Banking trends in india


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Banking trends in india

  1. 1. Commercial Bank Management PGSEM and PGP December 09-February 2010
  2. 2. This course is focused on… • Functional aspects of commercial banking – Liabilities management – Credit management – Capital adequacy management – Investment management • Risk management – Liquidity risk management – Interest rate risk management – Credit risk management – Operational risk management – Risk capital allocation Indian Banking policy and the environment is the backdrop of the course
  3. 3. Scheme of Evaluation • Three quizzes (30%)- quiz dates-16th September, 30th September, 14th October • Assignment-2 (25%) • Final test (45%)
  4. 4. Banking Sector in India :An Overview
  5. 5. Evolution of Indian Banking • Post-Independence(1947-69): Monopoly, concentration of economic power • Nationalization(1969): Social control, directed credit • Financial sector reforms(1992): Competition, deregulation • Consolidation(2001): Universal banking models, mergers etc… • Financial inclusion, Leveling the playing field (2008):
  6. 6. Indian Banking (1947-1970) • Government take over of RBI(January 1949) • Enactment of Banking Regulation Act 1949 • Committee on Rural Credit Survey(1951)The Committee recommended one strong integrated state partnered commercial banking institution to stimulate banking development in general and rural credit in particular. • The Imperial Bank of India was taken over by the Government of India and called as State Bank of India in 1955 • Nationalization of private banks in 1969 and 1980
  7. 7. Impact of Nationalization (1970 to 1992) • Substantial increase in banking business in terms of per capita branches, deposits, and deployment of credit. • Penetration of banking activity to rural and semi-urban areas • Excessive focus on quantitative achievement and social obligations, often at the expense of achieving profitability and efficiency • Capital base was eroded • Rise in quantum of bad Loans • Poor customer service
  8. 8. Indian Commercial banks: At a glance Jun-69 Mar-80 Mar-92 Mar-07 Number of Commercial Banks 73 75 77 82 Number of Bank Offices in India 8262 32149 60570 73836 Rural 1833 15105 35269 30560 Semi-urban 3342 8122 11356 16484 Urban 1584 5178 8279 13840 Metropoliton 1503 4014 5666 12952 Deposits (Rs in millions) 46460 426528 2654629 26969803 Advances (Rs in million) 35990 270081 1598078 19812163 Deposits of Public Sector Banks NA 391841.9 2358874 19941995.8 Advances of Public sector banks 248876.2 14401229 14401228.9 Percentage of Deposits of Public sector banks 92% 89% 74% Percentage of Advances of Public sector banks 92% 90% 73%
  9. 9. Financial Sector reforms: A beginning • Chakravarthy Committee Report (1985) and Vaghual Committee(1990) brought some changes in the financial markets. The innovative instruments like Treasury bills, CPs, CDs have become new avenues for banks. • Entry of Banks into para banking services (late eighties); Merchant banking, Mutual Funds, Leasing, Factoring etc...
  10. 10. McKinnon-Shaw-Maxwell Fry Hypothesis • Excessive intervention in the financial system leads to financial repression and comes in the way of financial intermediation and its contribution to resource mobilization needs to be qualified
  11. 11. Bank Management: Three fundamental approaches • The accommodation principle: Banks should accommodate the legitimate credit demands of commerce, industry and agriculture • The profit maximizing principle: • The stock adjustment principle
  12. 12. Profit Maximizing Principle • Neo classical marginal principle • Banks select asset portfolio by understanding cost- benefit analysis so as to maximize the return, net of cost, from the entire portfolio. • It is also risk-return approach • This approach attempts to incorporate the element of uncertainty inherently associated with decision making process • The asset choice modeling assumes greater importance
  13. 13. Stock Adjustment Principle • Banks have a desired level of each balance sheet item and they adjust the stocks of each of the variables so as to close the gap between actual and desired levels
  14. 14. Reforms in Banking Sector-post 1992 • Competition Enhancing Measures • Measures Enhancing Role of Market Forces • Prudential Measures • Institutional and Legal Measures • Supervisory Measures • Technology Related Measures
  15. 15. Implications of reforms on bank management • How do banks manage liabilities and funds? • How to price deposits and minimise cost of funds? • How to rate the loans? • What are the risk-return characteristics of loans? • How to price the loans? • How to fix the exposure norms? • How to estimate expected and unexpected losses on loans? • How to manage market risks?
