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Banking System

A Project Report
Submitted in partial fulfillment of the requirements for
Degree of Master of Business Administration (MBA).

2015 2017

Submitted by: Guided

Alok Kumar Dwivedi Mrs. Pooja Chaturvedi
2nd Year / 3rd Semester, (Internal
MBA, PRN no; 1628100051 Professor-BVIMR,
New Delhi
BVU-SDE New Delhi



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Academic Study Center - BVIMR, New Delhi
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NAAC Accredited Grade A University


I would take this opportunity to thank BHARATIY VIDYAPEETH

UNIVERSITY, PUNE for being cooperative and helpful guide.

A note of thanks is due to all those, systems, mechanism and online

infrastructure which have helped in achieving my dream to do MBA.

Their support, guidance and motivation were very valuable and encouraging.

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The introduction and application of the concept of customer services entered

in a welcoming way in India only after independence. The banking system in
India has come a long way during the last two centuries. Its growth was
faster and the coverage wider since 1969. In 1969 a major position of
banking sector was entrusted to the public sector. This process continued
and embraced few private banks in 1980.

The transfer of ownership of banks from the public to private was aimed at
entrusting the banks with greater responsibilities for the economic
development of India by taking banking services to the masses and taking
special care of the weaker section of the society and the priority sector of the
economy. Though the number of banks offices magnitude and the variety of
their operations has grown considerably during the period of near about
three decades, but it appears that the banking sector has entered into cut-
throat competition among customers and other banks.

For overcoming this problem, banking industry should seek introspection and
adopt refined management techniques. It has been endeavor of this study to
analyze the present state of various banks keeping in view the primary data
has been collected regarding the present state of loan schemes in various
banks by using a questionnaire.

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I undersigned Alok Kumar Dwivedi student of MBA (2015-2017). Hereby

declare that the project work is my own work and has been carried out under
the guidance of specific guide lines provided by the management of
India. This Report has been submitted to University for Evaluation.

Date: 27-04-2017

Place: New Delhi (Alok

Kumar Dwivedi)

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Table of contents

S. Particulars Pages













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The Indian Economy is driven by strong fundamentals with GDP growth at
9.1% for H1 FY07 strongest growth in any six months since H1 FY04 and
uptrend in Industrial Cycle with Average Index of Industrial Production growth
at 10.2% being the strongest run in the past 11 years.
On political front, the Indian Government has signed nuclear deal with
America indicating Indias importance in the global context opening up many
opportunities. Along with this, Chinese President Hu is expected to visit India.
This will improve trade and other ties between two of the fastest growing
In Capital Market, Strong foreign inflows with Portfolio flows of nearby USD
9.2bn took BSE Sensex to 14,000 + (50% higher) compared to FY 05-06. The
Indian corporate raised USD 6bn by issuing Initial public offer in India and
abroad. High Credit growth at 30%, it continued the trend of last 5 years
where it has averaged around 25% and lastly M&A activity which was at its
peak with sectors beyond IT and Pharma making global & domestic

The high growth sectors are Power where power ministry and local
private players announce 9 Ultra Mega projects (4,000 MW each)
provides visibility on power & infra front.
Retail - a Point of inflection with major Indian corporate announcing
plans, entry of world majors like Wal-Mart & foreign investment allowed
in single brand retail and Real Estate with major huge build-out plans
and Special Economic Zone policy of government is major driver of
Banking in which Banks are allowed to raise hybrid capital which opens
new avenues for funding credit growth.

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As such, the report focus on change factors in Banking Industry as this
industry is expected to have major impact on Indian Economy.


In India, given the relatively underdeveloped capital market and with little
internal resources, firms and economic entities depend, largely, on financial
intermediaries to meet their fund requirements. In terms of supply of credit,
financial intermediaries can broadly be categorized as institutional and non-
institutional. The major institutional suppliers of credit in India are banks and
non-bank financial institutions (that is, development financial institutions or
DFIs), other financial institutions (FIs), and non-banking finance companies
(NBFCs). The non-institutional or unorganized sources of credit include
indigenous bankers and money-lenders. Information about the unorganized
sector is limited and not readily available.

An important feature of the credit market is its term structure:

(a) Short-term credit
(b) Medium-term credit
(c) Long-term credit.

While banks and NBFCs predominantly cater for short-term needs, FIs
provide mostly medium and long-term funds.

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IA Bank ties up with SBI for money transfers

Sunday, 09.23.2007, 11:59pm (GMT-7)

NEW JERSEY: Indus American Bank has tied up with State Bank of India to
offer money transfer services to India for its clients. Under the new money
transfer service, which will provide expanded services to Indus American
Bank customers can expect service at over 14,000 branch locations of State
Bank of India within India, and at over 14,000 additional RTGS participating

Funds remitted from Indus American Bank would reach recipients typically
within 24 hours. As the largest bank in India, State Bank of India offers
excellent exchange rates which are now available to Indus American Bank
customers. India is one of the biggest destinations for foreign remittances.

ICICI Bank allots equity shares

ICICI Bank allotted 17,800 equity shares of face value of Rs.10 each on Sep.
18, 2007 under the employees stock option scheme, 2000 (ESOS). ICICI Bank
(ICICIBANK) was promoted in 1994 by ICICI, an Indian development financial
institution. The two entities subsequently merged to become the largest
commercial bank in the private sector.

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Shares of the company gained Rs 7.75, or 1.38%, to settle at Rs 569.9. The
total volume of shares traded was 173,655 at the BSE. (Tuesday)

HDFC Asset Management to launch debt fund on Sept 27

Tue Sep 25, 2007 12:50pm IST

MUMBAI (Reuters) - HDFC Asset Management Co Ltd said on Tuesday that it

will launch a close-ended debt fund on Sept. 27.

The fund, HDFC FMP 18M September 2007, will be open for subscription till
Oct. 8. It will invest at least 60 percent of the assets in debt and money
market instruments and the rest in government securities, the fund house

HDFC to cut interest rates

Economic Times, India - Sat Sep 22, 2007 12:14pm IST

Mortgage lender Housing Development Finance Corp is likely to cut its

interest rates next week, the Economic Times reported on Saturday.

"The cost of wholesale funding has come down and we are taking a look at
passing on the benefits to borrowers," HDFC Chairman Deepak Parekh was
quoted as saying.

The report also quoted HDFC Managing Director Keki Mistry as saying the
company was looking at a half percentage point cut and that the new rates
would be announced next week.

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Todays banking sector play a dominant role regarding investment

decision. It basically tells about how these funds are effectively and
efficiently utilized in order to maximize profits.

To study the growth and performance of banking company.

To find out what are the policies that we have to be adopted to

increase the goodwill of the company.

To provide suggestions for better functioning of business.

To know about the various loan schemes of these two banking

companies i.e. ICICI & SBI.

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To make a detailed study of various financial services provide by the

different banks.

To analyze customers view point regarding their banks.

To study effective and most popular bank among the customers

regarding its services.

To find out the rate of interest of banks and reaction of customers on it.

To make analysis on the economic benefits provided by various banks.

Suggest the investors whether to invest in shares of Banking


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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.

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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. In this white paper, we
emphasize the need to act both decisively and quickly to build an enabling,
rather than a limiting, banking sector in India


The research report concentrates on macro and micro factors affecting

Banking Industry, Evolution of Banking Industry and its current status.
Various regulatory and reform processes also affect banking industry. The
report also throws a light on them.

