Banking Sector

Index-1
Topic

Page No.

Summary

Overview

Evolution of Banking

Structure

14

Exports & Imports

15

Growth & Segments

17

Regulatory Framework

37

Demand

43

Competetive Landscape

45

M&A

46

Growth Drivers

47

Technology usage in banks

50

Credit Portfolio

54

Index-2
Topic

Page No.

Basel III

62

Corporate Restructuring

65

Priority lending

66

Financial Evaluation of Banks

68

Impact of Union Budget

76

Important Concepts & Trends

77

Financial Inclusion

92

Governance

96

SMAC

98

Rural Banking

100

Infrastructure

110

Big Data

113

Companies Infortmation

115

Roles

120

Executive Summary

Advantage India

Overview
$1.4 trillion Banking Deposits
42.8 - Indias Banking Penetration Score
27.5% - Banking Sectors Share in Total
BFSI Employment
41% - Unbanked Population in India
$1.8 trillion - Total Banking Assets
157 - Total Number of Schedule
Commercial Banks in India

Contribution to GDP
Aggregate deposits of all
Scheduled Commercial
Banks(SCBs),as a percentage
of GDP increased from 61% in
FY07 to 67% in FY13,driven
by increasing demand from
retail customers.
Credit to GDP increased from
45% in FY07 to 53% in FY13
indicating the improved
lending of SCBs to various
industries,which has
enhanced trade and
economic development.

Contribution to Employment
Within the Banking, Financial
services and Insurance (BFSI)
sector, financial intermediaries
such as DSAs, insurance
agents, mutual fund
advisors,etc. Account for the
largest share (6570%)of
employment.
Banking stands second in
terms of employment (average
share of 28%). The banking
sector is projected to create
upto 2million new jobs in the
next 5-10 years driven by
issuance of new licenses and
efforts to expand financial
services into rural areas.

Evolution of the Indian Banking Sector

Indian Banking Sector has grown at

a healthy pace -1
Credit off-take has been surging ahead over the
past decade, aided by strong economic growth,
rising disposable incomes, increasing consumerism
and easier access to credit
During FY0613, credit off-take expanded at a
CAGR of 22.8 per cent to USD 991 billion
Total credit off-take is estimated to grow to USD
1,140 billion in FY14
Demand has grown for both corporate and retail
loans

Indian Banking Sector has grown at

a healthy pace -2
Deposits have grown at a CAGR of 21.2 per cent during
FY0613; in FY13 total deposits stood at USD1,274.3
billion
Total deposits are estimated to grow to USD1,452.7
billion in FY14
Deposit growth has been mainly driven by strong
growth in savings amid rising disposable income levels
Access to the banking system has also improved over
the years due to persistent government efforts; at the
same time Indias banking sector has remained stable
despite global upheavals, thereby retaining public
confidence over the years

Assets base continues to

expand
Total banking sector assets have increased at a CAGR
of 11.5 per cent to USD1.7 trillion during FY1013
FY1013 saw growth in assets of banks across sectors
Assets of public sector banks, which account for 72.7
per cent of the total banking asset, grew at an average
of 73.7 per cent
Private sector expanded at an CAGR of 14.7 per cent,
while foreign banks posted a growth of 7.6 per cent

And so does the money

supply
Total money supply increased at a CAGR of 14.0 per cent to
USD1.5 trillion during FY 0613
Narrow money supply (M1) rose at a CAGR of 12.6 per cent
while its components currency with public and Deposit money
of the public grew at a CAGR of 15.7 and 8.9 per cent during
FY 0613
Broad money supply (M2) increased at a CAGR of 12.5 per
cent to USD349.8 billion during FY 06-13
Money supply (M3) grew at a CAGR of 17.4 per cent to USD
1.5 trillion during FY 06-13
Time deposits with banks have shown highest average growth
of 19.2 per cent to USD 1.2 trillion during FY 0613

The Structure of the Indian Banking

Sector

Public + Private + Foreign =

combined market share of over
90% of the total assets

Exports
Indian banks have been increasingly growing their
international presence in the recent past. In part to cater to
the growing Indian diaspora in foreign countries (estimated
at ~ 20 mn persons) and in part to meet the growing
demands from cross border trade and economic activity.
The Public sector banks (PSBs) are much ahead of the Private
sector banks in their overseas presence, constituting over 90
percent of 171 overseas branches as of March 31st, 20133.
Many of the private banks do not have branches, but are
present through representative offices.
Non resident Indians (NRIs) deposits aggregated USD 14.2 bn
in the financial year ended March 2013, a y-o-y increase of
19 percent. The Indian Diaspora worldwide is estimated to be
~20 mn persons4 and is on a constant rise.

Exports and Imports

SEGMENTS

Branches
The Indian
banking system
has been
continuously
expanding with the
number of SCB
branches
increasing at a
CAGR of 7.8%
during
FY09toFY13.
The private sector
banks have been
expanding a ta
faster
rate(7.1%CAGR in
number of
branches)
compared to

Branches
Of the total
number of new
branches opened in
FY13, 24% were
opened in un
banked centers.
The proportion of
branches opened in
unbanked centers
has witnessed a
consistent increase
in recent years
driven by
aggressive rural
expansion by
private sector
banks.

Number of SCB Employees

Over all employment
levels in the Indian
banking system
increased at a CAGR of
3.5% during the FY09FY13 period.
The main drivers of
these employment
trends have been the
private sector banks
which witnessed a
growth of 8.7% CAGR
in their number of
employees during the
same period.

Number if Bank employees by bank

group

Public sector
banks(PSBs)
grew at a
CAGR of 2.3%
while the
foreign banks
saw a decline
of-3.8% in the
employment
levels.

