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Indian Banking Industry HISTORY OF THE BANKING INDUSTRY

The first bank of India - The General Bank of India was set up in the year 1786. In early phase, Indian banks were established as private banks, with mostly private shareholders. In 1865, Allahabad Bank was established exclusively by Indians for the first time. Reserve Bank of India was set up in 1935. To regulate the functioning and activities of commercial banks, the Government of India carried out The Banking Companies Act, 1949, which was later changed to Banking Regulation Act 1949 with Reserve Bank of India empowered over banking sector. In 1955, India government nationalized Imperial Bank of India on a large scale especially in rural and semi-urban areas and formed State Bank of India. From 1955 to 1969, SBI subsidiaries and 14 major banks in India had been nationalized. In the second phase of Indian Banking Sector Reform in 1980, seven more banks were nationalized, which have brought 80% of the banking segment in India under Government ownership. After the nationalization reform, branches of the public sector bank India rose to approximately 800% in deposits and advances surged by 11,000%. In 1991, India government embarked on the policy of liberalization of banking sector. A small number of banks have been licensed and rules on foreign direct investment have been relaxed. The banking industry in any economy provides its financial backbone. This places it on a completely different platform from any other industry, including economy is regulated undisputed, it utilities. is this While criticality its that also criticality makes it for vulnerable the to

failure. This is the reason the banking industry is regulated, albeit in different degrees, in every economy. A fair amount of research, both international and Indian has gone into determining the factors that affect bank performance. However, the relationship between performance and stock returns has not received much attention. With more and more banks in India getting listed in the stock markets, shareholder value creation has assumed importance along with the other traditional objectives these banks (especially nationalized banks) were set up for. The challenge before banks is to create such value by differentiating themselves from competition on the one hand, while working within the regulatory boundaries on the other . The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related

government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel continued growth, which has harmed the long-term health of their economies

MAJOR PLAYERS:
The major players in the Indian banking sector are: Reserve Bank of India State Bank of India ICICI Bank AXIS Bank HDFC Bank HSBC Bank

Reserve Bank of India:

Referred as the Central Bank of India, RBI is a premier bank of India having about 22 regional offices across the nation and most of the offices are in the capitals of the Indian states. RBI is

fully owned by Government of India and it performs myriad range of services from supervising and regulating financial system to managing exchange control. Established in 1935, RBI remains the most prestigious entity playing the guardian of all commercial banks of India.

State Bank of India:

SBI is the oldest bank of Indi- and also India's largest commercial bank. This government owned bank was established in the year 1806.It is also the second largest bank in the globe. The bank provides a wide array of banking products through their effective network not only on India but also overseas. The bank has about 16,000 branches and is also accountable for one-fifth of the loans of India. It has about 8500 ATMs across the nation.

ICICI Bank:
This is the second largest bank in India with about 1,419 branches and 4,644 ATMs spread countrywide. It is among the top commercial banks of India providing a wide range of banking services through varied delivery channels. Besides offering high-end banking facilities like Internet banking, Phone Banking and Mobile Banking, ICICI also plays a pivotal role in the domains of investment banking, venture capital and asset management and life and non-life insurance. It has its presence in 18 countries across the world including UK, Canada and others.

AXIS Bank:
One of the top private banks in India, it was earlier known as the Unit Trust of India (UTI) since it was promoted by the same organization. It was first among the new private banks to have started its operations in the year 1994. AXIS has its significant presence in about 4509 districts of India with a wide network of over 729 branch offices and Extension Counters.

HDFC Bank:
It is also among the top banks of India offering various banking services for the customers like Personal Banking, NRI Services, Net Banking, Online Remittances and others. The year 2008 has been very prosperous for HDFC as it won a host of awards for being the best retail bank and also the best among other Indian banks to adopt Information Technology. With a total income of more than Rs. 5,400 crores, it demands a significant position in Indian banking industry.

HSBC:
The first ATM provider of India, HSBC Bank is one of India's top banks with its operational base extending consistently. This commercial bank of India first started to function in 1853. It opens up ample banking services for the customers apart from cash management, financial planning and business banking facility.

Porter's 5 Forces Analysis Of Banking Industry 1. 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. 1. 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. A producing industry requires raw materials - labour, components, and other supplies. This requirement leads to buyer-supplier relationships between the industry and the firms that provide the raw materials used to create products. Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. In a service sector there is no direct supplier of raw material. However the supply of supporting facilities like cheque books, furniture, stationeries, etc can give the same analogy.

2. 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. The power of buyers is the impact that customers have on a buying process of the products from a certain industry. In general, when buyers power is strong, the relationship to the industry is near to what an economist terms a monophony - a market in which there are many suppliers and one buyer. Under such market conditions, the buyer sets the price. In reality few pure monopolies exist, but frequently there is some asymmetry between a producing industry and buyers. The same case can as well be applied to the service industry, as nowadays there is no pure-manufacturing or pure-service industry. The combination is the way forward. The only vital difference is the definition of the core product. For instance much as we consider banks to be under the service industry, physical properties like furniture, building, computers, etc are vital to make the service a possibility. 3. 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 General Motors and Microsoft 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? A close substitute product constrains the ability of firms (banks) in an industry to raise prices. The competition engendered by a Threat of Substitute comes from products outside the industry. In the banking sector, there are so many products and at the same time there are so many substitute products. For example if someone is looking for a travelers cheque and that could not be provided, one might decide to opt for Telegraphic Transfer.

1. 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.

PEST ANALYSIS: PEST analysis of any industry investigates the important factors that affect
the industry and influence the companies operating in the sector. PEST stands for Political, Economic, Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry.

POLITICAL FACTORS: Government and RBI policies affect the banking sector.
Sometimes looking into the political advantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmers votes. By doing so the profits of the bank get affected. Various banks in the cooperative

sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks.

