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The five major areas covered by the reform program: fiscal deficit reduction, industrial and
trade policy, agricultural policy, infrastructure development and social sector development.
Foreign Direct Investment
Liberalizing FDI was a crucial part of Indias reforms, driven by the belief that this will move
the total value of saving in the country, improving production technology, and increase access
to global markets. The move allows 100% foreign belonging in a large number of industries
and majority belonging in all except banks, insurance companies, telecommunications and
airlines.
These reforms have created a very different challenging environment for Indias industry than
existed in 1991, which had led to significant changes. Indian companies have upgraded their
technology and expanded to more efficient ways of production. They have also restructured
through mergers and acquisitions and refocused their activities to concentrate on areas of
competence.
Financial Sector Reform
Banking Changes included: (a) measures for liberalization, like eliminating prior approval of
the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in
government securities; (b) measures designed to increase financial soundness, like
introducing capital adequacy requirements and other prudential norms for banks and
strengthening banking supervision; (c) measures for increasing competition like more liberal
licensing of private banks and freer expansion by foreign banks. These steps have produced
some positive outcomes.
Indias banking reforms differ from those in other developing countries in one important
respect and that is the challenge towards PSB, which controlled the banks.
The insurance sector (including pension schemes), was a public sector monopoly at the start
of the reforms. The need to open the sector to private insurance companies was recommended
by an expert committee (the Malhotra Committee) in 1994, but there was strong political
resistance. It was only in 2000 that the law was finally amended to allow private sector
insurance companies, with foreign equity allowed up to 26 per cent, to enter the field.
Privatization
Initially, the government adopted a limited approach of selling a minority stake in public
sector enterprises while retaining management control with the government, a policy
described as disinvestment to distinguish it from privatization. This policy had very limited
success. Disinvestment receipts were consistently below budget expectations and the average
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realization in the first five years was less than 0.25 per cent of GDP 2 compared with an
average of 1.7 per cent in seventeen countries reported in a recent study.
An important recent innovation, which may increase public acceptance of privatization, is the
decision to earmark the proceeds of privatization to finance additional expenditure on social
sector development and for retirement of public debt. Privatization is clearly not a permanent
source of revenue, but it can help fill critical gaps in the next five to ten years while longerterm solutions to the fiscal problem are attempted.
Social Sector Development in Health and Education
Much of the debate in this area had focused on what had happened to expenditure on social
sector development in the post-reform period. Closing the social sector gaps between India
and other countries in Southeast Asia will require additional expenditure, which in turn
depends upon improvements in the fiscal position of both the central and state governments.
Some of the issues to social development being lack of resources, as when the bulk of the
budget is absorbed in paying salaries , leaving little available for medicines in clinics or
essential teaching aids in schools. There are also governance problems such as nonattendance
by teachers in rural schools and poor quality of teaching.
Using all such LPG reforms, HDFC bank, which was promoted by Housing Development
Finance Corporation, a premier housing finance company, was incorporated in 1994.
Indian Banking Industry
Indian banking is the lifeline of the nation and its people. A progressively growing balance
sheet, higher pace of credit expansion, expanding profitability and productivity akin to banks
in developed markets, lower incidence of non-performing assets and focus on financial
inclusion have contributed to making Indian banking vibrant and strong. Indian banks have
begun to revise their growth approach and re-evaluate the prospects on hand to keep the
economy rolling. The way forward for the Indian banks is to innovate to take advantage of
the new business opportunities and at the same time ensure continuous assessment of risks.
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 cooperative banks. In terms of
ownership, commercial banks can be further grouped into nationalized banks, regional rural
banks and private sector banks.
The entire range of banking operations are segmented into four broad heads- retail banking
businesses, wholesale banking businesses, treasury operations and other banking activities.
Banks have dedicated business units and branches for retail banking, wholesale banking.
2 GDP means Gross Domestic Product
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Over the last three decades, there has been a remarkable increase in the size, spread and scope
of activities of banks in India. The business profile of banks has transformed dramatically to
include non-traditional activities like merchant banking, mutual funds, new financial services
and products and the human resource development.
