INDUSTRY AWARENESS

TITLE: CORPORATE BANKING

REPORT SUBMITTED BY:

SECTION D GROUP 2

Anshul Seth

IPM2011014

Deepti Singh

IPM2011019

Karan Dev

2014PGP155

Pedhambkar Sameer Sanjay IPM2011065

Pragya Pathak

IPM2011068

Rahul Shrivastava

2014PGP283

EXECUTIVE SUMMARY
This report provides a holistic view of Corporate Banking. It starts with the comparison between
the two broad divisions of banking Retail and Corporate. The various functions of a Corporate
Bank have been explained in detail. This is followed by an account of some of the latest events
surrounding the sector.
The report also examines the significant impact of the usage of technology in the banking sector.
The analysts views pertaining to growth and profitability of the various firms have been
depicted with the help of suitable graphs and tables.
The products and services offered by the prominent players in the Corporate Banking sector have
been elucidated. The report also provides a comparative analysis of the financial data of
respective players.
The salient features of the Union Budget with respect to the Banking and Financial Services
sector have been included in this report. Analysis of the implications of the various regulations
and policies associated with the Corporate Banking sector, including the much significant Basel
III Capital Regulation has been carried out.

Table of Contents
1

INDUSTRY PROFILE ........................................................................................................................ 4

1.1

Overview: ...................................................................................................................................... 4

1.1.1

Retail Banking ...................................................................................................................... 4

1.1.2

Corporate Banking ................................................................................................................ 5

1.2

Recent News in the Corporate Banking Sector ............................................................................. 8

1.3

Technological Trends and Major Innovations .............................................................................. 9

1.4

Analysts Views of the Industry.................................................................................................... 9

1.4.1

Growth .................................................................................................................................. 9

1.4.2

Profitability ......................................................................................................................... 10

PLAYERS PROFILE ....................................................................................................................... 12

2.1

Indian Banks ............................................................................................................................... 12

2.1.1

ING Vysya Bank ................................................................................................................. 12

2.1.2

ICICI Bank .......................................................................................................................... 12

2.1.3

HDFC Bank ........................................................................................................................ 12

2.2

Foreign Banks ............................................................................................................................. 13

2.2.1
3

Citigroup ............................................................................................................................. 13

MACROECONOMIC PROFILE ...................................................................................................... 13

3.1

Regulations and Policy Changes ................................................................................................. 13

3.2

Impact of Union Budget 2014 ..................................................................................................... 14

3.3

Impact of International Regulations .......................................................................................... 155

References ........................................................................................................................................ 177

Table of Figures ................................................................................................................................. 18

1 INDUSTRY PROFILE
1.1 Overview:
Broadly, banking can be classified into two basic divisions Retail Banking and Corporate
Banking.
Figure 1: Divisions of Banking

(Source: www.rbi.org.in, n.d.)

1.1.1 Retail Banking
As defined in Investopedia, Retail Banking refers to the division of a bank that deals directly
with retail customers. Also known as Consumer Banking or Personal Banking, retail banking
is the visible face of banking to the general public, with bank branches located in abundance in
most major cities. Customer deposits garnered by retail banking represent an extremely
important source of funding for most banks. Some of the important products and services
provided by retail banks are:

Checking and savings accounts

Mortgages on residential and investment properties

Automobile financing

Credit cards

Foreign currency and remittance services

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1.1.2 Corporate Banking

Investopedia explains Corporate Banking, also known as Business Banking, as that aspect of
banking which deals with corporate customers. Corporate banking is a key profit center for most
banks. It is the biggest originator of customer loans, and also the source of regular write-downs
for loans that have soured.
The corporate banking segment of banks serves a diverse range of clients which could range
from

Small to mid-sized local businesses (a few millions in revenues)

Large conglomerates (with billions in sales and offices across the country)

(Source: www.itcinfotech.com, n.d.)

Commercial banks offer the following products and services to corporations and other financial
institutions:

Loans and other credit products This is the biggest area of business within corporate
banking and one of the biggest sources of profit and risk for a bank. Following are the
types of loans offered by a typical commercial bank :

Term Loans This product is mainly used by the clients for financing the
acquisition of fixed assets i.e. land, building, machinery, vehicles, etc. or
financing of the long term portion of Working Capital (WC) requirements. This
product is non-revolving in nature with tenure generally more than 1 year and up
to 10 years. Repayment can be either as bullet or in installments, matching the
cash flows of the client.