  16. 16. Emerging Trends • Deposit banking to financial services • Balance sheet exposures to off-balance sheet exposures • Capital adequacy to capital efficiency • Physical distribution to virtual distribution • Fragmentation to consolidation • Data to information to knowledge
  17. 17. INDIAN COMMERCIALBANKING:INSTITUTIONAL SET UP SBIandAssociates (8) Nationalised Banks (19+1) RRBs (193) PublicSector Old Banks (19) New Banks (8) LABs (4) Domesticbanks Foreignbanks (31) Private Sector Commercial Banks Coperative banks (2805) ReserveBank of India
  18. 18. Scheduled Commercial Banks • A bank which is included under second schedule of the RBI Act. Under Section 42(6) of the Act, the RBI may include any bank after satisfying minimum criteria. • The minimum criteria is Banks whose deposits are more than Rs. 150 Cr, they are all Scheduled Banks
  20. 20. SBI group 13% Nationalised Banks 52% Private Banks 26% Foreign Banks 9% Advances of Various Banking Groups as on 31 March 2007
  21. 21. SBI group 24% Nationalised Banks 50% Private Banks 20% Foreign Banks 6% Deposits of various banking Groups as on 31st March 2007
  22. 22. Banking Sector: Emerging Trends
  23. 23. Forces of change • Competition • Deregulation and reregulation • Technology • Globalisation • Global Regulation: Basel-II
  24. 24. Foreign banks entry time-table ROADMAP PRIOR TO MARCH 2005 2005-2009 AFTER 2009 Structure of foreign bank presence in India Branches only Branches or wholly-owned subsidiaries Full national treatment, including IPO, subject to 26% of paid-in capital being held by resident Indians Aggregate FDI limit in private banks 49% 74% for banks identified as distressed by RBI 74% Foreign voting rights limit 10% Branching limit per year 12 Unchanged Proposed amendment to allow voting rights to reflect ownership level >12 subject to RBI approval 5% foreign investment limit in private banks by individual foreign banks 10% foreign investment limit in private banks by FIIs or individual corporate entities
  25. 25. Competition from Non-Banks • In US, GE and Ford emerged as the largest financial services companies • In UK, Sainsbury, Marks & Spencer and Tesco are taking deposits and making loans • Fixed costs of entering into various markets has come down due to technology • Australian retail giant Woolworths is launching its credit card in calendar year 2008. After that, the company would consider offering other financial services including home loans or insurance to its customers.
  26. 26. Year Retailer Product Provider Brand Promoted in Store Jun-96 Tesco Instant Access Savings Account Natwest Tesco Oct-96 Sainsbury Instant Access Savings Account Bank of Scotland Sainsbury Credit Cards Dec-96 Safeway Deposit Account Abbey National Abbey National Feb-97 Tesco Instant Access Savings Account RBS Tesco Mar-97 Morrisons Savings Account Midland Midland Jul-97 Tesco Credit Card Travel Insurance, Foreign Currency RBS, Direct lane Tesco Jul-97 Sainsbury Mortgages Bank of Scotland Sainsbury Sep-97 Asda Insurance Lloyds-Tsb Lloyds-Tsb Jan-98 Safeway Instant Access Account Abbey National Abbey National Jan-98 Sainsbury Home Insurance Royal and Sun Alliance Royal and Sun Alliance Mar-98 Tesco Home Insurance Direct Line Tesco Jun-98 Sainsbury Pet Care Insurance Royal and Sun Alliance Royal and Sun Alliance Source: Andrew Alexander and Jane Pollard, Banks, Grocers and the changing retailing of financial services in Britain, JRCS, 2000
  27. 27. Competition from Non-Banks • Controlling communication networks and gate ways are emerging as “brokers” directing the customers • The loyalty of customer is increasingly broker oriented rather than ultimate producer of the product • The possession of brand name is inspiring confidence