The report finally ends with valuation of major players in banking Industry
and the major challenges faced by this industry.

1. Banking Challenges

It is expected that the Indian banking and finance system will be globally
competitive. For this the market players will have to be financially strong and
operationally efficient. Capital would be a key factor in building a successful
institution. The banking and finance system will improve competitiveness
through a process of consolidation, either through mergers and acquisitions
through strategic alliances. Technology would be the key to the

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competitiveness of banking and finance system. Indian players will keep
pace with global leaders in the use of banking technology.

In such a scenario, on-line accessibility will be available to the customers

from any part of the globe; Anywhere and Anytime banking will be realized
truly and fully. In this context, the research paper approached Indian
Banking System as the shape of the banking sector will be the result of a
strong interplay between the decisions taken by policy makers and actions of
bank managements.

2. Banking Evolution & Regulatory Framework

Financial Sector Reforms set in motion in 1991 have greatly changed the face
of Indian Banking. The banking industry has moved gradually from a
regulated environment to a deregulated market economy. The market
developments kindled by liberalization and globalization have resulted in
changes in the intermediation role of banks. The pace of transformation has
been more significant in recent times with technology acting as a catalyst.
While the banking system has done fairly well in adjusting to the new market
dynamics, greater challenges lie ahead. Financial sector would be opened up
for greater international competition under WTO. Banks will have to gear up
to meet stringent prudential capital adequacy norms under Basel II. In
addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with
Singapore, may have an impact on the shape of the banking industry. Banks
will also have to cope with challenges posed by technological innovations in
banking. Banks need to prepare for the changes. In this context, the need for
drawing up a Road Map to the future assumes relevance.

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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

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, and enabling
policy and regulatory framework will also be critical to their success.

3. Internal Hindrances to Banking Industry

The research focuses on emphasizing the need of decisively and quickly to

build and enabling, rather than a limiting, banking sector in India. The major
challenges ahead for bank management are as follows:

First, cost management, a key to sustainability of bank profits as well as

their long-term viability.

Second, recovery management, which is a key to the stability of the

banking sector.

Third, technological intensity of banking, an area where India happens to

be a world leader in information technology, but its usage by our banking

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system is somewhat muted. It is wise for Indian banks to exploit this
globally state-of-art expertise, domestically available, to their fullest

Fourth, risk management, Banks can, on their part, formulate early

warning indicators suited to their own requirements, business profile and
risk appetite in order to better monitor and manage risks.

Fifth, governance because the quality of corporate governance in the banks

becomes critical as competition intensifies, banks strive to retain their client
base, and regulators move out of controls and micro-regulation.


The scope of the study will be restricted to selected Banks.

Many of the respondents did not think hard enough while choosing the
specific point.

This could have led to a biased view and thus affected the analysis.

There may be other events during the Clean and Window Period which
may distort the results.

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Problem Definition:

To determine and analyze the hidden potential in Banking sector in India so

as to suggest the investors whether to invest in shares of Banking


Discover insights into and develop an understanding of the various Macro

and Micro Economic Factors that have bearing on the functioning of the
Banking sector.

Evaluate the performance of some of the banks based on the past data and
forecast the future prospects.

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The project involves valuation of major Indian Banks including ICICI Bank, SBI
and HDFC Bank. The methodology followed is Target Pricing, which includes
estimating growth rate by regression on historical sales to forecast next year
sales, earning and Profit and Loss account. Then EPS is calculated which is
multiplied to Historical P/E to forecast intrinsic value of share.


All shares are undervalued and expected to give positive risk adjusted
returns to investors. Since the intrinsic value is more than current market
price for all the companies, the share can be recommended to conservative


Exploratory Research Design because the problem required an in-depth

study of all the related variables.

Past information and forecasts:

Collected the past information in the form of details of the various

accounting statements (Income Statement, Balance Sheet etc.), including
the sales for the past 10 years (1997-2006). Forecasts are done in relation to
the future performance in terms of sales for HDFC Bank, ICICI Bank, and SBI.

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Other forecasts include the EPS calculation and comparison of forecasted
Future Target Price with the Current Market Price.

Once the information was collected, the next step was to search for
resources and constraints with respect to the area of research.

Resources and Constraints:


Various Publications like

AT Kearney Report, 2005
FICCI Survey on status of Indian Banking Industry Progress and
Agenda Ahead
Indian Banks Association, Various Years, Performance Highlights of
Banks (Mumbai).
Reserve Bank of India, 2005, Annual Policy Statement for the year
2005-06 (Mumbai).
Company Reports


Lack of time availability with the people involved in any manner with
the research especially when decisions were to be made quickly.

Difficulty in application of Statistical Tools.

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Difficulty in making accurate forecasts because of presence of
Economic impediments like inflation, RBI policies etc.


Sampling Technique:

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Convenience Sampling as a part of Non-Probability sampling by taking
the three banks as the major performers in the Indian Banking Sector and
highlighters of sectors overall performance.

Sample Size:

Sample Size was restricted to 3, including ICICI Bank, HDFC Bank and State
Bank of India.

Executing the Sampling Process:

Through making a comparison among the various key figures of sales, profits
and accounting ratios deduced from accounting statements.

Method of Data Collection:

Secondary Data is collected to carry out the study. To review the literature
available regarding the subject; various journals, magazines, related
research papers and Internet would be used



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Major Changes in FY 2006-07

Robust economic growth in FY07. GDP is increased by over 8% in FY07;

Agriculture, industry and services to grow at 1.7%, 10.5% and 10.7%

Rabi season experiences normal monsoon

IIP (Index of Industrial Production) growth dips in October 2006. The

poor performance of the manufacturing sector, which forms 80% of the
IIP index lead to a blip in its robust growth trend for the past 9 months.
Both mining and electricity grew faster than last year at 4% and 9.7%
Vs 0.1% and 7.7% respectively

WPI (Wholesale Price Index) rose to 5.43% for the week ending
December 16; higher inflation in primary commodities remains. The
inflation in the coming weeks may remain high due to lower base

CRR (Cash Reserve Ratio) hike of 50 bps to absorb Rs.135bn from the
system. The CRR rate hike of 50bps came as a surprise but it reflects
that RBIs intention of controlling credit off-take and liquidity
management by raising repo and reverse repo rate could not achieve
the desired results due to which RBI used CRR rate hike a new
instrument to control liquidity

Exports growth back on track in November 2006. On the basis of the

BOP, in H1FY06 exports grew at 23%, imports at 25.3% resulting in the
trade balance of US$35bn. Net invisibles grew by 17.6% to US$23.5bn
and capital inflows (in the form of FDI, NRI deposits and ECB) at
US$20.3bn (a growth of 49%) brought the balance of payment to
US$8.6bn, (a growth of 33%).

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Rupee appreciates further against dollar and yen but continues to
depreciate against Euro and pound on an YTD basis as on December
2006. In real terms, from April 2006 to October 2006, the rupee
appreciated by 1.8% vis--vis a basket of six currencies.

The Indian Economy has seen major Macro changes in:

1. Gross Domestic Product:

The Indian Economy is driven by the strong fundamentals and uptrend in

industrial cycle. The Indian economy maintained a strong growth
momentum for the third successive year in 2005-06 with real GDP growth
accelerating to 8.4% 2005-06. The services sector recorded double digit
growth to contribute nearly three-fourths of incremental GDP. A consistent
increase in domestic investment rate from 23.0% of GDP in 2001-02 to
30.1% in 2004-05 supported a high credit growth witnessed during the
past few years. The manufacturing sector the key growth driver for
banking credit, clocked a healthy growth of 9.0% during FY06.