Private players driving

employement

Segmentation and offerings

Bank Deposits
Deposits increased
at a CAGR of 11.4%
during FY09FY13
to reach USD1,360
billion in FY13.
Growth in deposits
was primarily due
tos strong growth in
current account
savings
account(CASA)
(33%growthinFY13).
CASA growth was
strong for new
private sector
banks,due to their
higher savings

Total Assets
Total banking
sector assets
increased at a
CAGR
of11.3%toUSD1.8
trillionin FY13.
Public sector
banks accounted
for majority(73%)
of the total assets
in FY 13.

Non-Performing Assets
Asset quality
continued to worsen
due to decreasing GDP
growth,policyhurdles,
aggressive expansion
by corporates during
the boom phase with
resultant excess
capacities and
deficiencies in credit
appraisal.
Within non-performing
assets(NPAs),the
proportion of doubtful
loan assets has
increased,especially

Interest Income has seen robust

growth
Public sector banks account for over
73.3 per cent of interest income in
the sector
They lead the pack in interest income
growth with a CAGR of 15.7 per cent
over FY09-12
Overall, the interest income for the
sector has grown at 13.8 per cent
CAGR during FY09-12

Net Interest Margin continues to be

strong - 1
Net Interest Margin (NIM) for
scheduled commercial banks stood
at 3.2 per cent in FY13, up from 2.6
per cent in FY08
Foreign banks, State Bank of India &
its associates as well as private
sector banks posted higher NIM at
4.8, 2.9 and 3.2 per cent,
respectively in FY13

Net Interest Margin continues to be

strong - 2
Indian banking sector enjoys healthy Net
Interest Margins (NIMs) compared with global
peers
HDFC leads the large banks with NIMs of over
4 per cent
Prominent Chinese banks have NIMs between
2-3 per cent, significantly lower than Indian
peers
Despite virtually zero cost funds, the banks in
the US have NIMs comparable to Indian peers

Contd.
Net interest
margins(NIM) declined
marginally in FY13,due to
subdued credit
demand,fall in yield on
funds,less than
proportionate fall in cost
of funds and sharp rise in
non-performing assets.
Margins pressures were
higher in case of PSBs
compared to private
sector and foreign banks
on rising cost of funds

Growth in Other Income

also on a positive trend
Public sector banks account for about
59 per cent of income other than
from interest (other income)
Other income for public sector
banks has risen at a CAGR of 4.2 per
cent during FY09-13
Overall, other income for the sector
has risen at 3.5 per cent CAGR
during FY09-13

CAR
Continuing with
the past trend, the
capital adequacy
ratio(CAR)
remained above
the stipulated 9%
norm both at the
aggregate and
bank group levels
in FY13;however,its
a a marginal
declineinFY13.
The decline in
capital level at the
aggregate level
was due to

ROA and Loan to Deposit ratio

showing an uptrend
Loan-to-Deposit ratio for banks
across sectors has increased over the
years
Private and foreign banks have
posted high return on assets than
nationalised and public banks

ROA
Thereturnonassets
(ROA)forthebankin
gsectorreducedfur
therbyabout5basis
pointsinFY13.
Thisreductionwa
sdiscernibleinthec
aseofPSBsingener
al,andnationalized
banksinparticular.
Newprivatesector
banksandforeignb
anksmanagedtoim
provetheirreturnso
nassetsbyreducing
operationalcosts

Bank credit
FY13witnessedaslowdowninthegrowthofcreditinmajorsec
tors,includingtheindustrysectoraswellasagricultureandall
iedactivities.Slowdownintheindustrysectorwasprimarilyd
uetoasluggishinfrastructuresectorimpactedbyregulatory
delays,powersupplyissues,anddelaysinlandacquisition.
Growthofservicessectorcreditdeclinedduetoslowdowni
ncredittononbankingfinancialcompanies(NBFCs),whichaccountsforab
outone-fifthofthetotalcredittotheservicessector.
RetailloanssegmenthowevergrewinFY13,asbanksincrea
sedtheirfocusonthissegmenttooffsetsluggishgrowthinoth
ersegments.

Contd.

Private Banks aggressively

increasing presence
Share of public sector banks in total
deposits have also declined from
78.2 per cent in FY05 to 77.3 per
cent in FY13
This is largely due to the fact that
private banks are rapidly capturing
share in savings deposit

Strong economic growth to propel

banking - 1
Rising per capita income will lead to
increase in the fraction of the Indian
population that uses banking
services
Population in 25 60 age group is
expected to grow slowly going
ahead, giving further push to the
number of customers in banking
sector

Strong economic growth to propel

banking - 1
Indias GDP is forecasted to expand at a
healthy CAGR of 7.0 per cent during 201217 to USD2,735.7 billion
Strong GDP growth will facilitate banking
sector expansion
Total banking sector credit is expected to
increase at a CAGR of 18.1 per cent to
USD2.4 trillion by 2017
The sector will also benefit from economic
stability and credibility of Monetary Policy

Comparison with peer countries (2013)

Regulatory Framework

Contd.

Low banking penetration indicates

latent demand -1
Despite healthy growth over the past
few years, the Indian banking sector
is relatively underpenetrated
Loans-to-GDP ratio is low (62 per
cent) relative to many of its
emerging markets peers as well as
developed economies such as the US
and UK

Low banking penetration indicates

latent demand -2
Limited banking penetration in India is
also evident from low branch per 100,000
adults ratio
Branch per 100,000 adults in India stands
at 747 compared to 1,065 for Brazil and
2,063 for Malaysia
Bank deposit accounts per 1000 adults in
India stands at 953.1 compared to
1,032.7 in Brazil and 1,642.2 in Malaysia