The products of the banking industry broadly include deposit products, credit products and
customized banking services. Apart from the generic products like deposits (demand deposits
current, savings and term deposits), loans and advances (short term and long-term loans)
and services, there have been innovations in terms and products such as the flexible term
deposit, convertible savings deposit. Innovations have been increasingly directed towards the
delivery channels used, with the focus shifting towards ATM transactions, phone and internet
banking. Product differentiating services have been attached to most products, such as
debit/ATM cards, credit cards, nomination and demat services.
Other banking products include fee-based services that provide non-interest income to the
banks. Corporate fee-based services offered by banks include treasury products; cash
management services; letter of credit and bank guarantee; bill discounting; foreign exchange
services; and other value added services.
The banks are compared on various parameters. Amongst them, the most vital is NPA ratio.
Net NPA ratio is simply that number adjusted for provisions for losses and not received
interest. Exhibit 1.
Other important ratios would include:
Credit to deposit ratio: This ratio indicates how much of the advances lent by banks is done
through deposits. It is the proportion of loan-assets created by banks from the deposits
received.
Capital adequacy ratio: A bank's capital ratio is the ratio of qualifying capital to risk adjusted
(or weighted) assets. The RBI has set the minimum capital adequacy ratio at 9% for all banks.
Provision coverage ratio: It is a measure that indicates the extent to which the bank has
provided against the troubled part of its loan portfolio.
Return on assets ratio: Returns on asset ratio is the net income (profits) generated by the bank
on its total assets (including fixed assets).
Success Story of HDFC Bank
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For HDFC bank, a CASA3 ratio of 44%, NIM4 of 4.2%, and customer base growth of 35%
CAGR since 2001 have come by simply following a conservative approach to banking. When
the economy grows by x, banking industry grows by 2.5x and HDFC bank has grown at 33.5x compared to peers. So how has the bank managed to outperform its peers? The answer is
in the quality of growth.
Market Penetration Strategy
A conservative approach, in the context of HDFC Bank, means the bank did not compromise
on margins and asset quality risks and has waited for the right opportunities. During the first
decade, the focus was on urban centres, but today semi-urban and rural areas generate a large
chunk. In the past decade, 80% of their income came from the top 15 cities; today 40%
comes from semi urban and rural areas. That strategic shift happened as the bank looked to
morph itself into a banker for the bottom of the pyramid. The management plans across three
horizons in the future:
i.
ii.
iii.
3 CASA means Current accounts, savings accounts (cheap source of funds for
banks)
4 NIM means Net interest Marging i.e. difference of interest earned and interest
expended
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Even in its beginning, HDFC Bank focused more on quality assets and less on pace of
growth, so NPAs were few. Thus, while other banks were spending a lot of time on legacy
issues and salvaging bad loans, HDFC Bank focused on growth when the markets grew. It
also helped that in that era, bank shares (other than SBI's) were not sought after.
Consequently, Puri and his team were not obsessed with valuation. They had no compulsion
to grow the balance sheet at a fast pace.
A Cautious Banker
A cautious banker, Puri will not venture into a product headlong it is a deliberate process
of learning, adapting, creating viability, and then expanding gradually. In category after
category where the bank is a leader personal loans, gold loans, microfinance, twowheelers, crop loans it has been the same, deliberate process.
LEARN
ADAPT
VIABILITY
EXPAND
For example in gold loans business, when retail banks were allowed to give loans against
gold, HDFC Bank did not blindly follow ICICI Bank in entering the retail loan space. It
waited for the market to mature, practices to settle in, and the industry got a sense of the
default pattern, particularly in products like credit cards and personal loans. HDFC bank is a
leader in credit cards market even after it being a late entrant. While other banks focused on
looking out for new customers for their credit cards business, which had resulted in
delinquencies rising up in 2008-10, Aditya Puri focused on selling cards to its own internal
customers and today 70% of the credit cards are issued to internal customers.
Similarly, due to Puri's experience at Citi, the bank mastered that which no bank could. It
entered the unchartered territory of financing stockbrokers, giving guarantees, extending loan
against shares to retail investors. Armed with proper risk management techniques, it
associated itself in every way a bank with the stock market. Today more than 50% of the
stock exchange settlement happens through the bank.
