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India Banking & Finance Industry


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India Banking & Finance Industry

  1. 1. India Banking & Finance Industry Benjamin Weber Institute of Management Technology Nagpur October 17, 2011Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 1 / 12
  2. 2. Facts I Well-organised and regulated financial industry. A strong banking sector is needed to power economical growth. 42% of rural population in India have bank accounts. Total asset size of Indian banking industry rose from USD 250 billion (March, 2000) to USD 1.3 trillion (March, 2010); CAGR: 18 % .1 Retail banking sector: 30% CAGR2 ATMs: 70 000 (2010) to 250 000 (2020)3 Structural changes in regulatory frameworks, securisation, stringent NPA. 1 IBEF, 2011. 2 Chanda Kochhar, ED, ICICI Bank. 3 Boston Consulting Group, 2011.Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 2 / 12
  3. 3. Facts II Pitfalls of growth: home, car, consumer loans. Primary target & fluffiest segment: upwardly mobile urban salaried class. Limit of FDI in private banks has been lifted to 74%, no cap on voting rights anymore. Average Tier-1 Capital Adequacy Ration of 10% (Basel III: 8.5%).4 TOP 10 banks accounted for 57% share of total credit (March 31, 2011).5 Loans increased by 19.9%, deposits by 18.4%. Indian labor force grows faster than population. Mortgage loan and wealth management will grow 10 times by 2020.6 4 IBEF, 2011. 5 See above. 6 Boston Consulting Group, 2011.Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 3 / 12
  4. 4. Facts III Retail New market areas: Wealth management, private banking, doorstep banking; housing is expected to continue to be the biggest growth segment followed by auto loans. Significant growth can be identified in areas of electronic banking, credit cards, investment advisory services. Corporate Doubling of credit flow to the SME; annual growth of 20% (5Y period, ending by 2011-12). Micro Increasing economic prosperity in rural areas vs. fierce competition in urban and metropolitan areas → opportunity to cater rural market.Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 4 / 12
  5. 5. for  more  of  it.  Having  moved  the  needle  on  almost  all   Sound  performance  is  complemented  by  rapid  growth   performance   metrics   in   the   last   decade,   the   Indian   that  supports  India’s  GDP  expansion.  At  the  current  rate,   banking   industry   stands   out   for   its   relatively   robust   the  Indian  banking  industry  will  be  the  world’s  third– balance   sheet   and   sound   performance.   As   shown   in   largest  by  2025,  as  shown  in  Exhibit  1b.  This  increasing  Indian Banking Industry at a Glance Exhibit 1a. Indian banking: Sound health and balanced performance Return on equity (%) Cost: Income ratio (%) Valuation (P–BV) Bad debt1 to assets ratio Return on Cost to Price / book Bad debt to Country Country Country Country equity income ratio ratio assets ratio Turkey 19.6% Indonesia 79.3% Indonesia 3.6 Russia 2.4% Indonesia 17.8% Germany 75.1% Malaysia 2.3 Indonesia 2.0% Malaysia 17.4% France 73.1% Canada 2.0 Turkey 1.3% China 16.7% Canada 65.7% Russia 2.0 USA 1.2% India 15.3% USA 65.4% Thailand 1.9 China 0.9% Singapore 14.6% Russia 59.4% India 1.8 Spain 0.7% Australia 14.0% Thailand 56.7% China 1.7 South Korea 0.6% Canada 12.4% Australia 55.6% Australia 1.6 India 0.6% South Korea 10.1% Malaysia 54.6% Turkey 1.5 Singapore 0.5% Spain 8.2% India 47.3% Singapore 1.4 Thailand 0.4% Russia 7.9% South Korea 46.5% South Korea 0.9 Malaysia 0.4% Thailand 6.9% Spain 42.1% USA 0.8 Germany 0.4% France 4.0% Turkey 41.9% Spain 0.8 Australia 0.4% USA 2.7% China 40.4% France 0.5 Canada 0.3% Germany –0.8% Singapore 40.1% Germany 0.3 France 0.2% Sources:  OECD;  IBA  data;  Turkish  Banking  Association;  Central  Banks  of  Malaysia,  Singapore,  Thailand  and  Indonesia;  Thomson  Reuters  Datastream;   BCG  analysis. Note:  Weighted  averages  over  the  years  2007  to  2009.  