Competitive Landscape

SBI leads the public

sector space

HDFC and ICICI

drive the private

Deals and Moves

Growth drivers of Indian

banking sector

Housing and personal finance - key

drivers - 1
Rapid urbanisation, decreasing household size and
easier availability of home loans has been driving
demand for housing
Credit to housing sector increased at a CAGR of 7.8
per cent during FY 0813
As of November 2013, credit to housing sector was at
USD 94.0 billion compared to USD 90.5 billion
corresponding to prior period
Demand in the low- and mid-income segments
exceeds supply three- to four-fold
This has propelled demand for housing loans in the
last few years

Housing and personal finance - key

drivers - 2
Growth in disposable income has been
encouraging households to raise their
standard of living and boost demand for
personal credit
Credit under the personal finance segment
(excluding housing) rose at a CAGR of 5.9
per cent during FY0813
Unlike some other emerging markets,
credit-induced consumption is still less in
India

Banks reaping benefits from

technology - 1

Banks reaping benefits from

technology - 2

A paradigm shift: online and ATMs

usages - 1
The wide scope and ease of online banking has led to
a paradigm shift from traditional branch banking to net
banking
The total number of people using net banking has
increased to 7 per cent in 2012
Extensions for facilities such as fund transfer, account
maintenance and bill payment at ATM stations have
reduced branch banking footfall
ATMs in India have increased to 1,26,950 in 2013 and
are further expected to double over the next two years
The increase would take the number of ATMs per
million population from the current 85 to about 170

A paradigm shift: online and ATMs

usages - 2

Credit Portfolios
The domestic credit portfolio of Indian Banks grew 14.0% during
2013-14, which is marginally higher than the 13.6% growth reported
during 2012- 132, but significantly lower than the three-year
(FY2010-FY2012) average of around 18%. With long term credit
growth broadly following the pattern of nominal GDP growth, it is
likely to remain muted at 13.5-14.5% during 2014-15, assuming a
GDP growth rate of 5-5.5% during the current fiscal.
In 2013-14, credit growth marginally outperformed nominal GDP
growth on the strength of sustained high credit growth in micro
enterprises (23.7% during 2013-14 vs. 20.2% during 2012-13),
higher growth in commercial real estate (22.4% during 2013-14 vs.
11.9% during 2012-13) and increased credit flow to agriculture and
allied activities (13.5% in 2013-14 vs. 7.9% in 2012-13); excluding
these segments non-food credit growth was at 13.5- 13.6% during
2013-14.

Contd.

Contd.
Growth of credit to the infrastructure sector fell sharply to an annualized
15- 16% growth over the last two years (35-40% in FY2010 and FY2011),
while credit to Industry and Services (excluding infrastructure) also
slowed, even as credit to retail remained stable and that to agriculture
volatile.
Growth in bank credit to large industries declined 12.2% in 2013-14 (from
15.6% in 2012-13), while that to medium industries saw some revival at
2.2% (-0.1%) over the same horizon. In the case of micro & small
enterprises however, banks credit to this sector increased 23.7% during
2013-14 from 20.2% during 2012-13 on the strength of favourable riskadjusted returns and the part credit protection available under the
CGTMSE scheme.
Industry wise, credit growth declined in textiles (11.1% during 2013-14 vs.
15.1%), chemical & chemical products (5.3% vs. 25.4%) and engineering
(13.3% vs. 13.7%) industry.

Contd.

Contd.
With asset quality in retail loans showing resilience to a slowing
economy and in the absence of adequate lending opportunities
elsewhere, banks retail loan portfolio grew by 15.5% during 201314 (14.7% during 2012-13). Within retail, housing loans, which
account for over 50% of banks retail loan book, gained the most
reporting 18.4% growth during 2013-14.
Vehicles loans, on the other hand, grew 17.4% during 2013-14.
Going forward, banks retail loan book is expected to report faster
growth than the overall credit growth, considering the increasing
focus of banks on housing & vehicle loans despite this segment
being low interest yielding vis--vis corporate loan segment.
Increase in share of retails loans in total credit portfolio of banks
could be lending yields dilutive however same is expected to offset
by low credit provisioning in the segment vis--vis corporate loans.

Contd.
Major Sectors growth

Contd.
In terms of sectoral distribution, overall, Indian banks
have been maintaining a well diversified credit
portfolio. As of March 2014, credit to industries
accounted for 45% of banks total credit portfolio,
followed by services (24%), retail (18%) and agriculture
& allied activities (12%).
Within industries and services too, the portfolio is well
diversified across activities; while infrastructure
represents the largest industry exposure for banks with
a share of about ~15% of the total credit book as of
March 21, 2014, no other industry or service accounts
for a share exceeding 10%.

Domestic Credit Mix 2014

Basel III
In 2010, Basel Committee on Banking Supervision
(BCBS) issued comprehensive Basel III guidelines to
improve the banking sectors ability to absorb
shocks arising from financial and economic stress.
The guidelines recommend more stringent capital
and liquidity requirements apart from suggesting
enhancements to Basel II and market risk
frameworks.
In the same year the US introduced Dodd-Frank Act
to enhance financial stability, orderly liquidation and
other host of measures to ensure measures directed
at hedge funds, insurance companies and banks.

Basel III and Challenge to meet

capital reqt.
The capital allocation made as part of the interim budget is much smaller
than its estimate of the Rs.25,000-36,000 crore required by Indias public
sector banks to meet a minimum equity capital ratio of 8% under Basel III
norms by 2018.
Under Basel III norms, which are being implemented in phases between
April 2013 and March 2018, banks need to have a 8% core capital ratio and
total capital adequacy ratio of 11.5% against 9% prescribed now, including
a capital conservation buffer of 2.5%. Such a buffer is built by banks in good
times to be used only in times of economic or system-wide downturns.
In February, this year, the Reserve Bank of India (RBI) permitted banks to
use one-third of the amount banks have set aside as counter-cyclical buffers
to make provisions against bad loansthe first time since the reserves were
created starting 2010, implicitly acknowledging that mounting bad loans are
a systemic concern.
RBIs concern is justified going by the sharp surge in bad loans in recent
years and the resultant pressure on the capital adequacy of banks.
Gross non-performing assets (NPAs) of Indian banks rose to Rs.2.4 trillion in
the December quarter, while another Rs.4 trillion is being restructured for
stressed borrowers. Together, such loans constitute at least 11% of the total
advances of Indian banks.

