Structure of The Financial Sector in India

Broadly, the financial sector in India can be broken into the following main divisions :
FINANCIAL Sector

Banking Sector

Financial services

NBFCs (Non Banking

financial Companies)
Capital Markets
Forex Markets
Asset Management
Insurance
MFIs (Micro finance
Institutions)

Scheduled
Commercial
Banks (SCBs)

Regional Rural
Banks

Scheduled Cooperative Banks

Private Banks

Public Banks
Foreign Banks

The sector has important effects not only on the domestic economy but also on the global
economy, thus it usually is the most heavily regulated sector by government

Financial Products of Banks

Loan Products
Auto Loan

Deposit Products
Deposits

Other Products /
Services

Saving Accounts NRI services

Current Accounts POS Terminals
Fixed /Recurring
Private Banking
Credit cards
Corporate Salary A/C Demat Services
Education Loan
Mutual Fund Sales
Loan against Securities
Foreign Exchange
Retail Banking
Services
Business
Gold Loan
House Loan

Retail Banking

Commercial Banking Transaction Banking

Term Loan
Guarantees
Bill Collection

Wholesale Banking

Key Segment

Cash Management Large Corporates

Custodian Services Emerging Corporates
Clearing Bank Services Financial
Institutions
Letter of Credit
Tax Collections
Government/PSUs
Working Capital
Banker to Public Issues Agriculture
Forex & Derivatives Commodities(Inc
Commodities
Wholesale Deposits Hedging)

Product Segment
Equities
Derivatives
Capital Market

Other Financing

Cash Management
Statutory Reserve
Financial Decisions

aDebt Securities
Exchange Foreign

Asset Liability Management

19

PEST Analysis on the Banking Industry

Factors Affecting the Industry

Political Factors

- Monetary Policy

- Regulatory Framework
- Budget & Budget Measures
- Changes in interest rates

Social Factors

- Increase in population
- Changes in lifestyle
- Easy way of lending money
- Exploring banking facilities in

Economic Factors

- More savings

- More Capital Formation

- Increase in production of
goods and Services
- Banking Channels

T Technological Factors
rural areas

Inte
rne

t Banking
- IT Services & Mobile Banking
- Credit Cards
- Improvement in efficiency

PEST Analysis on the Banking Industry

Political Factors Affecting the Industry
The Indian banking Industry is mostly dependent on
the monetary policy decided by the RBI
Stricter regulations with respect to capital and
liquidity directly affects the business of banks
Banks need to adjust their interest rates
accordingly, which may or may not favor them
Banks are forced to lend as per the guidelines of
RBI, that includes credit growth in all sectors
Budgetary Measures announced by the
government at the beginning of every financial
year also lay down guidelines to banks to lend or
accept deposits
The government can also increase credit in
particular sectors such as increase in farm
credit, increase in infrastructure credit
etc.(priority lending)
Sometimes the government gives debt waivers to
certain sections of the society that need to be
adhered to by banks as well

25

PEST Analysis on the Banking Industry

Economic Factors Affecting the Industry
Economic factors in the country also effect the
Banking Industry both favorably or unfavorably
When the economy is in good shape in terms of
high per capita income, good agriculture
harvest and normal inflation,banks have an
edge as people are left with more money to
deposit them with banks
This helps in more capital formation as more
deposits can be realized
Also In the times of economic boom, more and
more FDI is brought into India through banking
channels, that actually improves business for

banks and the economy in general

prosperity encourages
Economic

lending

business for the banks but in times of

recession banks face tough times to recover
their money, issue fresh credit and NIMs are
lower too
26

PEST Analysis on the Banking Industry

Social Factors Affecting the Industry

The Indian banking system has been progressing

rapidly. There are still several
untapped rural
markets, despite the large number of banks in India
Many farmers still take loans from moneylenders at
a very high interest rate and small-scale industries

continue to remain important for banks

However changes could be expected in the near

future for the unorganized sector
The growing population of India is a great
opportunity for Indian banks as a lot of people
in the country want to open a bank account
and develop good savings habits
Changing lifestyle of the Indian urban
population who wants easy ways of financing
to their desires

