Structure of The Financial Sector in India

Broadly, the financial sector in India can be broken into the following main divisions :
FINANCIAL Sector
Financial services
Banking Sector
NBFCs (Non Banking
fnancial Companies)
Capital Markets
Forex Markets
Asset Management
Insurance
MFIs (Micro fnance
Institutions)
Scheduled
Commercial
Banks (SCBs)
Private Banks
Public Banks
Foreign Banks
Regional Rural
Banks
Scheduled Co-
operative Banks
The sector has important effects not only on the domestic economy but also on the global
economy, thus it usually is the most heavily regulated sector by government
Financial Products of Banks
Loan Products Deposit Products
Auto Loan Deposits
Other Products /
Services
Gold Loan
House Loan
Credit cards
Saving Accounts
Current Accounts
Fixed /Recurring
NRI services
POS Terminals
Private Banking
Education Loan Corporate Salary A/C Demat Services
1
Retail Banking
Loan against Securities
Retail Banking
Business
Commercial Banking Transaction Banking
Term Loan Cash Management
Guarantees Custodian Services
Mutual Fund Sales
Foreign Exchange
Services
Key Segment
Large Corporates
Emerging Corporates
Bill Collection Clearing Bank Services Financial
Institutions
Letter of Credit Tax Collections Government/PSUs
Working Capital Banker to Public Issues Agriculture

Wholesale Banking
Forex & Derivatives
Wholesale Deposits
Product Segment
Equities
Derivatives
Capital Market
Commodities(Inc
Hedging)
Other Financing
Cash Management
Statutory Reserve
Financial Decisions
Commodities
aDebt Securities
Exchange Foreign
Asset Liability Management
19
P!ST "nalysis on the Banking Industry
Factors Afecting the Industry
P
Political Factors
!
!conomic Factors
- Monetary Policy
- Regulatory Framework
- Budget & Budget Measures
- Changes in interest rates
- More savings
- More Capital Formation
- Increase in production of
goods and Services
- Banking Channels
S
Social Factors
T
Technological Factors
- Increase in population
- Changes in lifestyle
- Easy way of lending money
- Exploring banking facilities in
rural areas
-
Inte
rne
t Banking
- IT Services & Mobile Banking
- Credit Cards
- Improvement in efciency
P!ST "nalysis on the Banking Industry
Political Factors Afecting the Industry
The Indian banking Industry is mostly dependent on
the monetary #olicy decided by the $BI
Stricter regulations with respect to capital and
li%uidity directly afects the business of banks
Banks need to adjust their interest rates
accordingly, which may or may not favor them
Banks are forced to lend as per the guidelines of
$BI, that includes credit growth in all sectors
Budgetary &easures announced by the
government at the beginning of every fnancial
year also lay down guidelines to banks to lend or
acce#t de#osits
The government can also increase credit in
#articular sectors such as increase in farm
credit, increase in infrastructure credit
etc.(priority lending)
Sometimes the government gives debt waivers to
certain sections of the society that need to be
adhered to by banks as well
25
P!ST "nalysis on the Banking Industry
Economic Factors Afecting the Industry
!conomic factors in the country also efect the
Banking Industry both favorably or unfavorably
When the economy is in good shape in terms of
high#er ca#ita income, good agriculture
harvest and normal inflation,banks have an
edge as people are left with more money to
de#osit them with banks
This helps in moreca#ital formation as more
deposits can be realized
Also In the times of economic boom, more and
more F'I is brought into India through banking
channels, that actually im#roves business for
banks and the economy in general
Economic
prosperity encourages lending
business for the banks but in times of
recession banks face tough times to recover
their money, issue fresh credit and (I&s are
lower too
2
P!ST "nalysis on the Banking Industry
Social Factors Afecting the Industry
The Indian banking system hasbeen #rogressing
ra#idly. There are still several unta##ed rural
markets, despite the large number of banks in India
Many farmers still take loans from moneylenders at
a very high interest rate and small)scale industries
continue to remain important for banks
However changes could be expected in the near
future for the unorgani*ed sector
Thegrowing #o#ulation of India is a great
opportunity for Indian banks as a lot of #eo#le
in the country want to o#en a bank account
and develo# good savings habits
Changing lifestyle of the Indian urban
#o#ulation who wantseasy ways of financing
to their desires
2!
