Introduction of banking industry
The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at end-March 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban co-operative banks and 16 scheduled state co-operative banks. Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5% against 17.3% of the earlier year.
CLASSIFICATION OF BANKS: The Indian banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old / new domestic and foreign). These banks have over 67,000 branches spread across the country. The Indian banking industry is a mix of the public sector, private sector and foreign banks. The private sector banks are again spilt into old banks and new banks.
Banking System in India Reserve bank of India (Controlling Authority)
Development Financial institutions
IFCI IDBI ICICI
NABARD NHB
Commercial Banks
IRBI
Regional Rural Banks
Public Sector Banks
SBI Groups
Banks
EXIM Bank
Land Development Banks
Nationalized Banks
Indian Banks
Deposits Public Sector Banks Nationalized Banks State Bank Group Private Sector Banks Foreign Banks Financial Cards Credit Cards Debit Cards Loans and Advances ATMs and Branch Network LEADING PLAYERS
Co-operative Banks
Private Sector Banks
PRODUCTS AND SERVICES
ISIDBI
Public sector banks:
Bank of Baroda
Canara Bank
Punjab National Bank
Foreign Banks
Private Sector Bank
HDFC
ICICI Bank
Axis Bank Ltd.
Foreign Sector Banks
Citi Bank
Standard Chartered Bank
HSBC Bank
MARKET STRUCTURE
Public Sector Banks: Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines.
Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses - well beyond the commitments made to the World Trade Organization. The presence of foreign banks in India has benefited the financial system by enhancing competition, resulting in higher efficiency. There has also been transfer of technology and specialized skills which has had some "demonstration effect" as Indian banks too have upgraded their skills, improved their scale of operations and diversified into other activities. At a time when access to foreign currency funds was a constraint
for the Indian companies, the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. Also with the presence of foreign banks, as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market. Now, it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence. MARKET SHARE
Market Overview The banking industry too has evolved rapidly over the last few years in India due to the availability of cheaper technology and falling communication costs. De-regulation, competition from non-financial players, new compliance requirements, and changing customer expectations has added complexity and challenges to banking systems and processes. Banks, however, face an uphill task in reaching out to the customers in remote locations such as villages. There is a lower level of literacy and access to Internet. Setting up branches involves higher cost and operating expenses, and lower return on investment. Given the 742-million rural population, the penetration of deposit accounts languishes at a deplorable 18 per cent. (Source: Extending Banking to the poor in India”, Amit Singhal and Bikram Duggal, ICICI Bank).
Qualitative growth : The growth of banking in the coming years is likely to be more qualitative than quantitative, according to the report. 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. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40, 90,000 crore. That will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Banks assets are expected to grow at an annual composite rate of growth of 13.4 per cent during the rest of the decade against 16.7 per cent between 1994-95 and 200203. On the liability side, there is likely to be large additions to capital base and reserves. As the reliance on borrowed funds increases, the pace of deposit growth may slow down. On the asset side, the pace of growth in both advances and investments is forecast to weaken. The high GDP growth in India is creating lots of job opportunities in urban and semi-urban India and it will go further into rural India — increasing the potential for rural entrepreneurships and rural growth with higher per-capita income and savings opportunities.
Investment in Indian market
India, among the European investors, is believed to be a good investment despite political uncertainty, bureaucratic hassles, shortages of power and infrastructural deficiencies. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market. No companies, of any size, aspiring to be a global player can, for long ignore this country which is expected to become one of the top three emerging economies.