27

PEST Analysis on the Banking Industry

Technological Factors Affecting Industry
Indian banking has been consistently working
towards the development of technological
changes and its usage in its operations
With the application of new and improved
technologies banks are
expected to reduce
costs, time and provide higher customer
satisfaction
Internet banking or banking via the phone
can
be considered a remarkable development in the
banking industry
Mobile banking enables customers to check

their account balance, transfer funds 24x7, bill

payments, booking of bus/flight tickets, recharge
prepaid mobile and do a lot more
effortlessly

and securely

Banking through cell phone benefits the banks

too. It cuts down on the cost of
in-person
banking and helps reduce headcount at

branches
Technological developments facilitate the flow of

information and data faster leading to faster

appraisal and decision-making as well

28

Growth Drivers of the Banking Industry

High Growth of
the Indian
Economy
& Favorable
Demographics

Growth in infrastructure, industry, services and agriculture is expected to

grow corporate credit in the economy
Nearly 35% of the Indian population has a median age of 25.5 years
which signifies that India will gain from its demographic dividend
Given that 40% of Indians lack access even to the simplest kind of formal
financial services, the RBI on July 2011, mandated banks to allocate at
least 25% of the total number of branches proposed to be opened during a

Financial
Inclusion (FI)

year in unbanked rural centers

Banks considering FI as a banking opportunity rather than a Regulatory
obligation are likely to see long term profitable growth and a cushion

against market volatility

Private Banking
& Wealth
Management

Technology
Innovation

India not only enjoys a favourable demographic dividend but also has a
strong population of High Net worth Individuals (HNWI)
Given the improved performance of the equity markets in 2012 &
increasing affluence beyond urban and metro areas the number of HNWIs
is expected to rise further, HNWIS will continue to demand better or
more sophisticated service
New channels in banking services such as internet banking, mobile
banking have increased productivity and help in acquiring new
customers
As per a survey conducted by PwC, today banks spend 15% of the total
expenditure on technology today

29

Key Challenges
Introduction
of BaselIII
Norms

Intensifying
Competition

Increasing
NPA

Licensing
Requirement

Managing
Human
Resources

Indian Banks will have to bring in an additional capital of Rs. 5 Lakhs Crore
to meet the Basel III norms. The government on its part has to infuse Rs.
90,000 crore into the state-run banks to maintain majority shareholding
under Basel III
Basel III norms will be implemented in a phased manner starting from
January 2013 (now pushed to April) 2015, to be implemented to the fullest
by March 2018
High competition due to a large number of players in the banking industry
and other players such as NBFCs (less regulation)
Such competition in the industry has decreased the market share of the
existing banks
Economic slow down and aggressive lending by the banks has turned loans
into non- performing assets
This has impacted the profitability of the banks as they are required to have
higher provisioning amounts
For commencing a banking business in India, a banking license from the RBI has
to be acquired which has served as a associated protocol and formalities
The last licenses issued were to Kotak Mahindra Bank and Yes Bank in 2003
and 2004 respectively (as Kotak Mahindra Bank was earlier a NBFC)
Latest Licenses t o be issued is IDFC & BANDHAN FINANCIAL SERVICES -2014
Banks have to incur substantial employee costs as the attrition of the
employees in this sector is very high

37

Global vs. Indian Banking Industry

Indian Banking: Soundness, Health and Balanced Performance
Return on Equity (%)

Country

Return On
Equity

Turkey

19.60%

Cost: Income ratio (%)