  28. 28. The 6 Cs Traditional Model Internet Enabled Cross Sell Product driven Value driven Connectivity Stand alone Connected Channels Few Multiple Consolidation Low High-across products and banks Competition Within Industry Outside Industry Convenience Short time window 24 x 7x 365 (Source: Sanjiv Singhal (2003) Internet Banking: The Second Wave, p 43) Impact of Technology
  29. 29. “The PC will be the information highway. The mobile phone will be the transaction highway” -Kees Van Rossum, Executive Vice President, Retail Banking, Post bank
  30. 30. Country Bank Mobile Operator Finland Leonia/Various Sonera Germany Deutsche Mannesmann Direkt T-mobil Hypo Vereinsbank Viag Interkom LBBW MobilCom Italy Banca Intesa Omnitel Banco di Roma/Fineco Telcom Italia Japan Sakura Bank NTT DoCoMo Norway Den Norske Bank Telenor Spain BBVA Telefonica Moviles Sweden Swed Bank Telenor England Lloyd's BT-Celinet Natwest Orange
  31. 31. Leverage on Technology • Operational efficiency • Customer Management • Product Management • Distribution
  32. 32. Consolidation
  33. 33. Mergers and Acquisitions: Driving factors • Economies of Scale – Overcapacity – High cost distribution and transaction infrastructures such as branch networks and IT platforms that lend themselves to rationalization • Economies of Scope – Universal Banks – Barriers in product innovation leads to innovation on distribution side • Capital adequacy requirements
  34. 34. Potential Industry Structure Small Medium Large Size Few Many
  35. 35. Financial Inclusion • Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. • As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.
  36. 36. Financial Inclusion • The Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial inclusion – access to banking – access to affordable credit – access to free face-to-face money advice • UK has established a Financial Inclusion Fund to promote financial inclusion and assigned responsibility to banks and credit unions in removing financial exclusion. • Basic no frills accounts have been introduced.
  37. 37. Financial Inclusion: Initiatives of UK • Credit unions have been established, accompanied by tighter regulations to ensure greater protection for investors. • Post Office Card Account (POCA) has been created for those who are unable or unwilling to access a basic bank account. • The concept of a Savings Gateway has been piloted. This offers those on low-income employment, £1 from the State for every £1 they invest, up to a maximum of £25 per month. • Community Finance Learning Initiatives (CFLIs) were also introduced with a view to promoting basic financial literacy among housing association tenants.
  38. 38. Indicator of banking growth
  39. 39. Opportunity
  40. 40. Benchmarking of Indian Banking Sector Country Return on Assets Gross NPL to Gross Advances CRAR Provisions to NPL Capital to Assets 1 2 3 4 5 6 India 1.0* 2.3* 13.0* 52.6* 6.4** Emerging and Developing Economies Brazil 1.1 4.3 18.5 157.3 9.2 Mexico 1.2 3.8 15.2 143.7 9.1 Russia 0.5* 7.6 18.5 90.8 13.6* China 1* 1.8 12.0* 134.3 5.4 United Arab Emirates 2.2* 2.5* 16.2 101.5* 10.6* South Africa 1 5.1 13.5 _ 7.9* Advanced Economies USA 0.2 3.8 13.5 66.5 10.1 UK -0.5 1.6 12.9* 54.6^ 4.4* Japan 0.2 1.7 13.4 25.5 3.6* France 0.4** 2.8** 10.2** 51.3** 4.2* Germany 0.3** 2.7** 12.9** 56.7* 4.5* Italy 0.3* 5.5 10.8* 46.1* 6.6* Canada 1.3 0.9 10.3 29.8 5.8 Korea 0.5* 1.5 12.9 125.3 9.5 * Data pertains to 2008. ** data pertains to 2007 ^ Data pertains to 2006 Note: Data pertains to 2009.
  41. 41. All India Average (based on 2001 Census) 59% Kerala 89% Bihar 33% Nagaland 21% Haryana, Chandigarh and Delhi 84% UK (British Bankers Association Survey1992) 94% Ratio of Deposit Accounts to Adult Population