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In FY 06-07, services sector account for major 55% of India GDP followed
by 25% in
FY07 Vs Q2FY06, the growth rate in GDP components are as follows:
Agriculture: 1.7%
Industry: 10.5%
Service: 10.7

2. FDI Confidence Index:

Relaxation of foreign direct investment rules has expanded the mountain
of capital in every sector of Indian economy. The government is making
efforts in liberalizing the guidelines and norms for investment through FDI,
making them more NRI friendly. Mainly due to efforts taken by Indian
Government, Indian rank 2nd among all countries in the world on FDI
Confidence Index.

Source: AT Kearney Report, 2005

3. Inflation:

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Inflation remained largely benevolent due to investment driven nature of
growth and subsidized nature of oil prices as pass-on of international
crude price rise remained incomplete in India. WPI Inflation has risen to
5.45% for the week ended November 18, 2006 after remaining in the
range of 4.0-5.0% earlier. RBI has repeatedly cautioned that maintaining
inflation in the target range may call for substantial monetary tightening
should crude prices persist at high level. The money supply has grown by
18.7% yoy till November 10, 2006 during the current fiscal, which poses a
significant threat to RBIs efforts of containing inflation in the desired
range of 5.0-5.5%.

4. Gross Fiscal Deficit:

The gross fiscal deficit (GFD) to GDP ratio for 2005-06 was at 4.1 per cent
as against the budget estimate of 4.3 per cent. Fiscal and revenue deficit
for April-November 2006 widened to 72.8% of BE and 99.7% of BE Vs
74.7% of BE and 91.5% of BE respectively in April-November 2005. The
current levels are much higher than the last months fiscal deficit of
58.6% of BE and revenue deficit of79.4% of BE. The improvement in the
GFD was facilitated by a decline in capital outlay and the availability of
disinvestment proceeds. The revenue deficit, though lower in absolute
terms, remained at budgeted level of 2.7 per cent of GDP in 2005-06.

Source: RBI, Ministry of commerce and Industry

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5. Interest Rate:
The yield on dated government securities (G-Sec) has been moving up
since the beginning of FY05. The yield on 10 year paper began
during Q1 to close the quarter at 8.12%. During July 06, it continue to
move up to 8.42% but reacted sharply thereafter to once again come
down to 7.4% at present as the market participants believed that US Fed
and other central banks worldwide would not only pause rate hikes but
soon get into rate the current fiscal at 7.50% but moved up quite
sharply cut mode.

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Source: RBI

Real interest rate indicated by spread between inflation and 10 year

benchmark yield has trended in the range of 2-4%. The real interest rate in
developed economies is normally in the range of 2-3%. However, the
marginal productivity of capital being much higher in the developing
economy likes India. Due to this, real interest should be higher than those
prevailing in more matured economies.

6. Rising Oil prices and Exchange Rate:

World over, the central bankers led by US Federal Reserves embarked on
withdrawal of monetary accommodation through a series of rate hikes as
the rising oil and asset prices threatened the global economies with
inflationary pressures. The US Fed, which embarked on an aggressive rate
hike campaign through 17 consecutive rate hikes of the magnitude of 25
bps, several economies including Euro-zone and Japan hiked their key
policy rates. In response to the same, RBI has hiked the key policy Repo

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and Reverse Repo rates five times over the past two years. This has led to
a significant hardening of interest rates over the past 4-5 quarters, which
has adversely impacted the cost of funds for banks.

7. Capital Market:
Financial markets in India and globally have seen little volatility over the
last few Years. There have been only two spikes in India in April 2004
when the UPA government came to power and in May 2006. In India, stock
markets will be the most impacted by negative news flows as other areas
where shocks can be absorbed such as the currency, interest rate and
corporate bond markets are not free or well developed. The Capital
Market has seen balance sheet value being unlocked through
monetization of embedded assets, demergers, IPOs, etc. Indian
companies continue to build value in the balance sheet as newer
opportunities emerge through smart capex, inorganic growth and
extracting value thru the revenue statement.


In India, given the relatively underdeveloped capital market and with little
internal resources, firms and economic entities depend, largely, on financial
intermediaries to meet their fund requirements. In terms of supply of credit,
financial intermediaries can broadly be categorized as institutional and non-
institutional. The major institutional suppliers of credit in India are banks and
non-bank financial institutions (that is, development financial institutions or
DFIs), other financial institutions (FIs), and non-banking finance companies
(NBFCs). The non-institutional or unorganized sources of credit include
indigenous bankers and money-lenders. Information about the unorganized
sector is limited and not readily available.

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An important feature of the credit market is its term structure:
(a) Short-term credit
(b) Medium-term credit
(c) Long-term credit.

While banks and NBFCs predominantly cater for short-term needs, FIs
provide mostly medium and long-term funds.

Need for Banks

Role of Bank

Channel Risk Service

household savings Transformation Provider

Indian Banking Sector Experience

India inherited a weak financial system after Independence in 1947. At end-

1947, there were 625 commercial banks in India, with an asset base of Rs.
11.51 billion. Commercial banks mobilized household savings through
demand and term deposits, and disbursed credit primarily to large
corporations. Following Independence, the development of rural India was
given the highest priority. The commercial banks of the country including the
IBI had till then confined their operations to the urban sector and were not
equipped to respond to the emergent needs of economic regeneration of the
rural areas. In order to serve the economy in general and the rural sector in

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particular, the All India Rural Credit Survey Committee recommended the
creation of a state-partnered and state-sponsored bank by taking over the
IBI, and integrating with it, the former state-owned or state-associate banks.
Accordingly, an act was passed in Parliament in May 1955, and the State
Bank of India (SBI) was constituted on July 1, 1955. More than a quarter of
the resources of the Indian banking system thus passed under the direct
control of the State. Subsequently in 1959, the State Bank of India
(Subsidiary Bank) Act was passed (SBI Act), enabling the SBI to take over 8
former State-associate banks as its subsidiaries (later named Associates).

The Government also felt the need to bring about wider diffusion of banking
facilities and to change the uneven distribution of bank lending. The
proportion of credit going to industry and trade increased from a high 83% in
1951 to 90% in 1968. This increase was at the expense of some crucial
segment of the economy like agriculture and the small-scale industrial
sector. Bank failures and mergers resulted in a decline in number of banks
from 648 (including 97 scheduled commercial banks or SCBs and 551 non-
SCBs) in 1947 to 89 in 1969 (comprising 73 SCBs and 16 non-SCBs). The lop-
sided pattern of credit disbursal, and perhaps the spate of bank failures
during the sixties, forced the government to resort to nationalization of
banks. In July 1969, the Government nationalized 14 scheduled commercial
banks (SCBs), each having minimum aggregate deposits of Rs. 500 million.
State-control was considered as a necessary catalyst for economic growth
and ensuring an even distribution of banking facilities. Subsequently, in
1980, the Government nationalized another 6 banks2, each having deposits
of Rs. 2,000 million and above.

