Mohit Almal

Agenda

 Indian Banking Industry

 Overseas Opportunities

 Indian banking Performance

 Methodology
 Results

 Risk Quotient Survey

 Risk Management Trends

 Banking Industry
India’s banking sector has been relatively
insulated by regulators from the radioactive
fallout of the crisis

Few banks have developed an overseas

business model that can compete with
Changing foreign banks on their home ground
Dynamics
As Indian companies start making
overseas acquisitions, the opportunity
costs of not being able to give their clients
access to overseas credit markets could
cost banks dearly

Banks need to have in-house capabilities to manage large

transactions across markets and structure balance sheets that
can absorb the risks
Overseas Opportunities(1/2)
India is likely to emerge as Follow their customer A strong enterprise-
the third-largest domestic into trade financing and wide, risk-
banking market by 2040 participation in loan management
syndications architecture is
imperative
Advantages & Constraints

The risk appetite of banks

is still impaired and credit Provide integrated
growth has slowed down services at local and Banks aspiring for a
New Business Model
global level and hold global pie need to

Risk Management
adequate capital for move quickly towards
Overseas expansion would operational risks, economic capital
provide Indian banks mitigate concentration models, as they
access to new markets, risks through would have to raise
access to new products, diversification from funds to expand
sustained growth in the overseas expansion. beyond local shores
domestic market, and
enhance shareholder value
Overseas Opportunities(2/2)
Response of Indian Banks to
Current Crisis
 Conserve Capital

 Consolidate Credit Portfolios

 Contain Costs

 Plan for Economic Upturn

Challenges & Solutions in
Domestic Market

Challenges Solution Need to go beyond

Adoption of
the basic no-frills
technology that
accounts and
helps banks service
similar products to
their clientele
making finance a
better
cornerstone
Build business
models, products
Bringing access to
and services that
financial services
take banking
to the poor
services to the far-
populations
flung corners of
the nation
Foreign Banks

 As on end-March 2009, state-run banks collectively had

55,488 branches, foreign banks had just 233

 Conventional wisdom would have it that such reach

would give access to cheaper current and savings
accounts (CASA)

 The share of CASA in total deposits stood at 38.6 per

cent for the State Bank of India group, 29.9 per cent for
other nationalised banks and 41.7 per cent for the foreign
banks
Methodology
Categories
• Large Banks
• Mid Size Banks
• Small Banks

Primary Dimension
• Growth
Approach • Size
• Sustainability of Operations
• Risk

Secondary Factors
• Market Perception
• Management & Corporate
Governance
• Duration of Operations
Scoring
Results
Results-Socially Responsible
Results-Tech Savvy Bank
Risk Management Practices
 Tools such as risk-based • Basel II Norms
pricing have not been yet
implemented in India
• Enterprise Wide Risk
 Capital efficiency and an all- Management Practices
pervasive risk-based culture
will take centre-stage in the
medium term • Concerns
• Global Market Uncertainties
• Rising Inflation & Interest
 Risk Based Index
Rates
 It measures how much a bank’s
earnings can decline until book
value becomes negative
Risk Quotient Survey

 Information Required
 Sources of Risk

 Effectiveness of Compliance Processes

 Exposure to Risky Asset

 Preparation for Capital Requirement Norms

Risk Quotient Survey
 Risk Exposure & their Sources

 The responding banks had more than a 50 per cent

exposure to off-balance sheet assets vis-à-vis total
loans, with derivative instruments contributing about 30
per cent of these assets

 The exposure is skewed towards foreign banks in whose

case the ratio is more than 75 per cent. More than 50 per
cent of this consists of derivative instruments
Risk Quotient Survey
 For Whom Derivative Instruments are used?

