threat is companies offering other financial services.



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2) Power of Suppliers:

The suppliers of capital might not pose a big threat, but the threat of suppliers luring away

human capital does. If a talented individual is working in a smaller regional bank, there is

the chance that person will be enticed away by bigger banks, investment firms, etc.

3) Power of Buyers:

The individual doesnt pose much of a threat to the banking industry, but one major factor

affecting the power of buyers is relatively high switching costs. In an attempt to lure in

customers, banks try to lower the price of switching. Financial institutions by offering

better exchange rates, more services, and exposure to foreign capital markets, work

extremely hard to get high-margin corporate clients.

4) Availability of Substitutes:

There are plenty of substitutes in the banking industry. Banks offer a suite of services over

and above taking deposits and lending money, but whether it is insurance, mutual funds or

fixed income securities, chances are there is a non-banking financial services company that

can offer similar services. If car companies are offering 0% financing, why would anyonewant to get a car loan from the bank and pay 5-10% interest?

5) Competitive Rivalry:

The banking industry is highly competitive. The financial services industry has been

around for hundreds of years, and just about everyone who needs banking services already

has them. Because of this, banks must attempt to lure clients away from competitor banks.

They do this by offering lower financing, preferred rates and investment services. The

banking sector is in a race to see who can offer both the best and fastest services, but this

also causes banks to experience a lower ROA. Larger banks would prefer to take over or

merge with another bank rather than spend the money to market and advertise to people.



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* * *

FINDINGS



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COMPREHENSIVE FINDINGS

1. Excellent profit performance. Profit before tax increased by 17 per cent to 1,808

million, excluding the settlement of overdraft claims.

2. Strong income momentum, up 6 per cent, supported by overall sales growth of 17

per cent.

3. Excellent progress in growing the current account customer franchise, with

over 1 million new current accounts opened, an increase of 17 per cent. New Added

Value Accounts increased by 79 per cent. Lloyds TSB is now the UK market leader in

new current account customer recruitment.

4. Strong growth in savings deposits resulted in an 11 per cent increase in savings

balances, with 15 per cent growth in bank savings.

5. Stabilisation in net interest margin, with net interest margin in the second half of

2007 1 basis point higher than in the first half of 2007.

6. Continued good cost management, with a clear focus on investing to improve

service quality and processing efficiency. Excluding the impact of the settlement of

overdraft claims, operating expenses increased by 3 per cent and there was a substantial

improvement in the cost:income ratio to 45.7 per cent.



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7. The quality of new lending continues to be strong . Arrears levels have continued

to improve and the impairment charge in 2007 was lower than in 2006.Whilst the

economic outlook for 2008 is uncertain, we do not expect to experience a significant

change in the retail impairment charge in the first half of 2008, compared to the first

half of 2007.

8. Improved return on risk-weighted assets, reflecting the impact of double-digit

profit growth exceeding the increase in risk-weighted assets

Going by international standards, a large portion of the Indian population is simply not

bankable taking profitability into consideration.

The financial services market is highly over-leveraged in India. Competition is fierce,

particularly from local private banks such as HDFC and ICICI, in the business of home, car

and consumer loans. There, precisely lie the pitfalls of such explosive growth. All banks

are targeting the fluffiest segment i.e. the upwardly mobile urban salaried class.

Although the players are spreading their operations into segments like self-employed and

the semi-urban rich, it is an open secret that the big city Indian executives form the most

profitable segment. Over-dependence on this segment is bound to bring in inflexibility in

the business.

There are certain systematic risks involved in operating in the Retail market for foreign

banks in India. These include regulatory restrictions that prevent them from expanding

their branch network. So these banks often take the Direct Selling Agent (DSA) route

whereby low-end jobs like sourcing or transaction processing are outsourced to small

regional layers.

One of the biggest impediments in foreign players leveraging the Indian markets is the

absence of positive credit bureaus. In the west the risk profile can be easily mapped to



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things like SSNs and this information can be publicly traded. PAN is a step in this direction

but lot more work need to be done. What has been a positive step towards this is a negative

file sharing started by a consortium of 11 banks. However, as a McKinsey study points out

actual write-offs on NPAs show a strong negative correlation with sharing of positive

information.

The spend-now-pay-later credit culture in India is just not picking up. A swift legal

procedure against consumers creating bad debt is virtually nonexistent.