The nationalization of banks was the culmination of pressures to use the

banks as public instruments of development. The Government imposed
`social control on banks. However, by the 1980s, it was generally perceived
that the operational efficiency of banks was declining. Banks were

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characterized by low profitability, high and growing non-performing assets
(NPAs), and low capital base. Average returns on assets were only around
0.15% in the second half of the 1980s, and capital aggregated an estimated
1.5% of assets. Poor internal controls and the lack of proper disclosure norms
led to many problems being kept under cover. The quality of customer
service did not keep pace with the increasing expectations. In 1991, a fresh
era in Indian banking began, with the introduction of banking sector reforms
as part of the overall economic liberalization in India.



Proven asset quality resilience in past downturns

Proven management teams, track record

Stable industry dynamics

Well-established regulatory framework

Stable/low NPL formation rates

Continued crowding out effect from government budget deficit,
combined with accelerating private sector credit demands

Ownership restrictions

Constraints on state-owned banks' micro reforms, including HR, staff

cut, branch cut constraints

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Improving secular GDP growth prospects

Establishment of special economic zones likely to promote further


Years, if not decades, of catch-up economics low per capita income,

educated workforce
Rapid financial deepening, i.e. loan growth as multiple of nominal GDP

Rising consumer spending, consumer credit business

Rising corporate capex, investments

M&A optionality


"Running on empty" in terms of liquidity

Tightening in global liquidity may trickle down to India

Potentially hawkish RBI stance on inflation/monetary policy

Potential rise in long bond \ yields, MTM risk for banks

Potential for valuation pullback, should earnings delivery disappoint


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The banking sector in India functions under the umbrella of the RBI, the
regulatory, central bank. The Reserve Bank of India Act was passed in 1934
and the RBI was constituted in 1935 as the apex bank. The Banking
Regulations Act was passed in 1949. This Act brought the RBI under
government control. Under the Act, the RBI received wide-ranging powers in
regards to establishment of new banks, mergers and amalgamations of
banks, opening and closing of branches of banks, maintaining certain
standards of banking business, inspection of banks, etc. The Act also vested
licensing powers and the authority to conduct inspections with the RBI.
Banks in India can broadly be classified as regional rural banks or RRBs,
scheduled commercial banks or SCBs, and co-operative banks. The scope of
the report includes the SCBs only3.

The SCBs for the purpose of this comment can be classified into the following
three categories:
Public sector banks or PSBs (SBI & its associates, and nationalized
Private sector banks (old and new); and
Foreign banks

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Source: IBA

Source: IBA

In terms of asset size, among foreign banks - Citibank, HSBC and Standard
Chartered bank are leaders with asset base of Rs.45437 cr, Rs.37473 cr and
Rs.48412 cr. Resp. in FY 05-06. Among private sector banks, ICICI Bank is
the leader with asset base of Rs.251389 cr followed by HDFC Bank of size
Rs.73506 cr and UTI Bank of size Rs.49731 cr. In terms of asset size, public
sector banks have highest base compared to private and foreign banks. SBI
& Associated have asset base of Rs.691872 cr while other banks such as
BOB, BOI, Canara Bank and PNB Bank have each more than Rs.100000 cr.

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Credit Growth

The bank lending has expanded in a number of emerging market economies,

especially in Asia and Latin America, in recent years. Bank credit to the
private sector, in real terms, was rising at a rate between 10 and 40 per cent
in a number of countries by 2005 (BIS, 2006). Several factors have
contributed to the significant rise in bank lending in emerging economies
such as strong growth, excess liquidity in banking systems reflecting easier
global and domestic monetary conditions, and substantial bank
The recent surge in bank lending has been associated with important
changes on the asset side of banks balance sheet. First, credit to the
business sector - historically the most important component of banks assets
has been weak, while the share of the household sector has increased
sharply in several countries. Second, banks investments in Government
securities increased sharply until 2004-05. As a result, commercial banks
continue to hold a very large part of their domestic assets in the form of
Government securities - a process that seems to have begun in the mid-

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Loan Demand:
Over the past three years, Indian Banking Industry has seen sustained
strength in credit growth, which is not just a function of economic buoyancy
but also the broad-basing of loan demand. This has recently been articulated
by the central bank too:
A contextual analysis of the co-movement between macroeconomic
performance and bank credit in the current phase of the business cycle
suggests that factors other than demand may also be at work: financial
deepening from a low base; structural shifts in supply elasticitys; rising
efficiency of credit markets; and competitive pressures augmenting the
overall supply of credit. (Reserve Bank of India, Monetary Policy Review,
October 2006).

Loan growth sustained for very long

37 | P a g e
Source: RBI
The slowdown of the mid-1990s hit the banks very hard because corporate,
which accounted for a lions share of bank credit, went into a less profitable
and hence a financial restructuring mode. There was no retail credit then,
banks did not focus on Small and Medium Enterprises and farm lending was
done grudgingly, under compulsion. Along with the diversification of the pie
that keeps the tempo of demand intact, after a long time industry has also
started demanding higher levels of credit. In the five years prior to FY05,
growth in industrial credit was almost wholly driven by infrastructure. There
is a perceptibly wider participation from other segments during FY05 and
If a substantial portion of loan growth gets driven by the banking system
taking away market shares from informal sectors this is clearly happening to
farm credit, SMEs and to a limited extent non-mortgage retail interest rate
considerations influencing demand will be relatively low. SMEs and the rural
folk have accessed credit from other sources at exorbitant interest rates, and
hence banks rates going by 200-300bps is not so meaningful. That explains
the apparent lack of correlation between rates that have been rising and loan

38 | P a g e
Rising funding costs with soft lending rates

Plenty of historical evidence of return of pricing power to banks:

Concerns are often expressed about banks ability to increase lending rates
in the face of competition and government pressure. The reality is that
banks, which led the mortgage price war, have increased mortgage rate by
200-300bps from the bottom, and is yet to see significant resistance. That
PSU banks raised prime lending rates twice in. Competition from overseas
borrowings is a serious factor only with AAA companies, and banks have
reduced exposure to them considerably during the last 3-4 years.
Government stand is understandably against higher interest rates. However,
it is unlikely that the government will be able to influence the course of
interest rates single-handedly.

Inflexibility of deposit growth a myth:

With 100-200bps increase in the card rates of deposits, banks have managed
to move the deposit growth rate from 15-16% to 19- 20%, on a larger base.
In the last five years, household financial savings have moved out of equities
and long-term products to bank deposits in percentage terms. The point to
note here is that component of cash (currency) has marginally risen thats
the real, incremental opportunity as more cash from chests moves into bank
deposits first before potentially going to other avenues.
The Q4FY07 is expected to be a period of margin pressure. This is because as
the last interest-rate cycle showed, deposit costs increase first, and followed
by lending rates. Q4 is also usually a period of tight liquidity, and the RBI
could be increasing CRR or SLR requirements to further tighten the liquidity.
Also, banks will be cautious about the actual implementation of the lending
rate increases and may do it in a graduated fashion so as not to invite

39 | P a g e
outright resistance or overt attention from the government. HDFC Bank, PNB,
SBI and a few others have nevertheless already made a beginning by
increasing their prime lending rates after the cash reserve ratio hike by the
RBI. However, the fight for deposits has intensified and it is possible that in
Q4FY07 banks could be increasing their exposure to high-cost wholesale
deposits, taken at higher than card rates.