A tight rope on banks operations
"Given that Mr Puri has steered affairs of the bank since the inception of the bank and the
Bank has followed a consistent strategy since then. He should be credited for providing the
right direction and strategy, building the right team and ensuring the execution" said Lumba
of JM Financial. Through a delegating leader with a robust system of reviews and "special
reviews", Aditya Puri admits he may have a disproportionate say in strategy. For a man who
come in to office at 8.45 am and leaves at 5.30 pm, he runs a tight ship with a hands-on
approach: meeting lots of employees and customers, visiting branches, and keeping a hawkeye on things like cost, among others.
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For HDFC, it meant a reduction of 21 lacs hours per year thereby reducing long waiting
queues outside its ATMs and lesser demand for infrastructure.(~24 cr annual transactions)
Co-Branded Cards HDFC launched Indias first co-branded e-commerce credit
cards(Exhibit 6), in collaboration with Snapdeal, an Indian online marketplace, aimed at tier
2 and tier 3 cities in India, which account for 70% of Snapdeals total orders. In addition,
majority of these orders are based on cash on delivery, as rural/semi-urban India is still
uncovered
by
banks.
The features of this card include:
i.
ii.
iii.
iv.
v.
vi.
New customers will get bonus gift of Rs 500 reward point, meant for spending on
Snapdeal
On spending more than Rs 5000, customers can get flat cash back of Rs 500
10% cash back while using Freecharge
5% cash back on Ola Cabs
Rs 1000 cash back while spending Rs 5000 on Cleartrip app for hotel bookings
Exclusive Rewards Program, like 2 time reward point while spending Rs 150 on a
special; category of users choice
Kochi-based technology firm, to launch this app (Exhibit 8). It has is linked directly to the
customers bank account, so there is no need to worry about filling up a prepaid wallet. It
allows users to send money in three simple steps:
i.
ii.
iii.
major companies providing mobile wallet services in India are telecom service providers such
as Vodafones m-pesa, Bharti Airtel Ltds Airtel Money, Aircels Mobile Money and Tata
Teleservices Ltds mRupee and payment services companies like Oxigen Services, PayTM
and MobiKwik. Paytm is developing a system under which you could pay by simply
transferring money from your mobile wallet to the retailers wallet just like cash. The
universal banking license to new players in CY14 will be the game changer for the banking
sector, as it will allow nonfinancial nonbanking companies to establish banks, which will
increase competition in banking over the medium to long-term scenario. Such competition in
the industry may decrease the market share of the existing banks. One of the major causes of
concern is the payment banking licence given to 11 applicants in 2015, which will eat away
into the shares of existing banks. Another issue the bank is facing is its CASA has fallen from
47.4 per cent to 44.8 per cent in the last one year.
Another Cause for Concern is the fulfilment of Basel III norms. In which banks face stricter
capital constraints which creates major headwinds for profitability in CY15.Banks will have
to bring in an additional capital of Rs 1.82.0 trillion to meet Basel III norms. Out of this 45
50% may be issued in the form of Additional Tier I, 3540% through Tier II and balance
through common equity. Basel III norms have to be implemented in phased manner starting
from April 2013 until March 2019. Clearly, sourcing equity capital of this size in the face of
fiscal constraints poses significant challenges.
Increase in NPAs is one thing that bank has to keep in control because lot of provision needs
to be done for NPAs in different Asset Classes. Lack of significant improvement in economy
will lead to increase in NPAs and restructured loans of banks. Infrastructure exposure will
remain a key risk especially for PSBs, given the elevated execution challenges leading to
project delays. Moreover, the government is planning to infuse 7000 crores in the PSBs in the
year 2015-16 in a phased manner. This advantage is not present for the private banks so their
income is hurt because of provisions for NPA
Managing Human Resources is not only a problem for banks but also it is a problem
worldwide across sectors. Banks will have to incur substantial employee costs as the attrition
of the employees in banking industry may increase in CY15 with the entry of new banks.