P!ST "nalysis on the Banking Industry
Technological Factors Afecting Industry
Indian banking has been consistently working
towards the developmentof technological
changes and its usage in its o#erations
With the a##lication of new and im#roved
technologies banks are expected to reduce
costs,time and #rovide higher customer
satisfaction
Internet banking or banking via the #hone can
be considered a remarkabledevelo#ment in the
banking industry
Mobile bankingenables customers to check
their account balance, transfer funds 24x7, bill
payments, booking of bus/fight tickets, recharge
prepaid mobile and do a lot more effortlessly
and securely
Banking through cell #hone benefits the banks
too. It cuts down on the cost of in)#erson
banking and hel#s reduce headcount at
branches
Technological developments facilitate the fow of
information and datafaster leading to faster
a##raisal and decision)making as well
2"
+rowth 'rivers of the Banking Industry
,igh +rowth of
the Indian
!conomy
- Favorable
'emogra#hics
Financial
Inclusion .FI/
Private Banking
- 0ealth
&anagement
Technology
Innovation
Growth in infrastructure, industry, services and agriculture is expected to
grow cor#orate credit in the economy
Nearly 123 of the Indian #o#ulation has a median age of 242 years
which signifies that India will gain from its demographic dividend
Given that 563 of Indians lack access even to the simplest kind of formal
financial services, the $BI on 7uly 611, mandated banks to allocate at
least 25% of the total number of branches proposed to be opened during a
year in unbanked rural centers
Banks considering FI as a banking o##ortunity rather than a Regulatory
obligation are likely to see long term #rofitable growth and a cushion
against market volatility
India not only enjoys a favourable demogra#hic dividend but also has a
strong population of ,igh (et worth Individuals .,(0I/
Given the improved performance of the equity markets in 2012 &
increasing afuence beyond urban and metro areas the number of ,(0Is
is e8#ected to rise further, ,(0IS will continue to demand better or
more so#histicated service
New channels in banking services such as internet banking, mobile
banking have increased productivity and help in ac%uiring new
customers
As per a survey conducted by PwC, today banks s#end 123 of the total
e8#enditure on technology today
29
9ey :hallenges
Indian Banks will have to bring in an additional capital of $s4 2 ;akhs :rore
Introduction
of BaselIII
(orms
Intensifying
:om#etition
Increasing
(P"
;icensing
$e%uirement
&anaging
,uman
$esources
to meet the Basel III norms. The government on its part has to infuse $s4
<6,666 crore into the state-run banks to maintain majority shareholding
under Basel III
Basel III norms will be implemented in a #hased manner starting from
7anuary 611 .now #ushed to "#ril/ 612, to be im#lemented to the fullest
by &arch 61=
High competition due to a large number of #layers in the banking industry
and other players such as (BF:s .less regulation/
Such competition in the industry has decreased the market share of the
e8isting banks
Economic slow down and aggressive lending by the banks has turned loans
into non) #erforming assets
This has impacted the proftability of the banks as they are re%uired to have
higher #rovisioning amounts
For commencing a banking business in India, a banking license from the $BI has
to be ac%uired which has served as a associated #rotocol and formalities
The last licenses issued were to 9otak &ahindra Bank and >es Bank in 661
and 665 res#ectively .as 9otak &ahindra Bank was earlier a (BF:/
Latest Licenses t o be issued is IDFC & BANDHAN FINANCIAL SERVICES -2014
Banks have to incur substantial employee costs as the attrition of the
em#loyees in this sector is very high
#!