Demand/Short term Loans This product is used by the clients for meeting WC
requirements or temporary cash flow mismatches. This is revolving in nature i.e.
can be re-drawn once repaid within the approved limits. The tenure generally
ranges from 7 days up to maximum 1 year and repayable as bullet.

Cash Credit/Overdraft This is a running account with the flexibility of

remitting and drawing funds within the approved limits to meet the fluctuating
working capital requirements of the clients. This product is revolving in nature i.e.
can be re-drawn once repaid subject to the condition that the outstanding debit
balance in the account should not exceed the limit sanctioned by the Bank. This is
generally granted for a period of up to 12 months with a review after that period.

Treasury and cash management services These are used by companies for managing
their working capital and currency conversion requirements. Quick turnaround on
receivables, timely disbursement of payables and optimal returns from surpluses are some
of the chief objectives of Treasury and Cash Management.

Equipment lending Commercial banks structure customized loans and leases for a
range of equipment used by companies in diverse sectors such as manufacturing,
transportation and information technology.

Commercial real estate The services offered by banks in this area include real asset
analysis, portfolio evaluation, debt and equity structuring.

Trade finance This includes the following verticals :

Export Services Export credit, Export Bill Collection services, Export LC

advising and confirmation form a part of the export services provided by a typical
corporate bank.

Import Services This includes Import Letter of Credit, Import Collection Bill
services, Trade credits and Guarantees.

Employer services Services such as payroll and group retirement plans are typically
offered by specialized affiliates of a bank.

Debt Capital Markets Corporate banks structure products to suit the dynamic and
varied needs of customers across segments. They develop innovative products and then
deliver these through topnotch execution capabilities and a wide distribution network.
Some of these include:
Syndicated Loans The loan may involve fixed amounts, a credit line, or a
combination of the two. Interest rates can be fixed for the term of the loan, or
floating based on a benchmark rate such as the London Interbank Offered Rate
(LIBOR).
Bonds - Bond is a debt security, in which the authorized issuer owes the holders a
debt and, depending on the terms of the bond, is obliged to pay interest (the
coupon) to use and/or to repay the principal at a later date, termed maturity.

1.2 Recent News in the Corporate Banking Sector

Citigroup considers sale of retail-banking business in Japan to focus on its Corporate
Banking business
Citigroup is considering whether to pull out of retail banking in Japan, said people familiar with
the matter, as the New York lender rethinks its global operations after a string of regulatory
problems in the U.S. and abroad. Citigroup, which for decades has been a leading Western bank
in Japan, is considering a possible auction to sell the retail business, the people said. The move
would leave Citigroup, the third-largest U.S. bank by assets, to focus on its remaining businesses
in Japan: corporate banking, investment banking and trading.

Citizens Financial expands commercial banking in U.S.A

Citizens Financial Group Inc's commercial bank, RBS Citizens, said Wednesday it is expanding
its MidCorporate business nationwide, and has hired commercial banking teams in five new
cities. The focus will be on providing increased financing capabilities to companies in the
healthcare, technology and other growth industries, as well as franchising. It has hired
commercial banking teams in Washington, D.C., Charlotte, N.C., Atlanta, Dallas and Los
Angeles, as well as added key staff to bolster capabilities in specialties such as lender finance,
treasury services and global markets.
RBS reshapes India business, to focus on corporate banking
The Royal Bank of Scotland NV (RBS), UKs third-largest bank with $1.73 trillion in assets,
has reshaped into a corporate bank in India, by shrinking its loan book, focusing on investment
banking and lending only to Indian companies that it can service using its global network.
RBI to restrict banks' group exposure limit at 25%, down from current 40%
The Reserve Bank of India proposes to cut banks' group exposure limit by as much as 15
percentage points to reduce the systemic risk posed by lending too much to any single business
house. This means that credit to any particular group will have to be restricted to 25% of a bank's
capital, down from 40% now.
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1.3 Technological Trends and Major Innovations