Contd.
Banks need to make 5% provisions for new restructured loans and
the provision can shoot up drastically if the loan turn badIf the
government opts to maintain its shareholding at the current level,
the burden of recapitalization to meet Basel III norms will be of the
order of Rs.90,000 crore, while on the other hand, if the
government decides to reduce its shareholding in every bank to a
minimum of 51%, the burden reduces to under Rs.70,000 crore,
according to an RBI estimate in September 2012. .
Raising capital wouldnt be an easy task for state-run banks as
seen in the recent offering of State Bank of India to qualified
institutional investors, which received a tepid response. As against
the targeted Rs.9,600, the bankmanaged to raise only Rs.8,032
crore, with a state-owned Life Insurance Corporation of India
bailing out the issue by buying 41.3% of the total shares offered.

Corporate restructuring
The Reserve Bank of India (RBI) will offer more flexibility to
banks while restructuring corporate loans
The central bank will permit the use of 5-25 rule for loan
restructuring of existing projects, which are classified as
standard assets. In the 5-25 structure, a bank could fix longer
amortisation period (about 25 years) for loans to projects in
infrastructure and core industry sectors, with periodic
refinancing (say every five years). Such restructuring would
enable loan repayment to be co-terminus with cash flows from
the projects. It would also improve debt-servicing capacity and
viability of the operational projects.
Currently, banks are allowed to take maximum 10 per cent
equity in a restructured project.

Priority Lending Sector

The diversification of a large fraction of bank credit from the traditional sector to
the priority sector is a remarkable feature of credit deployment in the post
nationalization era.
The concept of priority sector lending is mainly intended to ensure that
assistance from the banking system in an increasing manner to those sectors of
the economy which have not received adequate support of institutional finance.
The Reserve Bank of India (RBI) emphasized that the priority sector comprised of
agriculture (direct and indirect finance) Small Scale Industries, Small Road and
Water Transport Operators, small business, professional and self employed
persons, education, housing, micro credit, weaker sections etc.
RBI monitors the priority sector lending of (PSL) Commercial Banks through
periodical returns received from the banks and the performance of banks is
reviewed in various foray setup under the Lead Bank Scheme (RBI) 2009.
Since seventies, RBI and Government of India have stipulated some guidelines
viz., financing in the priority sector on an increasing scale, more deployment of
credit to back ward regions, preparation and implementation of credit plan and
measures for enhancing productivity, employment and Economic Growth with
Social Institute (Narasimham 1994)

Both Public Sector Banks and Private Sector Banks play a vital role in
economic development by financing the priority sector of the economy

Profitability Pressures
Indian banks (PSBs + private) credit growth was muted at 14.7% during 2013-14 and
PSBs profitability saw a significant decline.
The aggregated profit after tax (PAT) of PSBs declined by 27% (year-on-year, or y-o-y)
to Rs. 370 billion during FY2014 from Rs. 507 billion during FY2013.
The PSBs net profitability (PAT/ATA2) declined to 0.50% in relation to average total
assets (ATA) during FY2014 vs. 0.78% during FY2013 and their return on net worth
dropped to 9.1% in FY2014 from 14.2% in FY2013.
Banks (PSBs + private) gross NPA% increased over the last one year from 3.3% to
3.9% as on March 2014 (ICRA estimate was 4.0-4.2%).
The increase in gross NPA% was due to higher fresh NPA generation rate (3.5-3.6%3
for PSBs in 2013-14, 3.4% in Q4, 2014 as against 3.1% in 2012-13). PSBs gross NPAs
increased from 3.6% as on March 2013 to 4.4% as on March 2014. As for Q4, FY2014,
Gross NPA% of PSBs declined by 30 basis points (bps) from December 31, 2013
levels.
This reduction is due to higher recovery efforts towards the end of the financial year,
higher write offs and sale of assets to asset reconstruction companies. None of these
are likely to be sustained in Q1, FY2015, thus the gross NPA% could move back to
December 2013 levels (~4.1%) in the first quarter itself.
Restructured advances of the PSBs remain at elevated levels of 6.2% as on March 31,
2014. Private sector banks were able to hold on good asset quality as reflected in
their gross NPAs of 1.8% as on March 2014 (vs 1.9% as on December 2013).

Contd.
Credit Growth drops marginally
Credit growth for the PSBs dropped from 15.3% in 2012-13 to 14% in 2013-14, while that for
private sector banks increased from 16.6% to 17.8% with overall growth declined from 15.6% to
14.7%
PSBs Earnings deteriorate sharply
Yield on advances for PSBs dropped by 40 basis points in FY2014 vs. FY2013, partly due to
increase in Gross NPA%, partly due to reduction in base rate towards the end of 2012-13 as well
as reduction in interest rates in selective segments (few banks, in a bid to gain higher growth in
retail loans, reduced interest rates for housing & auto loans
Asset Quality slide continues for PSBs
Fresh NPA generation rate of PSBs increased to 3.5-3.6% in 2013-14 as against 3.1% in 2012-13
leading to increase in Gross NPA% to 4.4% as on March 31, 2014 from 3.6% the previous year.
Gross NPA% of Private + Public Sector Banks increased to 3.9% from 3.3% in corresponding
period
PSBs Standard restructured advances remained elevated at 6.2% as on March 31, 2014
Capitalization comfortable against the current regulatory norms
Banks started reporting capital adequacy as per Basel III norms since June 2013, Tier 1 capital
of PSBs was around 8.6% as on March 31, 2014 as against the required Tier 1 capital of 6.5%,
while that of private sector banks was well above the norms around 12.8%
Operating profits as % of Net NPAs for PSBs was 90% during FY2014 as against 130% during
FY2013