+lobal vs4 Indian Banking Industry
Indian Banking: Soundness, ,ealth and Balanced Performance
$eturn on !%uity .3/
:ountry $eturn ?n
:ost: Income ratio .3/
:ost to
:ountry Income
@aluation .P)B@/
Price to
:ountry Book @alue
Bad 'ebt to "ssets $atio
:ountry Bad 'ebt to
Turkey
Indonesia
Malaysia
China
India
Singapore
Australia
Canada
!%uity
19.60%
17.8%
17.4%
16.7%
15.3%
14.6%
14.0%
12.4%
Indonesia
Germany
France
Canada
USA
Russia
Thailand
Australia
$atio
79.30%
75%
73%
66%
65%
59%
57%
56%
Indonesia
Malaysia
Canada
Russia
Thailand
India
China
Australia
$atio
3.6
2.3
2
2
1.9
1.8
1.7
1.6
Russia
Indonesia
Turkey
USA
China
Spain
South Korea
India
"ssets $atio
2.4%
2.0%
1.3%
1.2%
0.9%
0.7%
0.6%
0.6%
South Korea 10.1% Malaysia 55% Turkey 1.5 Singapore 0.5%
Spain
Russia
Thailand
France
USA
Germany
8.2%
7.9%
6.9%
4.0%
2.7%
-8.0%
India
South Korea
Spain
Turkey
China
Singapore
47%
47%
42%
42%
40%
40%
Singapore
South Korea
USA
Spain
France
Germany
1.4
0.9
0.8
0.8
0.5
0.3
Thailand
Malaysia
Germany
Australia
Canada
France
0.4%
0.4%
0.4%
0.4%
0.3%
0.2%
$9
&acro !conomic Factors That 'rive Banks
FY2012 was characterized bymany macro headwinds persistentlyhigh inflation
keeping interest rates high, moderation in industrial out#ut% I($
de#reciation, worsening balance of #ayments and ballooning fiscal deficit
However, higher ca#ital standards, stickier liquidity and leverage ratios, a more cautious
approach and deregulation in monetary #olicies by the $BI #layed a #ositive role
In this distressed macroeconomic situation, Indian banks em#hasi*ed their concentration
on maintaining balance sheet strength in terms of %uality over growth
12&
1'&
Fiscal 'eficit - Inflation
'
5'
$'
$$(1 $#(59
I($ABS'
5'(95
$5(1
$
$$(5
51(15
5$(5$
"&
&
$&
2&
'&
$&
#(#'& 2(5'&
& (5'&
$("'& $('&
#'
2'
1'
'
#9(9!
2''5)' 2'')'! 2''!)'" 2''")'9 2''9)1' 2'1')11 2'11)
12
March March March March March March
March *an+ary
Fiscal ,e-cit as & o. /,0
Source : RBI & Economy
survey 2011-12
1n2ati
on
2'' 2''! 2''" 2''9 2'1' 2'11 2'12 2'1#
5
&onetary Policy Transmission &echanism
$e#o rate hike
Inflation
Expectations
of Repo rate
Lower expected
proftability of the frms
Rise in market
interest rates
!8#ectation
Strong Exchange Rate
More difcult to obtain
credit - Lower investment
Decrease in
consumption
Reduction in
Investment
Exports
down, Imports up
Lower import
prices
The credit channel
Reduction in demand
;ower Inflation
The Interest rate channel
The e8change rate channel
5!
,ow Banks are $egulated in the SystemC
Financial
Institutions
Banking
Scheduled
Banks
Public
Private
Foreign
:oo#erative
Banks
,ousing
Finance
(on)
Banking
Finance
'evelo#ment
Finance
(on)Banking
Insurance
Insurance
Mutual
Funds etc.
Security
$eserve Bank of India
Regulatory and
Development
Authority
Exchange Board
of India 59
-Regulatory bodies
#'(''
25(''
2'(''
15(''
1'(''
5(''
'(''
:urrent Policy $ates
Indian Interest $ates
$e#o $ate, $everse $e#o, :$$, S;$ - &SF
:urrent $ates1
Policy $ates
Bank $ates 4663
$e#o $ate D423
$everse $e#o $ate E423
&SF $ate 10.23
Reserves Rates
CRR 4.00%
SLR 23.00%
Lending / Deposit Rates
Base Rate 9.75% -
10.50%
Deposit Rate 8.50%-9.00%
Although the critical rates have reduced
since the global economic crisis of 2008,
the RBI is still maintaining a tight
3e4o 3ate 3e5erse 3e4o 633 SL3 MSF
monetary policy in order to curb infation
and attain stability along with superior
economi
7
c

Major Banking Regulations & their Effects
B"S!; III
(orms--------------------------------------------------
An umbrella of rules and regulations to defne the roadmap
for banks under its three pillars:
) Pillar 1: :a#ital re%uirements: Minimum regulatory capital
requirement based on risk weighted assets
) Pillar : Su#ervisory review #rocess: Framework to deal
with risks that banks face from time to time
) Pillar 1: &arket disci#line: Increasing disclosures by
banks to bring more transparency