Banks increased risk appetite good for loan yields:

The banks lending risk appetite has increased significantly over the last five
years banks veering more towards lending at increasing spreads rather
than investing in risk-free bonds. Accordingly, banks are willing to take
higher risks, which is good for overall asset yields.

Investment spreads may increase in future:

As long-duration bonds at high interest rates have been coming up for
maturity and getting re-priced at lower interest rates, yields on investments
have been continuously falling over the last few years.

Non-Performing Loans (NPLs): concerns


Loan growth-NPL
The asset price deflation (read real estate prices) may hurting banks asset
quality has been blown out of proportion.

Residential mortgages:
It is very unlikely in near term that there can be a large-scale increase in
delinquencies on loans taken for the first house (typically self-occupied);

40 | P a g e
unless there is a household income problem, it does not matter to the
borrower whether the price of the house he is staying in is rising or falling.
Even then, with an average loan-to-value of 75%, a 25% fall is theoretically
not possible. LTV ratios had gone up to more risky levels at the peak of the
mortgage boom.
Problems can arise more frequently for loans taken for the second house,
typically for investment/speculation. Banks have been reluctant to disclose
the exact volume of second houses financed. Most banks claim that it is in
the range of 2-5% of incremental mortgage lending. There is a possibility
that some individuals have been hiding from banks the fact that they

Already have one more loan, but this is becoming increasingly difficult with a
credit bureau now in full swing. Even if the assumption that 10% of the
outstanding mortgages are for the second house and all of that goes bad, it
will mean 1% of the banking systems loans go bad. Commercial real estate:
According to figures disclosed by the RBI itself, real estate loans constituted
2.0% of gross non-food credit of banks as of end-June 2006. Even if it has
been growing at high percentage rates is not material as the base was very
low. In any case, by increasing standard assets provisioning on these loans to
100bps from 25bps, risk weights from 100% to 150% and instructing banks
not to lend unless the developer has all the permissions.

One stark example of this is the largest bank SBI itself. In the mid-1990s,
SBIs portfolio was distributed between large corporate, farm credit and
trade, with little coming from others. The Sep-06 portfolio looks dramatically

SBIs loan portfolio now quite diversified

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Source: Company data,

Cost of borrowing has risen, but so have incomes:

The apparent disconnect between interest rates rising now for two years and
lending not losing steam can be explained by i) rising incomes in case of
individuals, thereby imparting increased thrust to retail lending, and ii)
improved corporate profitability through better pricing power.
While there are several studies illustrating the household income growth in
India, according to National Council for Applied Economic Research, an
explosive growth is underway in the percentage of households earning
Rs.91,000 - 1,000,000 pa, the most prominent individual borrowers for
The corporate pricing power story is less known because of the media
harping on high competition and margin compression. While these issues
cannot be summarily dismissed, it is a fact that manufactured product
inflation has been rising. Even the RBI has recently commented on the
increased ability of manufacturers to pass on cost increases. And with a
considerably de-leveraged corporate India compared with the early/mid
1990s, these levels of increases in interest costs have been easily absorbed
by companies.

42 | P a g e

The trend in banking is changing from computerization of branches to laying

a common platform by having a core banking solution in all the branches. At
the same time, Indian banks are looking at internet banking which promises
to grow into an alternate self-service channel. As the mindset of the Indian
customer undergoes a change, Indian banks need to encompass the
extension of all the services that are required and dictated by customers. In
future, banks will need to focus on value-differentiating services by keeping
in-Houser their competitive advantages while partnering with others who
complement its services. The emergence of peer-to-peer money transmission
mechanisms (such as Western Union Money Transfer) poses a challenge to
current role of bankers and emphasizes the role of robust payment systems
like RTGS in maintaining and promoting financial stability.

Areas of Improvement:
Few challenges associated with technology adoption by banks are:
Indian banks still dont have the robust systems required for
efficient functioning of online banking. RBI has provided
guidelines relating to security and other issues and hopefully,
online banking will see a surge in the usage from current 1% to
at least 10% in the next couple of years.

Banks need to explore newer channels such as SMS, WAP and 3G

mobile telephony applications to facilitate online access to

Banks, in a drive to carry on with tremendous expansion in terms

of customer base, needs to have employees who are well

43 | P a g e
informed about products and services and are comfortable with
technology which requires extensive training.

Potential Pitfalls:
Banks should not get overwhelmed by the concept of automation and online
banking. The banks need to realize that they need to maintain different
delivery for different generations. Banks still need to maintain brick-and-
mortar locations that people feel comfortable with.


ICICI Bank was promoted in 1994 by ICICI Ltd., an Indian development
financial institution. The two entities subsequently merged to become the
largest commercial bank in the private sector. A new generation bank, ICICI
Bank started with all the latest technologies to hit the Indian banking
industry in the second half of the nineties. All its branches are fully
computerized with the state-of-the-art technology and systems, networked
through VSAT technology. The bank is connected to the SWIFT International
network. In 2005, it expanded its network to 562 branches and 1,910 ATMs.
It continued to expand its electronic channels, namely internet banking,
mobile banking, call centers and ATMs, and migrate customer transaction
volumes to these channels. Over 70% of customer induced transactions take
place through these electronic channels. It has acquired a small Russian
banking entity, Investitsionno-Kreditny Bank (IKB), which will help boost its
corporate business and deposit franchise overseas. The bank has also built
several strategic alliances with banks like Wells Fargo in USA, Lloyds TSB in
UK and DBS in Singapore.

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ICICI has entered into strategic alliance with Prudential plc of UK for its
mutual find business. The duo has been fairly aggressive through their
companies, Prudential ICICI Asset Management Company Limited and
Prudential ICICI Trust Limited. The bank is also keen to offer its
services to the Indian agricultural sector. Over 2,000 Internet kiosks
and 70 agri-desks have been established in locations with large
agricultural markets.

ICICI Bank launched `Mutual Fund Sweep Account` - an automatic

sweeping facility which allows current account holders to park their
short-term surpluses into liquid mutual funds and earn higher returns.
Initially, ICICI Bank current account customers will have the facility to
invest their account surpluses in the liquid fund schemes of Prudential
ICICI Asset Management Company and GIC Mutual Fund.

The bank is in the process of the reverse merger of ICICI with ICICI
Bank. The merger of two wholly-owned subsidiaries of ICICI, ICICI
Personal Financial Services Limited and ICICI Capital Services Limited,
with ICICI Bank is also underway.

ICRA has assigned an A1+ rating, indicating highest safety in the short-
term, to the Rs 500 crore certificates of deposit (CD) programme of
ICICI Bank Ltd (IBL). The rating agency said in its report that the rating
takes into consideration IBL`s strategic importance to its parent ICICI,
IBL`s comfortable profitability and capital adequacy, good control on
asset quality.

ICICI Bank has tied up with MasterCard International to launch ICICI

Bank MasterCard credit cards. At present ICICI Banks credit card base
stands at around 5, 50,000, while for debit cards it is 4,50,000. ICICI

45 | P a g e
Bank is the largest card issuer in the market. The bank is adding credit
and debit cards at the rate of 1,00,000 per month. The bank had
launched the credit card business 2 years back, while the debit card
business is relatively new.