Growing NPAs
India is one of the fastest growing economies in the world and is set to remain
on that path, backed by the growth in infrastructure, industry, services and
agriculture. To support this growth, credit flow to various sectors of the
economy has been increasing. GDP vs credit growth
Strong and sustainable credit growth is almost synonymous with a healthy
operating environment and strong economic growth. This trend by and large
leads to healthy and profitable asset creation within the economy and the
banking sector.
However, high growth phases are also when SAs are generated within the
banking sector. This is due to excess capacity creation, easy availability of
credit, less strict underwriting and easier monitoring during such a phase. This
SA accumulation is however masked by strong credit growth. As a result, Sas
look very low during this growth phase of the economy. A period of downturn
reverses thistrend of low SA levels and asset quality concern increases as the
growth in SA outpaces credit growth in the banking system. As a result, as the
graph depicts, growth in SA increased by 40.2% in 2013 as against a 15.1%
credit growth.

NPAs and GDP

 The problem is not only restricted to rising GNPA

ratios. The rise in the percentage of RA and
security receipts (SRs) issued by asset
reconstruction companies (ARCs) are also a cause
for concern
The true picture of SA can be depicted by
combining the GNPA and RA (as a percentage of
total advances).
This figure, as on March 2013 is as high as 10.2%
of the total banking credit.
The biggest contributor to the 10.2% pool of GNPA
is state-owned banks, where the stressed asset
ratios (SA/total advances) in some cases are
already high percentages. Stressed assets among
PSU banks have reached alarming proportions of
approximately 112% of equity, whereas the same
figure for private banks is manageable at about
50% of equity. The four broad sectors in the
economy where disbursements are taking place
are agriculture, industry, services and retail. For
most of these sectors (barring retail), stressed
asset ratios have increased substantially (and in
some cases almost doubled) from FY09 to FY13.

GNPA

ROE
Due to consistently high levels of inflation and slowdown in the broader
economy, demand across sectors dropped drastically (barring consumer
discretionary and pharmaceuticals), causing widespread decline in
capacity utilisations. This subsequently resulted in large stress in the
industrial sectors in particular and the economy at large.
The worst hit sectors on the basis of asset turnover are industrials,
telecommunication service providers, utilities and pharmaceuticals.
The sectors that retain a positive outlook are consumer discretionary, oil
and IT
The corporate sector in India has shown a marked decline in asset
turnover, depicting falling capacity utilisations.
As a result, return on equity has taken a huge hit. The chief concern
going forward is that new capacities that were added using leverage
remain either underutilised or suffer delayed commercial commissioning.
The additional capacity, instead of resulting in increased cash flows, is
adding to the debt burden, thus creating additional stress.

ROE

Union Budget impact on

Banking
Infusion of additional capital by way of equity in line with
Basel-III norms
Shareholding of public sector banks to be divested in a phased
manner by increasing shareholding of Indian citizens
Reserve Bank of India to create framework for license of small
banks and for other differentiated banks
Six new Debt Recovery Tribunals to be set up to recover Non
Performing Assets
Banks will be encouraged to extend long term loans to
infrastructure sector with flexible structuring
Banks will be permitted to raise long term funds for lending to
infrastructure sector with minimum regulatory pre-emption
such as Cash Reserve Ratio, Statutory Liquidity Ratio and
Priority Sector Lending

IMPORTANT CONCEPTS
AND TRENDS

Notable trends in the banking

industry - 1

Notable trends in the banking

industry - 2

Notable trends in the banking

industry - 3

Technology in Banking

Internet banking
Customer management
Business Intelligence
Risk Management and information
security
Technology in training
Financial Inclusion
Mobile banking
Payment systems

Mobile Banking
Banks are increasingly adopting mobile based
channels as delivery channels to expand reach
and lower costs since opening bank branches
comes with its associated regulatory and
financial restrictions.
In recent years, the mobile banking has been
reflecting a growing trend with the volume and
value increasing by 108.5%(53.30 million in
FY13vis-- vis 25.56million in FY12) and
228.9%(USD1.1 billion in FY13 vis-- vis
USD0.2billion inFY12),respectively.

Shift to fee based model

Banks are looking to increase fee- based
income by shifting focus to selling life and
general insurance policies through
bancassurance tie- ups insurance brokers.
Recent bancassurance tie-ups include
Indian bank with United Indian Insurance ,
PNB with Metlife, and Axis Bank with Max
Life insurance.
Retail fee income (insurance and mutual
funds sales commissions, transaction fees
on savings & current accounts, consumer
loans & credit cardsprocessing fees and
fees from forex transactions & remittances)
has been another focus area
Private sector banks are specifically
focusing on income on foreign exchange
transactions and remittances. Axis Bank,
the third largest private sector lender in
the country, reported close to 43 percent
rise in retail fee income in FY13.

Changing dynamics of fee based

income portfolio
Fee income has gained significant focus as a
source of revenue in the past decade. With the
rising pressure on cost of funds, it is imperative
for banks to look at other avenues to boost their
income. The fee income in FY 13 for 67 banks in
our sample set10 was INR 64,418 Cr; clocking a
three year CAGR of 12 percent and five year
CAGR of 15 percent.
PSBs have constituted a large part (60 percent) of
this basket since the beginning, owing to their
reach and size.

MSME Sector
The Micro, Small and Medium Enterprises(MSME)
segment accounts for 45% of the Indias
industrial output and contributes about 11.5% of
GDP . However, the segment faces a chronic
shortage of bank financing for growth. This unmet
demand presents a significant opportunity for the
flow of banking credit.