+overnment Initiatives------------------------------------------
$eduction in CRR, SLR and deregulation of interest
rates
Introduction of ca#ital to risk weighted assets ratio and
fi8ed #rudential norms will bring reduction in non
performing assets and increase capital position of banks
--------------------------------
These reforms will
require Indian banks to
raise around
Rs.E,66,666 crores by
66, for which the Fin
Min has advised banks
to push into mergers
and consolidations
--------------------------------
These strategic changes
will leave more loanable
funds with banks and
help them widen their
credit network
Foreign 'irect Investment--------------------------------------
Plugging in foreign investorsF money directly into the
Indian fnancial market
FDI limit for a foreign banks is D53 of the total #aid)u#
ca#ital of the bank
?ther
$eforms------------------------------------------------------
-------------------------------
FDI will bring better risk
management
capability, sound
technology and higher
growth prospects
-------------------------------
Banking diversification
andgeneration banks
introduction of new These reforms will give
banks greater strength
?#erational autonomy,say a bank satisfes the :"$ then it gets freedom in opening branch
es, upgrading
counters, liberal lending o#tions etc
to fight com#etition and
help them stand out in the
market
1
:hanging Industry 'ynamics by (ew $ules
BASEL III
Norms Indian Banking
Sector
Basel III norms: A comprehensive set of reform
measures, developed by the Basel Committee
on banking supervision and regulation
Government
Initiatives
+overnment Initiatives: The two regulatory bodies, RBI and SEBI
are taking every step possible to strengthen the economy by
safeguarding the banking sector
Foreign 'irect Investment: With the approval of
FDI, foreign banks can set up their branches in India, which
provides a world class banking experience and creates
healthy competition
?ther $eforms: Deregulating interest
rates, bank diversifcation and new generation
Foreign Direct
Investment(FDI)
banks are some other efective changes towards
a more positive direction
Other
Reforms
2
`
Banking Sector
Recent Deals (M&A)
"nnounced
Stake @alue
'ate
December
2011
April
2011
November
2010
August
2010
July
2010
February
2008
Target
Barclays Bank Plc, Performing
Credit Card Portfolio
Tamilnad Mercantile Bank Ltd.
Enam Securities Direct Pvt.
Ltd.
Bank of Rajasthan Ltd.
Kotak Mahindra Bank Ltd
Centurioun Bank of Punjab
"c%uirer
Standard Chartered
Bank India
Standard Chartered
Bank India
Axis Bank Ltd.
ICICI bank Ltd.
Sumitomo Mitsui
Banking Corporation
HDFC Bank
.3/
100
4.64
NA
100
4.50
100
.GBS mn/
36.00
NA
439.79
658.65
294.00
2200.00
Banking Sector
Recent Deals (PE)
"nnounced
'ate
January
2013
Investor
Ratnakar Bank Ltd.
Investee
Aditya Birla PE, Norwest venture
capital partners and Fearing
Capital
Stake
.3/
NA
@alue
.GBS mn/
54.00
April
2012
March
2012
February
2011
February
2011
Karur Vysya Bank Ltd.Olympus Capital Holdings Asia
Karur Vysya Bank Ltd.ChrysCapital V LLC
IndusInd Bank Ltd. General Atlantic Pvt. Ltd.
Ratnakar Bank Ltd. Beacon India Private Equity
Fund, Housing Development
Finance Corp. Ltd., Norwest
Venture Partners, India Evolving
Fund , Samara Capital
Partners,Cartica Capital LLC,
Gaja Capital Fund
4.80
3.90
0.60
NA
38.47
31.23
14.57
163.00
March
2010
Dhanlaxmi Bank Ltd. Arcstone Capital LLC 5.00 9.30
!
&aHor Players in the Industry
&aHor Banks in India
These are the small
banks in terms of
market capitalization
OBC
&arket :a# .in Thousand :rores/
These are the mid-
sized banks
consisting of 3 public
banks and 2 private
banks
These are the
growing banks that
consist of 2 public
banks and 2 private
banks
These are the
premium old
generation banks
consisting of 2 private
and 1 public bank
F
e
d
er
al
A
ll
a
h
a
b
a
d
UBI
Yes
C
a
nara
Indusind
Bank of India
Axis
Bank of Baroda
Punjab National
Kotak Mahindra
SBI
ICICI
HDFC
!