Market potential: India is the fifth largest economy in the world (ranking above France, Italy, the United Kingdom, and Russia) and has the third largest GDP in the entire continent of Asia. It is also the second largest among emerging nations. (These indicators are based on purchasing power parity.) India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Yet, despite the practically unlimited possibilities in India for overseas businesses, the world's most populous democracy has, until fairly recently, failed to get the kind of enthusiastic attention generated by other emerging economies such as China. PESTAL ANALYSIS
Political/ Legal Influences which have an impact on banking services and consumer confidence include the following: •
State provision of pensions
• Government encouragement of savings and investment (for e.g. via tax benefits) • Regulatory control and protection (to prevent the collapse of financial institutions and protect investors money)
Economic Economic factors are key variables which have an impact on the activity in the banking services sector. The level of consumer activity is governed by income levels and personal wealth. As income levels grow, more discretionary income is available to spend on banking services. Consumer confidence in the economy and in job security also has a major impact; if lean times are foreseen ahead, savings will take priority over loans and other forms
of expenditure. Consumers may also seek easy access savings and be willing to tie up their money for longer periods with potentially more attractive investments. The main economic factors that should be monitored with regard to banking services marketing are as follows:
Personal and household disposable income
Discretionary income levels
Employment levels
The rate of inflation
Income tax levels and taxation structures
Savings and investment levels and trends
Stock market performance
Consumer spending & Consumer credit
Socio-cultural Many demographic factors have an important bearing on banking services markets.
Changing attitude towards consumer credit and debt
Changing employment patterns
Numbers of working women
The ageing population
Marriage/divorce/birth rates
Consumption trends
Technological Technology has a major impact on many industries including financial services and banking in particular. ATM services which not only provide cash but also allow for bill payments, deposits and instant statements are widely used. From the customers’ viewpoint, technology has played a major role in the development of the process whereby the service is delivered. Automated queuing systems have made visits to the
bank easier and more convenient. Telephone Banking and insurance services are now being used in place of the traditional branch-based service process. Technology has also played a major role within organizations, bringing about far greater efficiency through computerized records and transaction systems and also in business development, through the setting up of detailed customer databases for effective segmentation and targeting. The main technological developments fall within these categories;
Process developments
Information storage and handling
Threat of New Entrants. The average person can't 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. What would it take for an insurance company to start offering mortgage and loan services? Not much. Also, when analyzing a regional bank, remember that the possibility of a mega bank entering into the market poses a real threat.
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.
Power of Buyers. The individual doesn't pose much of a threat to the banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure in customers, banks try to lower the price of switching, but many people would still rather stick with their current bank. On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions - by offering better exchange rates, more services, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients.
Availability of Substitutes. As you can probably imagine, 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. On the lending side of the business, banks are seeing competition rise from unconventional companies. Sony (NYSE: SNE), General Motors (NYSE:GM) and Microsoft (Nasdaq:MSFT) all offer preferred financing to customers who buy big ticket items. If car companies are offering 0% financing, why would anyone want to get a car loan from the bank and pay 5-10% interest?
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. They then have an incentive to take on high-risk projects. In the long run, we're likely to see more consolidation in the banking industry. Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people. SWOT ANALYSIS
STRENGTH:
Indian B anks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative
banks. Bank lending has been a significant driver of GDP growth and employment.
Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.
India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.
WEAKNESS
PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational
performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels.
The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies.
Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled
Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.
Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.
OPPORTUNITY
The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking
side. These require new skills in sales & marketing, credit and operations. banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.
With increased interest in India, competition from foreign banks will only intensify.
Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity .
Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term.
Maintaining a fundamentally long-term value-creation mindset reach in rural India for the private sector and foreign banks.
THREATS
Threat of stability of the system: failure of some weak banks has often threatened the
stability of the system.
Rise in inflation figures which would lead to increase in interest rates.
Increase in the number of foreign players would pose a threat to the PSB as well as the private players.
BEST PRACTICES
Impact on FDI: Two key aspects of the business are affected. The institution can have access to cheap retail deposits and the breadth of its advances increase to include short-term working capital loans to corporates. The Institution has greater operational flexibility. Also they can now effectively compete with the commercial banks.
IndianScenario: In India the five FDIs that are frontrunners in the race to convert to Universal Bank are:
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Development Bank of India (IDBI)
Export Import Bank (EXIM Bank)
Industrial Finance Corporation of India (IFCI)
Industrial Investment Bank of India (IIBI)
ICICI is already a virtual bank with subsidiaries like ICICI Bank engaged in banking business. Thus with clearing of legal hurdles it just has to work out the modalities to formally call itself a universal bank.