MSME

Supply Chain Financing (SCF) is

gaining traction in India
SCF is rapidly gaining attention in international markets
and is growing at a pace of 30 40 percent at major
international banks according to a research6.
Key elements of SCF include factoring, invoice
discounting/reverse factoring, purchase order/invoice data
management, bank assisted open account, open account
payment, export/seller finance and buyer side finance.
All the products aiming at providing better liquidity to the
corporates and their entire value chain at lower financing
rates.
Currently, the growth in this domain comes from US and
western European countries, but the future growth is
expected to come from emerging economies like India and
China.

Contd.
With various
government
policies supporting
exporters in India,
the export credit is
growing at a rapid
rate (Three year
CAGR at 14
percent and five
year CAGR at 22
percent). A part of
this is also supplier
financing, which
has been gaining
popularity

The Factoring bill

The Factoring bill essentially protects micro and
small businesses from delayed payments for
goods and services by larger entities. Traditional
banks used to provide loans based on the
borrowers (i.e. the MSME players) ability to
service the loan. Factoring will however evaluate
the lending decision based on the ultimate debtor
(i.e. the ultimate customer of the MSME). This will
greatly improve the liquidity and working capital
problems of MSME players.
With favourable legislations, factoring is gradually
taking off in India. The Indian market constitutes
a mere one percent of the worlds factoring
market and 0.5 percent of the working capital

Contd.

Low cost with technology

Indian banks are constantly optimising the use of technology as

the change agent, in order to improve operational efficiency and
enhance customer experience. It is estimated that Indian banking
and securities companies will spend INR 416 bn (USD 6.75 bn) on
IT products and services in 20138, which will be 13 percent
increase from INR 370 bn (USD 6.0 bn) spent in 2012.
Emergence of low cost channels like internet banking, mobile
banking, and mobile ATMs have been successfully implemented
by many players and have also found wider acceptance in the
customer base. This has led to enhanced focus on digital banking
and self-service channel usage to reduce the cost of operations.
The number of mobile banking transactions doubled to 5.6 mln in
January 2013 from 2.8 mln in January 20129. The value of these
transactions increased three-fold to INR 625 Cr (USD 105.73 mln)
during the month from INR 191 Cr (USD 32.31 mln).

New Banking License Focus on financial

inclusion
Reserve Bank of India has been very active in pushing the agenda of financial inclusion across the
country and has consistently emphasized on financial inclusion in the
un-/ under-included regions of the country. As a part of this vision, the RBI has recently awarded inprinciple banking licenses to two players, one of which is a microfinance company providing
microcredit to more than 55 lakh customers. It has also proposed guidelines for issuing banking
licenses on-tap, which essentially
means that the license window would be open throughout the year. This is in line with RBIs
mandate for setting up niche banks in the country catering to diverse sectors of the economy, with
special focus on Financial Inclusion and Micro-credit.
Proposed licenses for small and payments banks To enhance financial inclusion, the RBI has
recently issued draft guidelines for two new categories of banks small banks and payments
banks. The primary objective of setting up these banks is to extend financial inclusion across the
country. Small banks would be limited in size and operations compared to the scheduled
commercial banks and would offer only basic savings products and small loans.
These banks would cover only limited geographic areas and are expected to rely heavily on
technology to reduce operational costs. These small banks are expected to serve as saving
vehicles for the un-/ under-banked sections of the society.
Though the payments banks would not be able to offer credit products, these banks are expected
to extend financial inclusion by providing small savings accounts and payment or remittance
services to migrant labourers, low-income households, small businesses and unorganized sector
entities.
Payments banks are allowed to leverage other players network in addition to their own that would
help them in providing a large number of access points in particularly remote areas, thereby
including the people of these areas into the formal financial system.

Financial Inclusion
Financial exclusion has been an area of
concern and casts shadows over the longterm sustainable growth of the Indian
economy. Though the country has had a
large unorganized sector (consisting of
money lenders, chit funds, etc.) providing
the financial services for a long time, the
reach of the organized sector (banks,
NBFCs, MFIs, NGOs, etc.) remained limited.
The unregulated unorganised sector
players, with their strong focus on earning
profits, did little to bring in the financially
excluded people in the mainstream.
The central bank prescribes the following
four basic financial services to be provided
to any individual to count her as
financially included.
Access to basic savings account
Availability of affordable credit
Access to remittance services
Opportunity to buy insurance and
investment products.
Jan Dhan Yojana Prime Ministers
financial inclusion drive

Global FI models and relevance for India

Many of the scalable and successful experiences globally have been led by telecom companies
with the banks playing a secondary role.
M-Pesa in Kenya: Parallel banking ecosystem managed by telecom companies, allowing the
consumers to make majority of mobile banking payments, transfers and transactions on their
mobile phones. It is a cost effective and adaptable system which has brought many people into
the formal banking system and has grown rapidly with client base of around 10 million, roughly
40 percent of Kenyas adult population.
USAID MABS in Philippines: Microenterprise Access to Banking Services (MABS) assists network
of partner rural banks in the development and introduction of innovative products, including
mobile financial services. Its a successful model that has more than 90 MABS-supported rural
banks managing around 250,000 microloan borrowers and 1.5 million micro-savings accounts.
These banks have also registered more than 250,000 mobile phone banking clients and have
processed more than USD250 million in mobile banking transactions. This model could be used
to provide training and technical assistance to rural banks in India which could give a boost to
innovative product launches in the rural segment.
MTN Mobile Money in South Africa: Mobile operator MTN and Standard Bank, through their joint
venture MTN Banking, launched a mobile banking product MTN MobileMoney. Every MTN SIM
card has an embedded banking application and only MTN subscribers can open MobileMoney
accounts. Under MTN MobileMoney, 1.6 million people are registered users with over USD90
million transacted every month. Although Indian banks have started teaming up with mobile
operators for providing banking services to unbanked people, banking regulations do not permit
a lead role for telecom companies in India.