FOCUS ON REGULATIONS OF GOVERNMENT : Indian Banking is least affected as

compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework, stricter prudential regulations with respect to capital and liquidity. This gives India an advantage in terms of credibility over other countries. Government affects the performance of banking sector most by legislature and framing policy .government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers.

MONETARY POLICY
Bank Rate: The Bank Rate has been retained unchanged at 6.0%. Repo Rate. It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0% to 4.75% with immediate effect. Reverse Repo Rate: It has been reduced under LAF by 25 basis points from 3.5% to 3.25% with immediate effect. RBI has retained the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors.

FDI LIMIT
The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES BUDGET PROVISIONS Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs
325000 crore compared to Rs 287000 crore targeted in 2008-09.

Subvention of 1% to be paid as incentive to farmers : The Budget continued the Interest

subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for the same.

Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by
six more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st December, 2009.

Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of
debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year.

ECONOMIC FACTORS
Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. In India, banking has existed in one form or the other from time to time. The present era in banking may be taken to have commenced with establishment of bank of Bengal in 1809 under the government charter and with government participation in share capital. Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others followed. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget savings are encouraged, then more deposits will be attracted towards the banks and in

turn they can lend more money to the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through banking channels

GROWING ECONOMY: Indian economy has registered a growth of more that 9 per cent
for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. Banking Industry is directly related to the growth of the economy. The contributions of various sectors in the Indian GDP for 2007-2008 are as follows: Agriculture-17% Industry-29% ServiceSector-54% It is great news that today the service sector is contributing more than half of the Indian GDP. It takes India one step closer to the developed economies of the world. Earlier it was agriculture which mainly contributed to the Indian GDP. The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and hence the GDP.

SOCIO CULTURAL FACTORS: Socio culture factors also affect the business. They show
in which people behave in country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There is some socio-culture factors that affect banking in India have been analyzed below.

SHIFT TOWARDS NUCLEAR FAMILY: Attitude of people of India is changing. Now,

younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. There are many reasons behind that. But banking sector is positively affected by this trend. A family needs home consumer durables like freeze, washing machine, television, bike, car, etc. So, they demand for these products and borrow from banks.

CHANGE IN LIFE STYLE: Life style of India is changing rapidly. They are demanding
high class products. They have become more advanced. People want everything car, mobile, etc. What their fore father had dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want to have well furnished home, television, mobile, vehicle and this has opened opportunities for banking secter to tap this change. Every thing is available so it has become easy to purchase anything if you do not have lump sum.

POPULATION: Increase in population is one of the important factors, which affect the private
sector banks. Banks would open their branches after looking into the population demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. The population of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70% of population is below 35years of age. They are in the prime earning stage and this increase the earning of the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued growth during 2004-05.Income distributions also affects the operations and overall business of private sector banks.

LITERACY RATE: Literacy rate in India is very low compared to developed countries.
Illiterate people hesitate to transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e. illiterate people trust more on banks to deposit their money; they do not have market information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative. Literacy rate of India is around 65%

TECHNOLOGICAL FACTORS TECHNOLOGY IN BANKS: Technology plays a very important role in banks internal
control mechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services.

ATM: The latest developments in terms of technology in computer and telecommunication have
encouraged the bankers to change the concept of branch banking to anywhere banking. The use

of ATM and Internet banking has allowed anytime, anywhere banks facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interest directly to our account avoiding the delay or chance of losing the post.

IT SERVICES & MOBILE BANKING : Today banks are also using SMS and Internet as
major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers to adopt customer-based approach instead of product-based approach. Technology advancement has changed the face of traditional banking systems. Technology advancement has offer 24X7 banking even giving faster and secured service.

CORE BANKING SOLUTIONS

It is the buzzword today and every bank is trying to adopt it is the centralize banking platform through which a bank can control its entire operation the adoption of core banking solution will help bank to roll out new product and services.

SWOT ANALYSIS OF BANKING INDUSTRY

Strengths: The "Strengths" portion of the banking industrys SWOT analysis is a list of the
internal operational elements where the banking industry is succeeding or excelling. These elements need to refer to features the industry can control and has a direct power to change. For example, the banking industrys strengths can include record-high annual returns, diversified investment portfolio offerings, decreases in transaction and trading fees, an increase in the number of ATM machines and increased market share.

Weaknesses
The "Weaknesses" element of the banking industrys SWOT analysis is a list of the internal operational elements the banking industry needs to improve upon. These elements need to refer to features the industry can control and has a direct power to change. For example, the banking industry's weaknesses can include high loan rates, low bond credit ratings, an increased number of outstanding junk bonds, an increase in loan-sharking activity and an increased number of high-risk investment options.

Opportunities
The "Opportunities" part of the banking industrys SWOT analysis is a list of the external environmental elements the banking industry can potentially take advantage of in the near future or long-term. These external environmental elements should not reflect the internal components of the industry, but rather the factors or features outside the industrys control. For example, the banking industrys opportunities can include a growing economy, banking deregulation, increased client borrowing, an increase in the number of banks, an increase in the money supply, low government-set credit rates and larger customer checking account balances.

ThreatsThe "Threats" component of the banking industrys SWOT analysis is a list of the external environmental elements that can potentially harm the banking industry. These external environmental elements do not reflect the internal components of the industry, but the factors or features outside the industrys control. For example, the banking industrys threats could include a declining economy, increased banking regulations, larger capital gains taxes, new high-risk investment vehicles or higher health care costs. Its important to realize these examples are not Black and white. For example, new high-risk investment vehicles are inherently a liability because they include increased risk, but depending on the financial stake and position, it could be an opportunity or threat.