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Exhibits
Exhibit 1
Exhibit 2
Important Financial parameters for past 5 years
2014-15
2013-14
2012-13
2011-12
2010-11
10,700.05
8,764.51
6,900.28
5,273.40
4,017.69
6,07,168.86
501.3
1.76%
21.34
5,03,678.98
479.81
1.74%
18.27
4,07,780.56
475.88
1.69%
14.5
3,41,116.50
469.34
1.55%
11.24
2,78,038.80
465.23
1.45%
8.64
Networth (Rs
in Crores)
62,009.42
Market
2,56,376.87
Capitalisation
43,478.63
1,79,652.89
36,214.14
1,48,498.35
29,924.68
1,22,040.13
25,379.27
1,08,998.72
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(Rs in Crores)
ROG-Net
Worth (%)
42.62
ROG-Market
Capitalisation
(%)
42.71
CASA (%)
44
Gross NonPerforming
Assets (Rs.
Cr)
Net
NonPerforming
Assets (Rs.
Cr)
% of Net
NonPerforming
Assets to Net
Advance
CAR(%)
Net Interest
Income
/
Total Funds
(%)
Non-Interest
Income
/
Total Funds
(%)
CreditDeposit(%)
20.06
21.02
17.91
17.92
20.98
44.8
21.68
47.4
11.96
48.4
23.22
51
3,438.38
2,989.28
2,334.64
1,999.39
1,694.34
896.28
820.03
468.95
352.33
296.41
0.25
16.79
0.27
16.07
0.2
16.8
0.18
16.52
0.19
16.22
4.2
4.14
4.28
4.19
4.22
1.66
1.78
1.86
1.88
1.73
81.71
81.79
80.14
78.06
76.02
Source : Moneycontrol
Exhibit 3
Peer Comparison
HDFC
BANK
4.2
1.66
81.71
ICICI
BANK
3.06
1.95
104.72
AXIS
BANK
3.37
1.98
84.71
3,438.38
15,094.69
4,110.19
896.28
6,255.53
1,316.71
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SBI
2.86
1.18
84.47
56,725.3
4
27,590.5
8
0.25
1.76%
21.34
42.71
1.61
1.56%
11.16
27.07
0.46
1.59%
15.71
93.6
2.12
0.65%
23.46
39.19
Exhibit 5
Courtesy : valueresearchonline.com
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Exhibit
H
DFC launches co-branded cards with snapdeal
L
aunch of Start-up Village
Exhibit 7
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Exhibit 8
Exhibit 8
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Teaching Notes
Concepts and terminologies to be addressed through this case
i.
ii.
iii.
iv.
v.
vi.
The major assets of a bank are its loans to individuals, businesses, and other organizations
and the securities that it holds, while its major liabilities are its deposits and the money that
it borrows, either from other banks or by selling commercial paper in the money market.
Q What is the importance of ROE and ROA?
ROA
ROA signifies the amount of profit an organization earns for every rupee of its assets.
Assets include things like cash in the bank, accounts receivable, property, equipment,
inventory and furniture. ROA is calculated as:
ROA =
It is a basic test of how effectively a company's management uses investors' money - ROE
shows whether management is growing the company's value at an acceptable rate.
ROE =
Q. Why both the ROE and ROA should be considered and not one alone?
The major difference between ROE and ROA is financial leverage, or debt. We know that
assets = liabilities + shareholders' equity. This equation tells us that if a company carries no
debt, its shareholders' equity and its total assets will be the same. It follows then that their
ROE and ROA would also be the same. However, if that company takes on financial
leverage, ROE would rise above ROA. We know by another formula that: shareholders'
equity = assets - liabilities. By taking on debt, a company increases its assets because of the
cash that comes in. However, since equity equals assets minus total debt, a company
decreases its equity by increasing debt. In other words, when debt increases, equity
shrinks, and since equity is the ROE's denominator, ROE, in turn, gets a boost. At the same
time, when a company takes on debt, the total assets - the denominator of ROA - increase.
Therefore, debt amplifies ROE in relation to ROA.
Also , ROE weighs net income only against owners' equity therefore it doesn't say much
about how well a company uses its financing from borrowing and bonds. Such a company
may deliver an impressive ROE without actually being more effective at using the
shareholders' equity to grow the company. ROA - because its denominator includes both
debt and equity - can help you see how well a company puts both these forms of financing
to use.
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Other Questions
Q1. What are different challenges that banks are facing?
Q2. What is the Tier I Capital requirement according to Basel III norms?
Q3. What are the priority sector initiatives taken by the bank?
Q4. What are the areas of main focus for HDFC bank?
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