Indian  data  for  a  year  corresponds  to  year  ending  in  March  (e.g.  April  2009  to  March  2010  corresponds   to  year  2009).  For  other  countries  the  data  corresponds  to  the  calendar  years.  The  valuation  data  is  for  the  calendar  year  2010.   1 The  bad  debt  charged  to  P&L  as  a  percentage  of  assets. B  F  S    P:  R    E    I  B   Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 5 / 12
  6. 6. Will Exhibit 1b.#3 by 2025? worlds 3rd largest by 2025 it be Indian Banking will be Sources:  EIU  country  data;  OECD;  IBA  data;  BCG  analysis. significance  and  influence  comes  with  a  higher  level  of   reasonable  interest  margins  and  serving  high  cost,  high   responsibility   towards   the   real   economy.   The   global   risk  customers  that  are  on  national  priority.Benjamin Weber banking  crisis  has  highlighted  the  perils  of  irresponsible   Institute of Management Technology NagpurIndia Banking with  the  real  economy  footing  the  bill  for  banks’   banking,   & Finance Industry 6 / 12
  7. 7. MARKET OVERVIEW Banking November 2010Structure of Banking Industry system Structure of the Indian banking Reserve Bank of India Banks Financial institutions Scheduled Cooperative All-India financial State-level Other Commercial credit institutions institutions institutions Banks (SCBs) institutions Regional rural Urban Rural cooperative Public sector Private sector Foreign banks banks (RRB) cooperative credit institutions banks (27) banks (22) (32) (82) banks (1,674) (96,751) Source:“Report on trend and trend ofand progress ofRBI website,, accessed 30 November 2010 Source: Report on progress banking in India 2009–10”, banking in India 200910, RBI website, 9Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 7 / 12
  8. 8. MARKET OVERVIEW Banking November 2010Structural Change Market analysis … (1/3) There has been a gradual shift in business from public to private and foreign banks. Market share by assets (2002–03) Market share by assets (2009–2010) 7% 7.2% 17% Public banks 19.1% Public banks Private banks Gradual Private banks shift Foreign banks 73.7% Foreign banks 76% Source:banking systemtrend and progress of banking in Indiabanks (SCBs) withwebsite, • The Report on in India is dominated by scheduled commercial 200910, RBI a pan-India March 2010, SCBs controlled most of the assets, with the rest being controlled by a large presence. As of number of small cooperative credit institutions with a very limited geographic reach. • Within SCBs, public sector banks accounted for 73.7 per cent of the assets and the rest was held by foreign banks and private sector banks. Source: “Report on trend and progress of banking in India 2009–10”, RBI website,, accessed 30 November 2010Benjamin Weber 6 Institute of Management Technology NagpurIndia Banking & Finance Industry 8 / 12
  9. 9. banks  to  differentiate  themselves,  to  improve  customer   captures  how  the  face  of  Indian  banking  will  change  during   service,  to  generate  new  leads  for  sales,  and  to  reduce   the  next  decade.  It  shows  the  percentage  composition  of   costs.  The  productivity  survey  revealed  that  many  banks   transaction   volumes   by   channel   in   2003,   2010,   and   as   may  not  be  ready  to  harness  this  opportunity. projected  for  2020.  