Success of new banks would depend on-

Sectoral expertise/ knowledge

Customer segmentation is the key
Rural branches as the final frontier
Learning from the past to secure
future

Governance in Indian
banks
Governments control over public sector banks
The Indian banking sector is characterised by the dominance of PSBs which account for
approximately 70 percent of the industry1
Bank Subsidiary Model needs to be reassessed
Another governance related issue in Indian banks is the corporate structure they follow.
Currently in India, the bank subsidiary model is popular. Under this model, non-banking
activities such as insurance, asset management etc are done in separately constituted
subsidiaries of the bank. This model has its own set of problems and disadvantages.
Revising the compensation structure to improve governance
After the 2008 financial crisis, compensation structure in banks came under sharp focus
and criticism. Now it is widely acknowledged that aggressive and irrational incentives
and excessive risk taking by bank executives fuelled the crisis. The compensation
structure at times encouraged compromising long-term interests for short-term gains.
Allowing corporates into the banking space
The RBI has received 26 applications for new banking licences2. However, there is a lot
of debate on whether large corporates should be allowed to start a bank. International
experience in this regard has been mixed. While corporates can bring in professional
management experience and capital, many experts fear that they will use the bank as a
private pool of readily available funds

Government and regulators

initiatives
RBI has already made it very clear that the new banks, that will be
given licenses, have to open one in four branches in rural areas.
Premises of allowing new banks in the sector is to reach out to the
bottom of pyramid.
Improve Financial Literacy: The GoI and RBI should put in place a
country-wide strategy to provide financial education using standard
literacy material both as part of the school curriculum and as a part
of the kit to educate adults.
Aadhaar card: The nation-wide initiative to provide a unique identifier
to every Indian, could be integrated with the service delivery
mechanism. It could help address the main issue of complying with
the know your customer (KYC) norms that banks perceive to be
probably the biggest hurdle in expanding their reach. Successful
integration of Aadhaar with banks database would also allow banks
to have a 360 degree view of their customers to better manage risk
and cross sell more services.

Way ahead- SMAC

Social Media
Mobility
Cloud
Analytics

SMAC
The collective usage of SMAC has a multiplier effect on the benefits delivered.
These tools can be applied at different stages of any typical banking process.
For example, the data generated by users social media postings can be
coupled with location-based data from their mobile devices, which can, in
turn, be analysed in real time on a virtual cloud platform. The explosion of
data and analytics technology allows banks to store, manipulate, and analyse
greater volumes of data and extract meaningful insights about customers
preferences.
This comprehensive view of the customer can be used to effectively engage
existing and potential customers through tailored marketing strategies.
Services and products can be presented based on customers preferences.
Individualised sales and marketing strategies can help banks target different
customers for easy mobile deposits, mortgage loans, small business loans,
and so on.
Ultimately, this granular, 360-degree customer view made possible through
SMAC technologies can improve the loyalty of existing customers, help banks
engage these customers in new services, and increase the market share for
banks by attracting new customers

Rural Banking
As per Census 2011, 58.7 percent households are
availing banking services in the country. There are
102,343 branches of Scheduled Commercial Banks
(SCBs) in the country, out of which 37,953 (37 percent)
bank branches are in the rural areas and 27,219 (26
percent) in semi-urban areas, constituting 63 percent of
the total numbers of branches in semi-urban and rural
areas of the country. However, a significant proportion
of the households, especially in rural areas, are still
outside the formal fold of the banking system. New
banks would help in inclusive growth.

Rural Challenges

The profile of rural economy is also changing fast and is getting

increasingly diversified and moving beyond agriculture. The share of
agriculture in rural GDP has reduced from 42 percent in 2001 to 27 percent
in 2011
2. A holistic approach to rural India would therefore require
understanding the non-agro space as well which includes activities such as
manufacturing, trading, transportation, construction etc. In addition to
rising rural incomes, improved rural infrastructure like roads, power and
telecom has also contributed to growth of the rural economy. Access to
banking services is still constrained despite the size of the pie In the
backdrop of this growth in rural India, however, there is still a huge
demand supply gap for banking services. Rural India accounted for only 9
percent of the total deposits and ~10 percent of the total credit of the
banking sector in 2011 with a large number of rural households having no
access to formal sources of credit.
.

 3 Various challenges inherent in rural finance have led to

inadequate access to financial services for the rural population.
Some of these are as below:
Lack of adequate credit information: Credit information for rural customers
is usually constrained as the penetration of credit bureaus is not strong
and the borrowers possess limited documentation in terms of proof of
income.
Limited collateral: Assets ownership is limited and generally restricted to
farm land with lack of clear title and documentation. As a result of which,
this sector becomes a high risk segment for banks to finance.
High operational costs and complexity: Operational costs are higher on
account of low ticket sizes, low population density and higher cost of due
diligence. In addition, the rural economy is largely a cash economy, which
leads to increased complexity and risk of operations.
Diverse profile: The sheer diversity of the Indian rural landscape poses
significant challenges as the customer profile and banking needs vary
across regions

Leveraging rural markets

Tapping the rural banking opportunity requires an innovative

approach The traditional banking model has clearly not worked in
rural India due to its high cost structures and ineffectiveness in
adapting to the requirements of rural customer. Tapping the rural
opportunity would require banks to focus on the following few
things:
Developing simple products Rural customers would typically
have basic needs which can be met with simple plain vanilla
products with minimal additional features and options. The
product terms need tobe communicated clearly and in a
transparent manner. A gold loan is a good example of a highly
simple and effective product to meet the credit needs of the rural
customers. The product can be delivered quickly in a decentralised
environment, requires very limited documentation and provides
the security of collateral like gold.
Low cost innovative delivery models Several new alternative
channels are emerging as against the traditional branch-led
model. Business Correspondent (BC) channel has a strong

market development to make the BC model sustainable and effective.