Country

Indonesia
Germany

Cost to
Income
Ratio
79.30%

Country

Indonesia
Malaysia

Bad Debt to Assets Ratio

Price to
Book Value
Ratio
3.6

Russia
Indonesia

Bad Debt to

Assets Ratio
2.4%

17.8%

Malaysia

17.4%

China

16.7%

India

15.3%

Singapore

14.6%

Australia

14.0%

Canada

12.4%

South Korea

10.1%

Malaysia

55%

Turkey

1.5

Singapore

0.5%

Spain

8.2%

India

47%

Singapore

1.4

Thailand

0.4%

Russia

7.9%

South Korea

47%

South Korea

0.9

Malaysia

0.4%

Thailand

6.9%

Spain

42%

USA

0.8

Germany

0.4%

France

4.0%

Turkey

42%

Spain

0.8

Australia

0.4%

USA

2.7%

China

40%

France

0.5

Canada

0.3%

Germany

-8.0%

Singapore

40%

Germany

0.3

France

0.2%

Canada
USA
Russia
Thailand
Australia

73%
66%
65%
59%
57%
56%

Canada
Russia
Thailand
India
China
Australia

2.3

Country

Indonesia

France

75%

Valuation (P-BV)

2
2
1.9
1.8
1.7
1.6

Turkey
USA
China
Spain
South Korea
India

2.0%
1.3%
1.2%
0.9%
0.7%
0.6%
0.6%

49

Macro Economic Factors That Drive Banks

FY2012 was characterized by many macro headwinds
persistently high inflation
keeping interest
rates
high,
moderation
in
industrial
output,
INR
depreciation, worsening balance of payments and ballooning fiscal deficit
However, higher capital standards, stickier liquidity and leverage ratios, a more cautious
approach and deregulation in monetary policies by the RBI played a positive role
In this distressed macroeconomic situation, Indian banks emphasized their concentration
on maintaining balance sheet strength in terms of quality over growth
Fiscal Deficit & Inflation

INR/USD
60

12%

50

10%

40

8%
6%
4%

6%

4%

50.95
44.61

6.50% 4.80% 4.60%

30

3.30% 2.50%

51.15

54.54

44.65

39.97

20

2%

10

0%

0
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 201112
Fiscal Deficit as % of GDP

43.59

45.1
4

Source : RBI & Economy

survey 2011-12

March

March March

March March March

March January
2006 2007 2008 2009 2010 2011 2012
Inflati
on

2013

56

Monetary Policy Transmission Mechanism

Repo rate hike
Expectations
of Repo rate

Rise in market
interest rates

Lower expected
profitability of the firms
More difficult to obtain
credit - Lower investment

Inflation
Expectation

Strong Exchange Rate

Decrease in
consumption

Reduction in
Investment

Exports
down, Imports up

Lower import
prices

Reduction in demand
Lower Inflation

The credit channel

The Interest rate channel

The exchange rate channel

57

How Banks are Regulated in the System?

Financial
Institutions

Non-Banking

Banking

Scheduled
Banks

Cooperative
Banks

Public
Housing

Private

Finance

NonBanking
Finance

Development
Finance

Insurance

Mutual
Funds etc.

Foreign
Insurance

Reserve Bank of India

Regulatory and
Development
Authority

Security
Exchange Board
of India 59
-Regulatory bodies

Current Policy Rates

Current Rates1

Indian Interest Rates

Policy Rates
Bank Rates
Repo Rate
Reverse Repo Rate

Repo Rate, Reverse Repo, CRR, SLR & MSF

30.00

9.00%
8.00%
7.00%

25.00

Reserves Rates
CRR
SLR

20.00
15.00

Lending / Deposit Rates

Base Rate

10.00

5.00

Deposit Rate

0.00

4.00%

22.00%
10.00% 10.25%
8.00%-9.50%

Although the critical rates have reduced

since the global economic crisis of 2008,

Repo Rate

Reverse Repo

CRR

SLR

MSF

the RBI is still maintaining a tight

monetary policy in order to curb inflation
and attain stability along with superior
economi

Major Banking Regulations & their Effects

BASEL III
Norms--------------------------------------------------

An umbrella of rules and regulations to define the roadmap

for banks under its three pillars:
- Pillar 1: Capital requirements: Minimum regulatory capital
requirement based on risk weighted assets
- Pillar 2: Supervisory review process: Framework to deal

with risks that banks face from time to time

- Pillar 3: Market discipline: Increasing disclosures by
banks to bring more transparency

--------------------------------

These reforms will

require Indian banks to
raise around
Rs.6,00,000 crores by
2020, for which the Fin
Min has advised banks
to push into mergers
and consolidations