In the last few years, use of technology has increased many folds by Indian banks. They are
using technology at various levels such as, back-office processing, convergence of delivery
channels, IT-enabled business process reengineering as well as communication with customers.
They are currently devoting around 15 per cent of their total spend on technology which is
expected to increase at an annual rate of 14.2 per cent. This will amount to Indian banking
companies spending USD8.51 billion on IT products and services in 2014, an increase of nearly
9.8 percent over 2013.
Technology has allowed banks to increase their scale rapidly and manage increased business and
transactions volume with lesser man power and reduced costs. New channel-integration
technologies are enabling a more seamless end-to-end experience for banking customers. Social
media has a crucial role to play in offering new opportunities to engage and interact with
customers and thereby build relationship and grow revenues.
1.4 Analysts Views of the Industry
1.4.1 Growth
Credit growth in the banking sector, which grew by 17-18 per cent (y-o-y) during August October 2013, moderated significantly in the December 2013 - January 2014 period to 14-15 per
cent due to the economic slowdown. The credit outstanding of scheduled commercial banks had
grown by 14.7 per cent y-o-y as on January 24, 2014.
System-wide loan growth moderated back to the pre-July levels of ~14 per cent y-o-y. The credit
growth remains sluggish with meagre demand for long-term funds from companies. With rates
easing on the back of a cut in the Marginal Standing Facility (MSF) rate, commercial paper (CP)
and certificate of deposits (CD) rates have also softened, pushing demand for short-term funds
back into the money market from banks. It is believed that lower bond yields have resulted in
continued migration of credit demand to credit substitutes.
Monthly disaggregated data published by the Central Statistical Office indicates that industrial
production growth has moderated to -0.6 per cent y-o-y as of December 2013. With contraction
9

in manufacturing output, credit off take slowed across industries such as mining, textiles,
petroleum, pharmaceuticals, engineering and construction. Overall bank credit to industry grew
by 14.1 per cent y-o-y in January 2014, lower than the level of 15.2 per cent recorded a year ago.
(CRISIL, Credit growth to revive marginally in 2014-15 after declining to decadal low in 201314, 2014)
Table 1: Credit Growth Projections

(Source: Reserve Bank of India, n.d.)

1.4.2 Profitability
Banks' Return on Asset (RoA) is expected to decline to 0.7 per cent in 2013-14 from an
estimated 1.0 per cent in 2012-13. The decline will be largely due to the poor performance of
public sector banks who are projected to have 0.5 per cent RoA by March 2014. It is expected
that RBI's guidelines on restructuring of advances by banks and financial institutions would
increase provisioning of banks by Rs 150 billion over April 2013 - March 2015. A major portion
of this incremental provisioning will have to be done by public sector banks (PSBs), which

10

together accounted for 95 per cent of the restructured assets of the banking system as of June
2013.
RoA will remain at low levels in 2014-15 as Non-performing assets (NPAs) are expected to
remain at an elevated level for public sector banks (PSBs). However, private sector banks are
expected to see an improvement of ~10 basis points in RoAs in 2014-15 due to better efficiency
as well as a strict credit appraisal mechanism. (CRISIL, Banks' profitability to remain under
pressure, 2014)
Figure 2: Return on Asset

(Source: CRISIL, Banks' profitability to remain under pressure, 2014)

Figure 3: Net Interest Margin

11

(Source: CRISIL, Banks' profitability to remain under pressure, 2014)

2 PLAYERS PROFILE
2.1 Indian Banks
2.1.1 ING Vysya Bank
Products:
1
2
3

Loan Schemes for SMEs

Loans under CGTMSE Scheme
Agriculture

2.1.2 ICICI Bank

Products:
1
2
3

Cash Management Services

Collection Solutions
Payments

2.1.3 HDFC Bank

Products:
1
2
3

Large Corporates
Supply Chain Partners
Agricultural Lending

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Table 2: Market Cap, Net Profit, Total Assets

Name

Market Cap (in Rs.

Crore)

Net Profit (in Rs.

Crore)

Total Assets (in Rs.