Cash  and  cheque,  which  dominate  the  The Exhibit 3a. fundamental change? most Banking will not be the same Transaction  profile  of  India  is  expected  to  dramatically  change POS payment by mobile P2P remittance / transfer 100 Bill and utility payments 9 13 Ticket bookings Mobile top-ups 13 Insurance premiums 80 21 Shopping on mobile 7 42 Government payouts 7 60 14 Cash management instructions (business) 6 94 Mobile other 40 45 Mobile POS 32 Online 49 POS (card) 20 ATM cards 16 13 Call centre 0 Cash and cheque 2003 2010 2020 (base) 2020 (optimistic) ~30% financial ~45% Financial ~65% financial ~80% financial inclusion inclusion inclusion inclusion Adoption of Aadhar and direct credit of subsidy Regulations to encourage mobile transactions Sources:  FIBAC  Productivity  Survey  2011;  RBI  reports;  Central  banks  of  Germany,   Rigorous implementation of DTC1 and GST2 US   and   South   Korea;   World   Bank   population   data;   “The   Mobile   Financial   Channel innovations by banks Services  Development  Report”  by  World  Economic  forum  in  collaboration  with   Promotion of low cost NPCI interbank switch (RuPay) BCG;  BCG  analysis. Adoption of smart phone technology and 3G 1 Direct  tax  code. 2 Goods  and  services  tax.  T  B  C  G    Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 9 / 12
  10. 10. economies.   Unlike   many   developed   economies,   this   of   Indian   commercial   banks   as   on   March   31,   2011.   charge  has  not  increased  significantly  post  crisis.  Control   Corporate   and   institutional   credit,   which   accounts   for   over  bad  debt  indeed  appears  to  be  one  of  key  successes   more   than   50   percent   of   the   credit,   is   the   lowest   risk   of  the  industry  and  its  regulators.  A  disaggregated  and   segment   followed   closely   by   home   loans.   Unsecured  NPAExhibit 6a. NPA profile of Indiaindicator Ratio as quality Banking Category  wise  NPA Sources:  FICCI  IBA  Productivity  Survey  2011;  BCG  analysis. Note:  Asset  Finance  =  Construction  equipment,  commercial  vehicles;  Loan  against  security  =  Loan  against  jewels,  deposits,  shares,  etc. B  F  S    P:  R    E    I  B   Benjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 10 / 12
  11. 11. Exhibit 1e. Bank systems with lower opex ◊   Rising  interest  rates  im tend OPEX → lowerProfitability: Lower to operate at lower NIMs NIM due  to  Mark–to–Marke book.  Productivity  en for  such  loss  of  profitab ROE. ◊   The  specter  of  econom looms   large   in   the   ba inevitable  in  such  an  e already  being  seen  in   management  is  crucial such  a  scenario. ◊   Improving  the  efficacy mechanism  is  crucial   inflation.  As  such,  a  dis on   the   possibility   of   d (SB)   interest   rate.   It   deregulated,   SB   intere Sources:  OECD  data;  IBA  data;  Austin  Bank  –  Brazil;  Turkish  Banking   Association;   Central   Banks   of   Malaysia,   Singapore,   Thailand   and   competition.  Exhibit  1f Indonesia;  BCG  analysis. SB  rate  increases  on  t Note:  Weighted  averages  over  the  years  2005  to  2009.  Indian  data   for   a   year   corresponds   to   year   ending   in   March   (e.g.   April   2009   to   percent  increase  in  SB   March  2010  corresponds  to  year  2009).  For  other  countries  the  data   the   customers,   the   RO corresponds  to  the  calendar  years. percent.   Given   the   lowBenjamin Weber Institute of Management Technology Nagpur the  industry  to  set  high  aspirations  on  composite  metrics   Exhibit 1f. SB rate d of   productivity.   Such   composite   metrics   have   to  India Banking & Finance Industry 11 / 12
  12. 12. Challenges? 1. Branch sales and service excellence 2. New channel excellence 3. Lean operations and operating model 4. Highperformance organization 5. Bad debt management: proactive, preemptive, and preventiveBenjamin Weber Institute of Management Technology NagpurIndia Banking & Finance Industry 12 / 12