RBI Norms: The norms stipulated by RBI treat FDIs at par with the existing commercial banks. Thus all Universal banks have to maintain the CRR and the SLR requirement on the same lines as the commercial banks. Also they have to fulfill the priority sector lending norms applicable to the
commercial banks. These are the major hurdles as perceived by the institutions, as it is very difficult to fulfill such norms without hurting the bottomline
Effect on the Banking Sector: However, with large Term lenders converting into Commercial banks, the existing players in the industry are likely to face stiff competition, lower bottom line ultimately leading to a shakeout in the industry with only the operationally efficient banks will stay into the business, irrespective to the size.
Mergers & Acquisition The Indian Banking Sector is more overcrowded then ever. There are 96 commercial banks reporting to the RBI. Ever since the RBI opened up the sector to private players, there have been nine new entrants. All of them are growing at a scorching pace and redefining the rules of the business. However they are dwarfed by many large public and old private sector banks with a large network of branches spread over a diverse geographical area. Thus they are unable to make a significant dent in the market share of the old players. Also it is impossible to exponentially increase the number of branches. The only route available for these banks is to grow inorganically via the M & A route. Hence the new banks are under a tremendous pressure to acquire older banks and thus increase their business.
Multiple Delivery Channels Today the technology driven banks are finding various means to reduce costs and reach out to as many customers as possible spread over a diverse area. This has led to using multiple channels of delivery of their products.
ATM (Automatic Teller Machine): An ATM is basically a machine that can deliver cash to the customers on demand after authentication. However, nowadays we have ATMs that are used to vend different FMCG products also. An ATM does the basic function of a bank’s branch, i.e., delivering money on demand. Hence setting of newer branches is not required thereby significantly lowering infrastructure costs. Cost reduction is however possible only when these machines are used. In India, the average cash withdrawal per ATM per day has fallen from 100 last year to 70 this year. Though the number of ATMs has increased since last year, it is not in sync with the number of cards issued. Also, there are many dormant cardholders who do not use the ATMs and prefer the teller counters. Inspite of these odds, Indian banks are increasing the number of ATMs at a feverish pace. These machines also hold the keys to future operational efficiency.
Net Banking: Net banking means carrying out banking transactions via the Internet. Thus the need for a branch is completely eliminated by technology.Also this helps in serving the customer better and tailoring products better suited for the customer A customer can view his account details, transaction history, order drafts, electronically make payments, transfer funds, check his account position and electronically communicate with the bank through the Internet for which he may have wanted to visit the bank branch. Net banking helps a bank spread its reach to the entire world at a fraction of the cost.
Phone Banking:
This means carrying out of banking transaction through the telephone. A customer can call up the banks helpline or phone banking number to conduct transactions like transfer of funds, making payments, checking of account balance, ordering cheques, etc,. This also eliminates the customer of the need to visit the bank’s branch.
Mobile Banking: Banks can now help a customer conduct certain transactions through the Mobile Phone with the help of technologies like WAP, SMS, etc,. This helps a bank to combine the Internet and telephone and leverage it to cut costs and at the same time provide its customer the convenience. Thus it can be seen that tech savvy banks are tapping all the above alternative channels to cut costs improve customer satisfaction.
VRS (Voluntary Retirement Scheme): VRS or the ‘Golden Handshake’ is picking up very fast in the recent times due to the serious attention of the government towards overstaffing in the banks, especially among the public sector banks.
The government had also cleared a uniform VRS framework for the sector giving the banks a seven months time frame to cut flab. The scheme was open till 31
st
march, 2001.
Though many banks had announced different VRS schemes it involved an outflow of huge sums of money. This could have had an adverse impact on the Capital Adequacy Ratio (CAR). Hence the RBI allowed the banks to write off the VRS expenses over a period of 5 years.