 The public sector banks mostly use derivative

instruments to manage their own risks and helping
clients to manage their risks , while a few tend to use it
as a tool to enhance profitability (reducing income
volatility)

 Private and foreign banks also show a similar trend, with

most of them either helping clients or managing their
own risks
Risk Quotient Survey

 IT Related Risk
 Technology dependence
and payment systems
have emerged as key
sources of risks faced by
foreign banks

 High dependence on
technology is also an
emerging area of concern
for PSBs , while private
banks seem to be less
concerned.
Risk Quotient Survey

 Market Related Risk

 Interest Rate Movements
 Credit Spreads

 Credit growth has not picked up as expected, and if interest rates

harden, banks will be caught in a cleft stick: credit growth versus net
interest margins

 Credit spreads are a larger concern area for both private and foreign
banks than public sector banks, possibly because of their fund
sources and effective costs
Market Related Risk
Risk Quotient Survey

 Operations Risk
 Money Laundering
 Business Continuation

 While back office operations for foreign banks and

private banks appear as the next big source of
operational risks, PSBs seem to be more comfortable
with operation risks.
Operational Risk
Risk Quotient Survey

 Business Risk
 Credit Risk
 Fraud & Competition Risk
 Liquidity Risk

 Credit risks (2.0 out of 5) emerge as the biggest business risk for
private banks, while frauds and competition from new entrants (2.0
out of 5) appear more risky for foreign banks

 Liquidity risk is the least of the concerns, though it was one of the
highest concern areas last year
Business Risk
Risk Quotient Survey

 Capital Requirement & Basel II

 The responses show that the banks are not unduly worried about
capital requirement, with 47.4 per cent indicating they do not
need capital in the foreseeable future, and 52.6 per cent saying
they need capital, but not urgently

 Almost all the banks are in various stages of implementing

advanced approaches in operational and credit risk and some
have actually implemented
Risk Modeling in NetBanking

System assigns a Risk Score using various parameters

Higher the risk Score higher the Intervention

Authentication of transaction

Parameters Intervention
Pattern Of use Blocking the transaction
Size of Transaction One time use password
Geographical Location Verify the transaction
Trends
Best Bank Large:SBI
Even with its immense size, SBI has managed to grow faster than many
others

Size of the Balance sheet Rs 9,64,432 crore

Net Profit(FY 09) Rs 9,121 crore

It accounts for almost 20 per cent of the deposit base of the entire banking
system, and nearly 20 per cent of the credit portfolio

Advantages:
•Strong Brand Name
•Huge Distribution Network
•Essentially low cost deposit base

SBI is regaining market share it has lost in past years, increasing it from about
17 per cent in FY08 to almost 20 per cent in the first two quarters of FY10
Risk Concern - SBI

 Asset quality has become a matter of concern

 Lower profitability and rising non-performing

assets could become a drag on the balance
sheet

 There is impending retirement of a big slice of

senior management when the re-engineering
process is underway
Large Banks Shortlist
Best Bank Mid Size: Corporation
Bank- Quality assets have been the prime differentiator for the bank
Size of the Balance sheet Rs 86,906 crore
Net Profit(FY 09) Rs 893 crore

 Prudently balancing the positives of asset quality and lower

operational costs with the challenges of lower CASA (current and
savings accounts) deposits

 Its net NPL in the second quarter of 2009-10 was only 0.29 per cent,
while restructured loans constituted 3 per cent of the loan book as
compared to 10 per cent-plus levels for a handful of other banks

 The bank also has the lowest operational costs amongst its peers. Its
cost-to-income ratio fell from 44.6 to 32.2 per cent over a three-year
period
Risk Concern- Corporation
Bank
 The CASA ratio has declined to 22.4 per cent this
year from 25.4 per cent in the previous year

 The bank’s CD (credit deposit) ratio is just 65 per

cent as compared to 72 per cent a year ago; more
money is getting parked in low yield investments
than loans
Shortlist
Best Bank Small:Deutsche Bank
Deutsche Bank successfully proves there is more to banking than just giving loans

Size of the Balance sheet Rs 24,955 crore

Net Profit(FY 09) Rs 430 crore

 The infusion of Rs 324 crore in tier-1 capital during the year has
taken its capital to over Rs 4,300 crore

 Its capital adequacy at the end of March 2009 stood at 15.25 per
cent, up from 13.58 per cent

 Its net non-performing assets are at 0.88 per cent even as its net
interest margin was up from 3.8 per cent last year to 5.3 per cent
Shortlist-Small Size Banks