There are several instances of BCs opening a large number of accounts
which continue to stay inactive and ultimately become dormant. Banks
need to work on developing a comprehensive product suite including credit
that can help BCs engage the customer all year round.

Another low cost delivery model is supply chain linked financing. Several
commodities and agricultural produce have a strong well developed value
chain, wherein the linkage of the farmer to the end buyer can be tapped to
create a financing opportunity. A case in point is sugarcane, where the
farmer is obligated to sell his produce to a sugar mill in the vicinity. The
farmers cash flows are dependent on the sugar mill, and the repayments
for any loan to the farmer can be collected out of the money that the sugar
mill owes to the farmer at the time of harvest. The model helps banks
leverage the long standing relationship of sugar mill with the farmers to do
appraisal, disbursement and collections in a cost effective and efficient
manner. The same model can be extended to other commodities that have
strong value chain linkages e.g. tobacco, milk and other crops where
contract farming model is being adopted. strong influencers in adoption of

Harnessing and developing local talent A key challenge in rural

markets is information asymmetry due to lack of documented information.
A good way to overcome this challenge is to tap the local talent which
brings in immense local knowledge and relationships which can otherwise
not be accessed. Local talent is also likely to be much more stable against
talent brought in from larger cities. Banks therefore need to actively
develop the local talent base and use it as a hiring ground.
Leveraging technology :Technology enabled solutions can go a long way
in developing low cost and efficient delivery channels for rural
India. There are several technologies which have already come up in the
market low cost ATMs, point-of-sale terminals, mobile-based technologies
etc. and are being experimented with. Mobile- based technologies are likely
to lead the way as mobile consolidates its
position as an ubiquitous connectivity device. The key to success lies in
early adoption by the customers and banks need to work extensively
towards customer education and awareness. Experiential marketing is a
good way to encourage the usage of new technologies and banks should
focus on making customers comfortable with new technologies with a
sustained campaign. Targeting youngsters is also a good idea as they are
likely to be the future customers and are also

Innovative and cost effective

operating models
Alternate Partnership Models Optimizing the use
of technology as the change agent
Straight Through Processing (STP) will be a key
determinant for process Efficiencies Branch will
continue to play a core role in the operating
model; although in a different Avatar Customer
as the focal point of the operating model

Enhanced focus on digital banking and selfservice channel usage to reduce the cost of
operations
Leading global banks have focused on providing customers
with more self-service options for carrying out all banking
activities.
In India, the success of the ATM channel and increasing
usage of internet and mobile banking is clearly evident.
However, it is highly imperative to undertake a
comprehensive risk assessment exercise and plan carefully
before shifting processes to digital/self-service mode.
Many banks have struggled in this effort as they tried to
replicate a branch based or paper based process onto the
internet channel.
Only a few banks have successfully transitioned a customer
service to the internet, by redefining the underlying process,
the customer interface and all support systems.

Focus on Emerging sectors and

Rural markets
The tough macroeconomic situation in India is
driving private-sector banks to sharpen their
focus on emerging sectors and rural markets to
boost growth.
YESBANK for example, has defined a growth
strategy focused on emerging sectors such as
lifesciences, IT, education, and healthcare.
Some private banks are also setting out branches
to strengthen their rural presence.
Examples include ICICI, HDFC, AxisBank, etc.

Infrastructure
Given Indias size and relative under-development, there exists an
immense need to setup basic infrastructure across the country
As per the Planning Commissions XIth and XIIth 5-year plan, the
investment requirement in infrastructure is expected to grow at
CAGR of 14.6 percent from FY 08 to FY 17.
In order to sustain the long term growth momentum, India needs
significant investment in the infrastructure sector. Planning
commission has projected infrastructure investment of more than
INR 40 lakh crore in the XIIth 5-year plan, which is nearly twice
that of the XIth 5-year plan.
However, private investments which are required to increase
significantly to INR ~20.5 lakh cr for FY13-FY17, have not seen the
required traction in the first year of this plan.
Significant private sector investments are required for bridging
infrastructure investments gap and meeting revised targets by the
Planning Commission.

Considering the 70:30 debt to equity ratio, the overall

debt requirements (disbursement potential) is expected
to be INR ~14.3 lakh cr.
Policy inaction, reluctance of promoters to invest
additional equity, and specific issues like lack of reliable
fuel supply or issues in land acquisition have increased
risk in the largest infrastructure sectors i.e. Power and
roads

Due to lack of depth in the corporate debt market, bank finance to

the sector is of critical importance and the banks have currently
taken a cautious approach as they are experiencing portfolio
stress
Banks had been the mainstay for infrastructure funding during the
XIth plan period, especially for the power sector. However the
banks are taking highly cautious approach towards lending to the
infrastructure sectors. Several key reasons exist for banks
reluctance in further funding.
Most banks have already reached their internally approved sectorwise exposure norms. Limited availability of take-out finance is
eading to the asset being on the banks balance sheet longer than
expected.
Difficulties in recovering dues from promoters due to stalled
projects not generating revenue has increased the overall portfolio
stress. Also, the banks have limited appetite for complex
structures, which are more popular with NBFCs for smaller deals.
The lack of depth in the corporate debt market in India restricts

Big Data as a source of real time

business insights

 Banking for the affluent

Banking for the unbanked
Dealing with increasing fraud and
risk

ICICI

Success stories HDFC Bank

Success stories Axis Bank

Success stories SBI

Success stories SBI

Role of MBAs in banking

A commerce student is good in accounting but lacks
financial management skills, which comes from
logical analysis of financial data
MBA helps understand the customers needs and
provide relevant solutions
Roles
Relationship Manager
Product Specialist
Financial Management
Investment Banking
Corporate Finance
Research