Government Initiatives------------------------------------------ -------------------------------Reduction in

CRR, SLR and deregulation
of interest
rates
Introduction of capital to risk weighted assets ratio and
fixed prudential norms
will bring reduction in non
performing assets and increase capital position of banks

Foreign Direct Investment-------------------------------------Plugging in foreign investors

Indian financial market

money directly into the

FDI limit for a foreign banks is 74% of the total paid-up

capital of the bank

Other
Reforms------------------------------------------------------

These strategic changes

will leave more loanable
funds with banks and
help them widen their
credit network

------------------------------FDI will bring better risk

management
capability, sound
technology and higher
growth prospects

-------------------------------

Banking diversification
introduction of new
These reforms will give
banks greater strength
andgeneration banks
Operational autonomy,say a bank satisfies the CAR then it gets freedom
in opening

br

es, upgradingcounters, liberal lending options etc

to fight competition and help

them stand out in the market 61

Changing Industry Dynamics by New Rules

Government
Initiatives

BASEL III
Norms

Indian Banking
Sector
Basel III norms: A comprehensive set of reform
measures, developed by the Basel Committee
on banking supervision and regulation

Government Initiatives: The two regulatory bodies, RBI and SEBI

are taking every step possible to strengthen the economy by
safeguarding the banking sector
Foreign Direct Investment: With the approval of
FDI, foreign banks can set up their branches in India, which
provides a world class banking experience and creates
healthy competition

Foreign Direct
Investment(FDI)

Other Reforms: Deregulating interest

rates, bank diversification and new generation
banks are some other effective changes towards

a more positive direction

Other
Reforms

62

Banking Sector

Recent Deals (M&A)

Stake

Value

Announced
Date

Target

Acquirer

December Barclays Bank Plc, Performing Standard Chartered

2011
Credit Card Portfolio
Bank India
April
2011
November

2010

August
2010
July
2010
February
2008

Tamilnad Mercantile Bank Ltd. Standard Chartered

Bank India

(%)

($US mn)

100

36.00

4.64

NA

Enam Securities Direct Pvt.

Ltd.

Axis Bank Ltd.

NA

439.79

Bank of Rajasthan Ltd.

ICICI bank Ltd.

100

658.65

Kotak Mahindra Bank Ltd

Sumitomo Mitsui
Banking Corporation

4.50

294.00

Centurioun Bank of Punjab

HDFC Bank

100

2200.00

Banking Sector
Recent Deals (PE)
Announced
Date

January

Investor

Ratnakar Bank Ltd.

2013

Investee

Stake

Value

(%)

($US mn)

Aditya Birla PE, Norwest venture

NA
capital partners and Fearing
Capital

54.00

Karur Vysya Bank Ltd. Olympus Capital Holdings Asia

4.80

38.47

March
2012
February
2011

Karur Vysya Bank Ltd. ChrysCapital V LLC

3.90

31.23

IndusInd Bank Ltd.

General Atlantic Pvt. Ltd.

0.60

14.57

February

Ratnakar Bank Ltd.

Beacon India Private Equity

Fund, Housing Development
Finance Corp. Ltd., Norwest
Venture Partners, India Evolving
Fund , Samara Capital
Partners,Cartica Capital LLC,
Gaja Capital Fund

NA

163.00

5.00

9.30

April
2012

2011

March
2010

Dhanlaxmi Bank Ltd.

Arcstone Capital LLC

67

Major Players in the Industry

Market Cap (in Thousand Crores)
Major Banks in India
These are the small
banks in terms of
market capitalization
OBC
These are the midsized banks
consisting of 3 public
banks and 2 private
banks
These are the
growing banks that
consist of 2 public
banks and 2 private
banks
These are the
premium old
generation banks
consisting of 2 private
and 1 public bank

F
e
d
e
a
A
ll
a
h
a
b
a
d

U
Y
C
a

nara
Indusind
Bank of India
Axis
Bank of Baroda
Punjab National
Kotak Mahindra
SBI
ICICI
HDFC

76