Finally, the vast geographical and cultural diversity of the country makes credit policy

formulation a tough job.

All these add up to the unattractiveness of the Indian retail market to the foreign players.

RECOMMENDATIONS



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TACTICAL RECOMMENDATIONS

Criminals have moved on to using UK cloned cards overseas. Banks are increasingly in

need of solutions that can monitor and flag such activity.

Banks have to respond faster to the dynamic marketplace in the most cost effectivemanner.

With the EU pushing for a single financial market, competition continues to intensify

resulting in reduced customer loyalty.

Banks have to enhance service delivery and the customer experience to compete and strive

for market share.

A growing market can never be an alibi for lack of innovation. Indian banks have shown

little or no interest in innovative tailor-made products. They have often tried to copy

process designs that have been tested, albeit successfully, in the West.



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Each economic culture has its own traits and one who successfully adapts those to the

business is the eventual winner. A case in point is the successful implementation of micro-

credit networks in Bangladesh. Positioning a bank as a tech-savvy financial vendor in a

country where Internet penetration is an abysmal 1.65% can only add to the over-

leveraging.

The focus of the sector should remain in macroeconomic wealth creation and not

increasing the per capita indebtedness that will do little but add to the NPA burden. Retail

Banking in India has to be developed in the Indian way.

CONCLUSION



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JUDICIOUS CONCLUSION

There has been huge write-offs by major banks in UK due to rising bad debts.

Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of

Scotland accounted for around 65% of the stock of lending to businesses,45% of the stockof consumer credit, and 75% of the stock of mortgage lending at the end of 2009.

The overall availability of credit continued to improve, though by more for larger

businesses than smaller ones.

Banks have implemented tougher security measures to combat fraud via the introduction of

chip and pin and two-factor authentication.

Technological developments are dramatically changing the methods of supplying services.

Modern banking has reduced the barriers to entry in the financial industry.



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Over the past few years, in spite of the entry of MNCs in many industries, Retail Banking

in India has seen a flurry of panicky exits. Fewer than 40 remain in India and their share of

total bank assets currently 7.2% is falling. Those that remain might be thought to be likely

buyers of Indian banks.

Yet Citibank, HSBC and Standard Charteredall in India for more than a century, and

with relatively large retail networksseem to have no pressing need to acquire a local

bank. Established foreign banks have preferred to take over customers or businesses from

other foreign banks that want to leave. Thus HSBC, in recent years, has acquired customers

from France's BNP, Germany's Deutsche Bank and Japan's Bank of Tokyo-Mitsubishi.

ABN Amro took over Bank of America's retail business.

BIBLIOGRAPHY

And

REFERENCES



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REFERENCES

1) http://www.statistics.gov.uk/cci/nugget.asp?id=19

2) http://www.springerlink.com

3) http://www.uk-yankee.com

4) http://ukhousebubble.blogspot.com

5) http://www.investopedia.com/features/industryhandbook/banking.asp6) http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=840&a=11700

7) http://en.wikipedia.org/wiki/Banking_industry

8) https://www.paconline.com/pictures/SITSIBRO/SITSIVerticals/Banking_UK.pdf

9) http://www.bankofengland.co.uk

10) http://www.iimcal.ac.in/community/finclub/dhan/dhan6/1.pdf
http://www.statistics.gov.uk/cci/nugget.asp?id=19http://www.springerlink.com/http://www.uk-yankee.com/http://ukhousebubble.blogspot.com/http://www.investopedia.com/features/industryhandbook/banking.asphttp://www.bba.org.uk/bba/jsp/polopoly.jsp?d=840&a=11700http://en.wikipedia.org/wiki/Banking_industryhttps://www.pac-online.com/pictures/SITSIBRO/SITSIVerticals/Banking_UK.pdfhttp://www.bankofengland.co.uk/http://www.statistics.gov.uk/cci/nugget.asp?id=19http://www.springerlink.com/http://www.uk-yankee.com/http://ukhousebubble.blogspot.com/http://www.investopedia.com/features/industryhandbook/banking.asphttp://www.bba.org.uk/bba/jsp/polopoly.jsp?d=840&a=11700http://en.wikipedia.org/wiki/Banking_industryhttps://www.pac-online.com/pictures/SITSIBRO/SITSIVerticals/Banking_UK.pdfhttp://www.bankofengland.co.uk/

u.k. Banking Industry - A Country Report

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