ICICI Bank is India's second-largest bank with total assets of Rs. 3,562.28
billion (US$ 77 billion) at December 31, 2009 and profit after tax Rs. 30.19
billion (US$ 648.8 million) for the nine months ended December 31, 2009.
The Bank has a network of 1,646 branches and about 4,883 ATMs in India
and presence in 18 countries. ICICI Bank offers a wide range of banking
products and financial services to corporate and retail customers through a
variety of delivery channels and through its specialized subsidiaries and
affiliates in the areas of investment banking, life and non-life insurance,
venture capital and asset management. The Bank currently has subsidiaries
in the United Kingdom, Russia and Canada, branches in United States,
Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International
Finance Centre and representative offices in United Arab Emirates, China,
South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK
subsidiary has established branches in Belgium and Germany.

HDFC Bank:

HDFC Bank Ltd was set up in 1994 by Indias leading housing finance
company Housing Development Finance Corporation (HDFC). The bank offers
a wide range of services which can be classified into three categories
namely, treasury, wholesale banking and retail banking services. The bank
has a distribution network of 535 (in 228 cities) and 1,323 ATMs and a
customer base of 9.6 million as of March 2006.

Under wholesale banking, it provides working capital finance, trade services,

transactional services and cash management. Treasury function includes

46 | P a g e
foreign exchange & derivatives, money market securities and equities. Retail
loan products are auto loans, personal loans and loans for two-wheelers. It
also provides depository participant services for retail customers. It was the
first Indian bank which launched an international debit card.

With products including the Kisan Gold Card, rural supply chain initiatives
and commodity finance covering the entire agriculture financing cycle, the
banks agriculture lending increased by over 60% during the year. The
proportion of NPA`s to total advances increased to 0.4 per cent from 0.3 per
cent last year. This marginal increase is because of the changing mix of loans
as HDFC Bank has a high share of auto loans.

The banks focus on semi-urban and under banked markets continued with
more than half of its retail loans being given in non-metro markets. The
banks total capital adequacy ratio (CAR) as on March 31, 2006 stood at

The authorized capital of HDFC Bank is Rs.450 crore (Rs.4.5 billion). The
paid-up capital is Rs.311.9 crore (Rs.3.1 billion). The HDFC Group holds
22.1% of the bank's equity and about 19.4% of the equity is held by the ADS
Depository (in respect of the bank's American Depository Shares (ADS)
Issue). Roughly 31.3% of the equity is held by Foreign Institutional Investors
(FIIs) and the bank has about 190,000 shareholders. The shares are listed on
the Stock Exchange, Mumbai and the National Stock Exchange. The bank's
American Depository Shares are listed on the New York Stock Exchange
(NYSE) under the symbol "HDB".


HDFC Bank operates in a highly automated environment in terms of

information technology and communication systems. All the bank's branches

47 | P a g e
have online connectivity, which enables the bank to offer speedy funds
transfer facilities to its customers. Multi-branch access is also provided to
retail customers through the branch network and Automated Teller Machines

The Bank has made substantial efforts and investments in acquiring the best
technology available internationally, to build the infrastructure for a world
class bank. The Bank's business is supported by scalable and robust systems
which ensure that our clients always get the finest services we offer.

The Bank has prioritized its engagement in technology and the internet as
one of its key goals and has already made significant progress in web-
enabling its core businesses. In each of its businesses, the Bank has
succeeded in leveraging its market position, expertise and technology to
create a competitive advantage and build market share.

HDFC Bank offers a wide range of commercial and transactional banking

services and treasury products to wholesale and retail customers. The bank
has three key business segments:
Wholesale Banking Services:
The Bank's target market ranges from large, blue-chip manufacturing
companies in the Indian corporate to small & mid-sized corporates and
agri-based businesses. For these customers, the Bank provides a wide
range of commercial and transactional banking services, including
working capital finance, trade services, transactional services, cash
management, etc. The bank is also a leading provider of structured
solutions, which combine cash management services with vendor and
distributor finance for facilitating superior supply chain management
for its corporate customers.

48 | P a g e
Based on its superior product delivery / service levels and strong
customer orientation, the Bank has made significant inroads into the
banking consortia of a number of leading Indian corporates including
multinationals, companies from the domestic business houses and
prime public sector companies. It is recognised as a leading provider of
cash management and transactional banking solutions to corporate
customers, mutual funds, stock exchange members and banks.

Retail Banking Services:

The objective of the Retail Bank is to provide its target market

customers a full range of financial products and banking services,
giving the customer a one-stop window for all his/her banking
requirements. The products are backed by world-class service and
delivered to customers through the growing branch network, as well as
through alternative delivery channels like ATMs, Phone Banking,
NetBanking and Mobile Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC
Bank Plus and the Investment Advisory Services programs have been
designed keeping in mind needs of customers who seek distinct financial
solutions, information and advice on various investment avenues. The Bank
also has a wide array of retail loan products including Auto Loans, Loans
against marketable securities, Personal Loans and Loans for Two-wheelers. It
is also a leading provider of Depository Participant (DP) services for retail
customers, providing customers the facility to hold their investments in
electronic form.

HDFC Bank was the first bank in India to launch an International Debit

49 | P a g e
Card in association with VISA (VISA Electron) and issues the
MasterCard Maestro debit card as well. The Bank launched its credit
card business in late 2001. By March 2009, the bank had a total card
base (debit and credit cards) of over 13 million. The Bank is also one of
the leading players in the merchant acquiring business with over
70,000 Point-of-sale (POS) terminals for debit / credit cards acceptance
at merchant establishments. The Bank is well positioned as a leader in
various net based B2C opportunities including a wide range of internet
banking services for Fixed Deposits, Loans, Bill Payments, etc.


Withi this business, the bank has three main product areas - Foreign
Exchange and Derivatives, Local Currency Money Market & Debt
Securities, and Equities. With the liberalisation of the financial markets
in India, corporates need more sophisticated risk management
information, advice and product structures. These and fine pricing on
various treasury products are provided through the bank's Treasury
team. To comply with statutory reserve requirements, the bank is
required to hold 25% of its deposits in government securities. The
Treasury business is responsible for managing the returns and market
risk on this investment portfolio.

Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. Prior to
this, Mr. Capoor was a Deputy Governor of the Reserve Bank of India. The
Managing Director, Mr. Aditya Puri, has been a professional banker for over
25 years and before joining HDFC Bank in 1994 was heading Citibank's
operations in Malaysia. The Bank's Board of Directors is composed of
eminent individuals with a wealth of experience in public policy,

50 | P a g e
administration, industry and commercial banking. Senior executives
representing HDFC are also on the Board.
Senior banking professionals with substantial experience in India and abroad
head various businesses and functions and report to the Managing Director.
Given the professional expertise of the management team and the overall
focus on recruiting and retaining the best talent in the industry, the bank
believes that its people are a significant competitive strength.


