For Office Use:

Grade

Individual Assignment

Industry Note Report on

Banking

Industry

Submitted by:Name: Kushal Shah (151125)

Section: A
Batch: MBA-FT (2015-2017)

Submitted to:Prof. Rajesh Kikani

Institute of Management, Nirma University

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BUSINESS INFORMATION
Industry Analysis
Industry Size
The assets of Indian banking sector has reached US$ 1.8 trillion in FY14 from US$ 1.3
trillion in FY10.Public sector banking accounts for 70% of the total banking in India. Total
lending and deposits has increased at a compound annual growth rate (CAGR) of 20.7% and
19.7%, respectively, during FY07-14.

There are total 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional
rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks in India.

MAJOR INDUSTRY SEGMENTS

Loan Products
Deposit Products
Commercial Banking
Transactional Banking
Investment Banking
Treasury Products

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Structure of Indian Banking

1.1.5Category2009-102010-112011-122012-132013-142014-15Passenger
Major Players
Public Sector Banks SBI, PNB, Bank of Baroda, Bank of India
Private Sector Banks HDFC Bank, ICICI Bank, Axis Bank, Yes Bank
Foreign Banks Standard Chartered Bank, HSBC, City Bank

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RECENT INDUSTRY NEWS

OPPORTUNITY
With the growing Indian economy new foreign banks are entering Indian markets.
Looking at the demographics of India there is a huge scope for growth for
banking sector in India.
Reaching the rural area will become a game changer for the banks.
The growth in Indian economy will itself support the expansion of Indian banking
sector.
Reserve Bank of India (RBI) has approved a proposal from the government to
amend the Banking Regulation Act to permit banks to trade in commodities and
commodity derivatives.
CONCERN

Increasing foreign players pose a threat to the PSB and other private sector banks.
High interest rate because of high inflation is hindering growth.
Some unstable small banks are threatening the stability of the entire banking
system.

SERVICES OF INDUSTRY
RETAIL BANKING
CORPORATE BANKING
CORPORATE CREDIT
TREASURY CAPITAL MARKETS
LENDING TO MICRO, SME, AGRICULTURE AND MICRO FINANCE
INTERNATIONAL BANKING
MARKET
Credit off-take has increased over the past decade, supported by strong economic growth, rising
incomes and easy access to credit.
Total credit extended has reached US$ 1,089 billion by FY15
Credit to non-food industries increased 9.75 per cent to US$ 1,073.4 billion in FY15, from the
previous financial year
Demand has increased for corporate loan and retail loan both.
TECHNOLOGY
Technology is playing a big part in banking industry. The computerisation of banking industry
has brought immense benefits. ATM, mobile banking, net banking has made banking easier for
consumers. It has also increased the reach of the banking sector. Biometrics has increased the
security. Use of cards has reduced the use of cash.

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Prospects
India's underlying economic growth trends remained weak during FY14. High and persistent inflation
remained a key macroeconomic challenge facing India throughout the FY14.

During the year, the operating environment for the banking system continued to be challenging with

persistent high inflation, muted growth, slowdown in credit off-take, concerns over higher non-performing
assets and a high incidence of restructured assets.

Against the backdrop of a slowdown in the domestic economy and tepid global recovery, the growth of

Indian banking sector too remained under pressure in FY14. That said, the deposit and credit growth was
marginally better than that in FY13. The growth in deposits of scheduled commercial banks (SCBs) at
14.6% in FY14 was marginally better than the growth at 14.2% in the previous financial year. However,
this growth came on the back of the liberal policy adopted by the RBI towards non-resident Indian
deposits. The credit growth at 14.3% in FY14 too was marginally better than that at 14.1% in FY13. As a
part of monetary transmission, base rate of major banks inched up from 9.70%-10.25% in April 2013 to
10.0% -10.25% in March 2014, while deposit rates were readjusted from 7.5%-9.00% to 8.0%-9.25% in
the same period.

In FY14, private sector lenders experienced significant growth in credit cards and personal loan
businesses.

Owing to elevated inflation levels, the banks were compelled to offer attractive interest rates on their term

deposits so as to protect their liability franchise. The higher deposit rates coupled with lower credit offtake
impacted the net interest income and thereby the earnings profile of commercial banks. Additionally, the
macroeconomic challenges and poor repayment capacity of borrower's deteriorated the banks' asset
quality further in FY14. Consequently, the restructured assets moved north during the year. However,
despite the challenging environment, few banks with prudent risk management systems and the ones
with robust cash recovery delivered a sound performance during FY14.

The aggregated profit after tax (PAT) of PSBs declined by 27% YoY during FY14. The gross NPAs of

banks (PSBs + private) increased over the last one year from 3.3% to 3.9% as on March 2014.
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.

Banks started reporting capital adequacy as per Basel III norms since June 2013. The Tier 1 capital of

PSBs stood at 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%. Return on net worth for PSBs
dropped to single digit in FY14.

While the medium term prospects point towards an improving growth scenario, given the improved
macroeconomic fundamentals it is highly likely that there will only be a modest economic recovery in
FY15.

That said, the Indian economy is now on the threshold of a major transformation, with expectations of

policy initiatives by the change in guard at the Centre. Positive business sentiments, improved consumer
confidence and more controlled inflation should help boost the economic growth. With a new and stable

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Government in place now, a clear revival in the investment climate is sure to come. Higher spending on
infrastructure, speedy implementation of projects and continuation of reforms will provide further impetus
to growth. A moderate recovery is likely to be seen in FY15 and the real GDP is expected to grow by
5.3%-5.5%. While the CPI inflation is expected to remain an important challenge for India, it should
witness a downward trajectory during the major part of FY15

The worst seems to be over for the Indian banking industry, as there will be increased clarity on

macroeconomic and political fronts during FY15. On the positive side, liquidity remains steady, inflation is
expected to move downwards for the major part of FY15 and the RBI is in full control to manage any
volatility. Macroeconomic improvements and potential for post-election reforms should see a gradual
reduction in stressed loans on lower slippages and higher recoveries. Recovery in macroeconomic
environment and expected revival in economic growth will help to mitigate risks and resolve problems of
asset quality.

Not just that, the banking industry may see more participants and greater healthy competition. Two new
banks have already received licences from the RBI i.e. IDFC and Bandhan Group, which apart from
providing impetus to financial inclusion, is expected to intensify competition in the banking sector in the
medium term. In addition, by postponing the implementation of Basel III capital norm by one year, RBI
has given some breathing space to banks struggling with stressed margins and lower profitability on
account of increase in NPAs. The RBI's new norms will further encourage banks to identify potential bad
loans and take corrective actions.

The overall credit growth may revive marginally at 14-15% in FY15; private sector banks may continue to

outpace PSBs in credit growth. Overall (PSBs + private banks) gross NPAs could remain at 4-4.2% by
FY15 as against 3.9% in FY14.

Banks need to raise capital of Rs. 1.8-2 trillion over the next two years (FY15-FY16); of which 45-50%

may be issued in the form of additional Tier 1, 35-40 % through Tier II and balance through common
equity. However, if there are no seekers for additional Tier 1 capital instruments, Indian banks may need
to mop up Rs. 1-1.3 trillion common equity capital over the next two years as mentioned by a rating
agency report.

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