Crore)

HDFC Bank

204,147.57

8478.40

491,599.91

ICICI Bank

178,117.33

9810.48

594,641.60

ING Vysya Bank

12,247.53

657.85

60,413.23

2.2 Foreign Banks

2.2.1 Citigroup
1 Citi Commercial Bank
2 Citi Business
Table 3: Foreign Banks - Market Cap and Total Assets
Name
HSBC
Citi
J P Morgan Chase
Deutsche Bank

Market Cap (NYSE)

$ 203.89 billion
$ 154.57 billion
$ 220.34 billion
$ 45.65 billion

Total Assets
$2.67 trillion
$1.880 trillion
$2.42 trillion
$2.66 trillion

3 MACROECONOMIC PROFILE
3.1 Regulations and Policy Changes
The Reserve Bank of India (RBI) regulates and supervises the major part of the financial
system. Since the financial reforms of 1991 there have been significant favorable changes in
Indias highly regulated banking sector. These include:

Reduction in SLR and CRR - The recommendations regarding reduction of

Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) have been vigorously
implemented. The effective SLR is currently 22% .The CRR is currently 4%. Thus
commercial banks have more funds that can be given as loans, thereby solving the
liquidity problem.

Deregulation of Interest Rate: Earlier the pricing of loans was based at a common
cost plus profit basis. However, during the economic reforms period, interest rates of
commercial banks were deregulated. The banks have developed their own risk
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assessment model and enjoy freedom of fixing the lower and upper limit of interest on
deposits. These measures have resulted in more freedom to commercial banks in interest
rate regime.

Fixing prudential Norms: The RBI fixed prudential norms for commercial banks. It
includes recognition of income sources, classification of assets, provisions for bad debts,
maintaining international standards in accounting practices, etc. It has helped banks in
reducing and restructuring Non-Performing Assets (NPAs).

Introduction of CAR/CRAR: According to Moneycontrol.com, Capital Adequacy

Ratio (CAR), also known as Capital to Risk Weighted Assets Ratio (CRAR), is the
measure of a bank's capital and is expressed as a percentage of a bank's risk weighted
credit exposures. The total risk weighted assets take into account credit risk, market risk
and operational risk. It was introduced in 1992 and resulted in an improvement in the
capital position of commercial banks. Currently, RBI mandates minimum CRAR of 9%,
but the Government of India has mandated total CRAR of 12%, with 8% Tier I capital.

Operational Autonomy: If a bank satisfies the CAR then it gets freedom in opening new
branches, upgrading the extension counters, closing down existing branches and they get
liberal lending norms.

3.2 Impact of Union Budget 2014

According to Industry Impact Analysis Report by ICRA Management Consulting Services
Limited, the Union Budget 2014 has announced several measures that are expected to have a
positive and far reaching impact on the Indian Banking and

Financial Services sector on

multiple fronts, particularly in terms of achieving higher growth in lending for priority sector,
improving ability to raise funds, promoting autonomy, strengthening of governance and
infrastructure for improving access to finance in the country. Some of its key initiatives are:

Government would retain a majority stake in Public Sector Banks (PSBs) and would
infuse Rs 2, 40,000 crore as equity in various PSBs till 2018 to meet the Basel III norms.

The composite cap in the Insurance sector is to be increased to 49% from 26% for
companies with Indian management and control, subject to approval by the Foreign
Investment Promotion Board (FIPB).
14

The impending Insurance Amendment Law Bill is to be considered in the Parliament.

The RBI will create a framework for licensing small banks and other differentiated banks.

Six new debt recovery tribunals are to be set up for the revival of stressed assets of public
sector banks.

Banks are to be encouraged to extend long term loans to the infrastructure sector with
flexible structuring.

Banks allowed to raise long terms funds for lending to infrastructure through bonds that
will be exempted from cash reserve ratio (CRR), statutory liquidity ratio (SLR)
requirements and the amount borrowed is not be included in calculating the annual
mandatory targets of priority sector lending for banks.

The capital of banks is to be raised by increasing shareholding of citizens in a phased

manner.

The Government, following consultations with stakeholders, will implement the

suggestions of Financial Sector Legislative Reforms Commission, such as the enactment
of the Indian Financial Code, and simultaneously work with the RBI to develop a Modern
Monetary Policy Framework. To achieve this objective, the Government has proposed
the following measures:
Develop a robust liquid corporate bond market and currency derivatives market.
Liberalize the ADR/GDR regime to allow the issuance of depository receipts on
all permissible securities.
Allow international settlement of Indian debt securities.
Overhaul of the Indian Depository Receipt framework and introduction of Bharat
Depository Receipt.