State Bank of India (SBI) is the largest bank in India. It is also, measured
by the number of branch offices and employees, the largest bank in the
world. Established in 1806 as Bank of Bengal, it remains the oldest
commercial bank in the Indian Subcontinent and also the most successful
one providing various domestic, international and NRI products and services,
through its vast network in India and overseas. With an asset base of $126
billion and its reach, it is a regional banking behemoth. The bank was
nationalized in 1955 with the Reserve Bank of India having a 60% stake. It
has laid emphasis on reducing the huge manpower through Golden
handshake schemes and computerizing its operations.
State Bank of India has often acted as guarantor to the Indian Government,
most notably during Chandra Shekhar's tenure as Prime Minister of India.
With more than 9400 branches and a further 4000+ associate bank
branches, the SBI has extensive coverage. State Bank of India has
electronically networked most of its metropolitan, urban and semi-urban
branches under Core Banking System (CBS). The bank has the largest ATM
network in the country having more than 5600 in number. The State Bank of
India has had steady growth over its history, though it was marred by the
Harshad Mehta scam in 1992.Following its arch-rival ICICI Bank, the bank has
started Core banking process by which more than 4400+ branched have
been completed so far. In recent years, the bank has sought to expand its

51 | P a g e
overseas operations by buying foreign banks. It is the only Indian bank to
feature in the top 100 world banks in the Fortune Global 500 rating and
various other rankings. According to the Forbes 2000 listing it tops all Indian

Group companies

SBI Capital Markets Ltd

SBI Mutual Fund (A Trust)

SBI Factors and Commercial Services Ltd


SBI Cards and Payment Services Pvt Ltd

SBI Life Insurance Co. Ltd - Banc assurance (Life Insurance)

SBI Funds Management Pvt Ltd

According to PM Network, State Bank of India launched a project in 2002 to

network more than 14,000 domestic and 70 foreign offices and branches.
The first and the second phases of the project have already been completed
and the third phase is still in progress. As of December 2006, over 10,000
branches have been covered. The new infrastructure serves as the bank's
backbone, carrying all applications, such as the IP telephone network, ATM
network, Internet banking and internal e-mail. The new infrastructure has
enabled the bank to further grow its ATM network with plans to add another
3,000 by the end of 2008 raising the total number to 8,600.

Standard Chartered Bank :

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Standard chartered bank was form in 1969 through the merger of two
separate banks, the standard chartered bank of British South Africa and the
chartered bank of India, Australia and China.

These banks had capitalized on the expansion of trade between Europe, Asia
and Africa.

The chartered bank

The chartered bank was found by James Wilson following the grant of a royal
charter by queen Victoria in 1853.

The bank opened in Mumbai (Bombay) , Kolkata and shanghai in 1858 ,

followed by hong kong and Singapore in 1859.

The traditional trade was in cotton from Mumbai , indigo and tea from
Kolkata , rice from Burma, sugar from Java , tobacco from Sumatra , hemp
from manila and silk from yokohama.

The bank play a major role in the development of trade with the east
following the opening of the Suez canal in 1869 and the extension of the
telegraph to china in 1871.

In 1957 chartered bank brought the eastern bank, together with the lonian
banks Cyprus branches and established a presence in the gulf.

The Standard Bank

The Standard Bank was founded in London in 1862 by john Paterson from the
cape colony in South Africa and started business in port Elizabeth in the
following year.

The bank was prominent in financing the development of the diamond fields
of kinmerley from the 1870s. It later extended its network further north to
the new town of Johannesburg when gold was discovered there in 1886.

The bank expanded in southern, central & eastern Africa and had 600 offices
by 1953.

In 1965, it merged with the bank of West Africa, expanding its operations into
Cameroon, Gambia, Ghana, Nigeria and Sierra Leone.

53 | P a g e
In 1987 Standard Chartered Bank sold its stake in the Standard Bank, which
now operates as separate entity.

The small and medium enterprises play a vital role in the industrial
development of any country. The importance of the SME sector is well
recognized world over from its significant contribution in gratifying various
socio- economic objectives, such as higher growth of employment, output,
promotion of exports and fostering entrepreneurship.

Business Banking or SME Banking

Business Banking or SME Banking has become the focus area of banks these
days.The banks are looking to increase the share of their current accounts
and adds to their fee income by improving the business banking services. In
many private banks, the same sector contributes 13-14 percent to the bank's
total fee income, though its share in total assets is about 2-3 percent.

Business Banking services includes:

1. Current Account Services

2. Financing options like overdrafts, loans against property etc.

3. Trade Services

4. Forex Services

5. Escrow Services

Major Macro Economic Factors include Gross Domestic Product
which has grown by over 8% in 2005-06, FDI Confidence Index where India
stands II in the world, Inflation which has slow down due to falling crude
prices, Gross Fiscal Deficit Interest Rate the UPA government is confident to
achieve the budgeted targets, Rising Oil prices & Exchange Rate Indian

54 | P a g e
government and oil companies are relax as oil prices have fallen beside
Indian Rupee has strengthen against USD, EURO and Yen and Capital Market
the year is booming for market with FII and mutual fund are pumping money
increasing BSE Sensex returns over 50%.

In June 2006, Indian Banking System is spread through 66000 branches with
an asset base of about $270 billion. There are 87 Scheduled Commercial
Banks operating in India including 8 Bank of SBI & Associates, 20
Nationalized Banks, 29 Private Banks and 30 Foreign Banks. In terms of asset
size, public sector banks have highest base compared to private and foreign

SBI & Associated have asset base of Rs.691872 cr. Bank group-wise, new
private sector banks grew at the highest rate during 2005-06 (43.2 per cent),
followed by foreign banks (31.2 per cent), public sector banks (13.6 per cent)
and old private sector banks (12.2 per cent).
As a result, the relative significance of PSBs declined significantly with their
share in total assets of SCBs declining to 72.3 per cent at end-March 2006
from 75.3 per cent at end-March 2005, while that of new private sector
banks increasing to 15.1 per cent from 12.5 per cent.

Credit to the priority sector increased by 33.7 per cent in 2005-06 as against
40.3 per cent in the previous year. The agriculture and housing sectors were
the major beneficiaries, which together accounted for more than two-third of
incremental priority sector lending in 2005-06. Credit to small scale
industries also accelerated. Retail loans, which witnessed a growth of over
40.0 per cent in 2004-05 and again in 2005-06, have been the prime driver
of the credit growth in recent years. Retail loans as a percentage of gross
advances increased from 22.0 per cent in March 2004 to 25.5 per cent in
March 2006.

55 | P a g e
ICICI Bank is the leading market player with change in loans market share in
FY02-06 of over 5% and change in deposits market share in FY 02-06 is
nearby 2.5%. HDFC Bank and UTI Bank are also in high growth phase. The
laggards are SBI Bank, Bank of Baroda Bank, Bank of India and Punjab
National Bank.

Micro-Economic Factors affecting Banking Industry: Some of

Micro-Economic factors identified in the report are:

Loan Demand in which the Indian Banking Industry has seen sustained
strength in credit growth (a 30% increase in Oct 2006, of which 58%
growth has seen in service sector and 100% in real estate sector).

Rising funding costs with soft lending rates Deposits has seen a
growth of 22% of which household savings contribute to 43%, credit
spread increase to 3.3% and Yield on government bonds reduced to
7.75% due to rising interest cost

Non-Performing Loans (NPLs) - The Total bank loans stood at Rs

15,231.7bn, of which housing loans are Rs. 1719.2bn. However, the
Industrys share of total credit has dropped to 40%

Technology - Indian banks still dont have the robust systems required
for efficient functioning of online banking and Banks need to explore
newer channels such as SMS, WAP and 3G mobile telephony
applications to facilitate online access to customers.

Standard Chartered Bank needs to increase the size of its customer base in
North India. Its biggest problem is that customers are not aware of the bank
or its services. Thus, the bank should focus on attracting more customers to
the bank.

Some of the strategies it can adopt to attract customers are as follows:

56 | P a g e
1. Increasing the visibility of the bank. More aggressive advertising on
television, newspapers & radios.

2. Positioning the bank as people friendly. Customers would be more

willing to come if they are sure that they wont have to wait in long
queues at the bank. Developing a compelling marketing message is
very important.

3. Increasing awareness about the existing services of the bank. Online

advertising can be used for this. Direct mails and leaflet drops can
also be used.

4. Emphasis on generating leads through direct marketing, referrals,

seminars & networking. Also, implement an effective marketing
follow-up process for this.
5. Place an in-house research team and developing winning products
and services as per the needs of customers.

6. Introduce various schemes for new customers. First time customers

can be offered certain lucrative offers like short-term FD at high
interest rates etc.

7. Use deadlines. Whatever method of promotion is being used, it can

be aimed to stimulate an immediate action. It would be far more
effective if it has some kind of deadline or incentive to act now
before the customer loses interest. E.g., free gift if you visit the bank

8. Conducting demonstrations, seminars and conferences. Potential

customers can be invited to a working lunch and be given a
demonstration of the product concept.

9. Increase the no. of ATMs and networking of various branches across

the country.

10. Minimizing unnecessary paper work, customers should be able

to avail services of the bank without being hassled with too-much
paper work.

11. Informing the media about the banks activities, charity donations
& other newsworthy events might produce a high level of impact and
attract customers to the bank.

The project involves valuation of major Indian Banks including ICICI Bank, SBI
and HDFC Bank. The methodology followed is Target Pricing, which including

57 | P a g e
estimating growth rate by regression on historical sales to forecast next year
sales, earning and Profit and Loss account. Then EPS is calculated which is
multiplied to Historical P/E to forecast intrinsic value of share. All shares are
undervalued and expected to give positive risk adjusted returns to investors.
Since the intrinsic value is more than current market price for all the
companies, the share can be recommended to conservative investors.

New market players have made a recent entry into the banking sector, need
to closely examine the customer behaviour and try to know the expectations
of the customers, because without knowing the proper expectations of the
customer it will be rather pointless to pitch the customers for their products.

Banks have the ability & willingness to grow fast with the emergence into the
Indian market at the right time & with the backing of their strong network,
they have successfully been able to keep a stable position in the market.

Their steady profits are giving them the resources that will help them to grow
in the future.


Company Reports

Government of India, 1998, Report of the Committee on Banking

Sector Reforms

Government of India, 1991, Report of the Committee on the

Financial System

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IMF Working Paper - Competition in Indian Banking by A. Prasad and
Saibal Ghosh

Indian Banks Association, Various Years, Performance Highlights of

Banks (Mumbai).

Indian Banking Association

Ministry of commerce and Industry

Reserve Bank of India (a), Various Years, Report on Trend and

Progress of Banking in India (Mumbai).

Reserve Bank of India (b), Various Years, Statistical Tables Relating

to Banks in India (Mumbai).

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Questionnaire to Access the market potential for Standard Chartered Banks

Business Banking Services

Customer Information

Name of the Organization:


Address of the Organization:


Telephone No.:

Type of Organization:

Sole p Partnership Limited


Club / Society Trust HUF

Foreign Association Others (please


Nature of Business:

Textile/Clothing Transport/Cargo Engineering


Retail Chemicals
Wholesale Trade Hotel/ Food/ Restaurant

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BPO IT Jewellery Import/Export

Companys Turnover:

Yes/No <25 Lakhs 25-50 Lakhs 50Lakhs-1Cr >1Crore





No. of Employees:

Less Than 20 20-49 50-99 100-499

500-999 1000-4999 Over 5000

Which bank are you presently banking with?


Standard chartered Oriental Bank of

Bank Commerce

ABN Amro Bank Syndicate Bank

HSBC Canara Bank

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Kotak Mahindra Bank ING Vyasa Bank

How long have you been banking with this bank?

Less than 3 Years

3-7 Years

More than 7 Years

Are you satisfied with the following services of your present bank?

Services Type Goo Ba Avera

d d ge

Nearness of ATM

Timeliness of response to queries

Behavior of Employees


Assistance in preparation of requisite


Do you have overdraft limits with your present bank?

Y Yes



What is the mode of payment used?


Demand Drafts (DDs)

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Electronic Mode


Do you use any of the following electronic platforms for payments?





What is the mode of your collection?

Cheques / Demand Drafts (DDs)

Electronic Mode


If Cheques / Demand Drafts (DDs)

No. of instruments per month

Less than 50


More than 100

Do you have any suggestions that should be incorporated in the current

account offerings by a bank?

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Please rank the following characteristics of a bank as per their importance to
you. (Rank from 1-9 in the space provided)

Characteristics Ra

Relationship with the bank

Relationship with the RM


Convenience (required documents,

visits to bank)

Timeliness of response to queries

Facilitating understanding of procedure

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The following case is a true account of a customer who had visited the
Karol Bagh Branch of Standard Chartered Bank to open a Fixed Deposit
and was very disappointed with the look of the branch as well as the
services provided.

Mr. Ravi Kapoor, a senior citizen, had seen the Orange Fixed Deposit
advertisements and decided to make a fixed deposit at the Karol Bagh
Branch of Standard Chartered Bank. Since the bank is a reputed bank,
he thought it will be easy to find the bank. However, this was not the
case. He was mainly searching for the nicer buildings at the address
that he had taken from the bank website, and was expecting a visible
and a big board of Standard Chartered Bank. However, after roaming
on the streets for more than an hour he came across this really small
board filled with dirt and in dull letters was the name Standard
Chartered Bank. It was right next to Kotak Mahindra Bank which was
sparkling from outside as compared to Standard Chartered Bank. The
guard standing outside Standard Chartered Bank did not have a chair
to sit.

On entering the bank there was a distinctive odor in the air signaling
that one of the air conditioner was not working properly. The bank
looked dull with dim lights and very dull interiors. The place was very
suffocating and there was hardly any place to sit even when the bank
was not crowded. The staff was looking bored with no smile on their
faces. He found form with very difficult but could not the place to fill it.
There was no facility of drinking water on such hot afternoon for the
customers. The customers did not look happy either with the banks
staff. When Mr. Ravi went on the counter for form submission, he asked

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some queries for which the banks staff never gave the satisfactory


The main problem identified in the case is the lack of professionalism

in the branch look as well as in its employees. The look of the branch
was not very appealing. The board is filled with dirt which leaves a very
bad impression in the mind of the customers.

The interior of the branch is also shabby and compact with no waiting
area for the customers.

The employees are not very friendly. The competing banks like HSBC,
ING Vysya Bank, ABN Amro etc. are characterized by their distinctive
professional feel and ambience. However, in the case of this particular
branch of Standard Chartered, the multinational image is lacking and
immediate measures are required to be taken by the bank. Though the
branch has the advantage of its position being situated in the busy
area of Karol Bagh, it is not encashing the opportunity in attracting
good quality business.

These are the few suggestions that could help the Karol Bagh Branch
to attract more customers:

1. To increase the visibility of the branch, a bright and clean board

displaying the name of the bank should be put up.

2. The atmosphere should be more pleasurable for banking. A

provision for the availability of basic facilities like drinking water
should be made.

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3. There should be more no. of seats in the waiting area, for senior
citizens and women.

4. There should be sufficient counters so that customers dont have to

stand in the queue.

5. The branch should employ more experienced staff for the busy
counters so that the transactions take place faster and customers
dont have to wait unnecessarily.

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