Introduction of uniform KYC norms and inter usability of KYC records across entire
financial sector.
(ICRA, Union Budget 2014-15: Industry Impact Analysis , 2014)

3.3 Impact of International Regulations

"Basel III is a comprehensive set of reform measures, developed by the Basel Committee on
Banking Supervision, to strengthen the regulation, supervision and risk management of the
banking sector. These measures aim to:
15

Improve the banking sector's ability to absorb shocks arising from financial and economic
stress, whatever the source

Improve risk management and governance

Strengthen banks' transparency and disclosures

The reforms target:

Bank-level, or micro prudential, regulation, which will help raise the resilience of
individual banking institutions to periods of stress.

Macro prudential, system wide risks that can build up across the banking sector as well
as the pro cyclical amplification of these risks over time.

(Bank of International Settlements, 2014)

The RBI has extended the transition period for full implementation of Basel III Capital
Regulations in India by one year upto March 31, 2019, instead of March 31, 2018, following
concerns over the potential stress on the asset quality, specifically for Public Sector Banks
(PSBs), and its consequent impact on their profitability. The one-year extension will help banks
in raising capital for full implementation of the Basel III Capital Regulations.
Research estimates that Indian banks (private and public) will need to raise fresh capital of Rs
4.8 to 5.2 trillion over the next 5 years in order to comply with the norms. Of this, the tier-1
capital requirement of Rs 3.2 to 3.4 trillion would need to be raised through a mix of equity and
non-equity instruments. Public sector banks will be required to raise approximately 85 per cent
of the tier-1 capital. (CRISIL, Credit growth to revive marginally in 2014-15 after declining to
decadal low in 2013-14, 2014)
A substantial rise in stressed assets and further aggravation on account of pricing pressure is
expected to result in 30-35 per cent decline in net profits for public sector banks in 2014. The
private sector banks are relatively well placed in terms of profitability, and hence, in their ability
to meet the Basel III norms.
.

16

4 References
Bank of International Settlements. (2014). Retrieved from Bank of International Settlements
Website: http://www.bis.org/bcbs/basel3.htm
CRISIL. (2014). Banks' profitability to remain under pressure. CRISIL.
CRISIL. (2014). Credit growth to revive marginally in 2014-15 after declining to decadal low in
2013-14. CRISIL.
ICRA. (2014). Union Budget 2014-15: Industry Impact Analysis . ICRA.
ITC Infotech. (n.d.). Retrieved from ITC Infotech Website: www.itcinfotech.com
Livemint. (2014, August 4). Retrieved from Livemint Website:
http://www.livemint.com/Industry/1rVivcRFawWUgp2Q0zRYcN/RBS-reshapes-Indiabusiness-to-focus-on-wholesale-banking.html
Reserve Bank of India. (n.d.). Retrieved from Reserve Bank of India Web Site: www.rbi.org.in
Reuters. (2014, August 13). Retrieved from Reuters Website:
http://www.reuters.com/article/2014/08/13/citizens-expansionidUSL2N0QJ0VF20140813

17

Wall Street Journal. (2014, August 20). Retrieved from Wall Street Journal Website:
http://online.wsj.com/articles/citigroup-considers-sale-of-retail-banking-business-injapan-1408464316
Investopedia. Retrieved from Investopedia Website:
http://www.investopedia.com/articles/general/071213/retail-banking-vs-commercialbanking.asp
Nagaraju R.C (2014). Impact of Banking Sector Reforms on Indian Banking System - Some
Developments and Challenges Ahead
RBI. (2014). Perspectives on the Indian Banking Sector: www.rbi.org.in

5 Table of Figures
Figure 1: Divisions of Banking ..................................................................................................................... 4
Figure 2: Products and Services offered by Corporate Banks ....................... Error! Bookmark not defined.
Figure 3: Return on Asset ........................................................................................................................... 11
Figure 4: Net Interest Margin...................................................................................................................... 11

18