Banking Sector and

Opportunities in India
March 2004

Agenda
Economic backdrop

Banking sector - overview & opportunit

In summary

Indian economy - Strong

fundamentals
Forex
reserves
Exports
US$

GDP growth
Ten

year
average of
6.0%

50
billion in
FY2003

US$

90 billion

Indian economy - Strong

fundamentals
Interest
6.5%
rates
decline
in last five
years

Short
term debt
0.8%

of GDP

External debt
20%

of GDP

Diversified composition, robust

growth
Projected
Sector

Sectoral
share of GDP

growth
FY2004
(%)

Services

56.1

7.3

Industry

21.8

5.0

Agriculture

22.1

10.7

GDP

7.4

Strong growth drivers

Services

Information
Informationtechnology
technology

Business
Businessprocess
processoutsourcing
outsourcing

Financial services

Financial services

Entertainment,
Entertainment,media,
media,travel
travel&
&tourism
tourism

Industry

Agriculture

Strong
Strongdomestic
domesticdemand
demand

Improving competitiveness

Improving competitivenesslower
lower
interest
rates,
increased
productivity,
interest rates, increased productivity,
better
betterworking
workingcapital
capitalmanagement,
management,
deleveraging
deleveraging

Export
Exportthrust
thrust

Favourable
Favourableclimatic
climaticconditions
conditionswith
with
good
goodmonsoon
monsoon

Modernisation
Modernisationof
ofagriculture
agriculturescale
scale
and
farming
methods
and farming methods

underpinned by strong
infrastructure growth

Construction
Constructionof
ofGolden
GoldenQuadrilateral
Quadrilateral

Roads

and
andNorth-South,
North-South,East-West
East-Westcorridors
corridors

13,000
13,000km
kmlong
long--worlds
worldslargest
largest
single
highway
project
single highway project

Boosting
Boostingdemand
demandfor
forsteel,
steel,cement,
cement,
commercial
commercialvehicles
vehicles

Basic
Basictelephone
telephonesubscriber
subscriberbase
baseof
of

Industry

39.9
39.9million,
million,growing
growingat
atan
anaverage
average
rate
rateof
of23%
23%over
overlast
last77years
years

Cellular
Cellularsubscriber
subscriberbase
baseof
of11.7
11.7million,
million,
growing
at
an
average
rate
of
88%
growing at an average rate of 88%over
over
last
6
years
last 6 years

Positive
Positiveimpact
impacton
onefficiency
efficiencyof
offirms
firms
and
andservices
servicesexports
exports

though certain areas require

close attention

Certain
Certainmis-steps
mis-stepshave
haveconstrained
constrained

Power

Urban
infrastructure

development
developmentin
inthis
thissector
sector

Now
Nowbeing
beingcorrected
correctedthrough
throughpolicy
policy
initiatives
initiatives

Electricity
ElectricityAct
Actpassed
passedby
byParliament
Parliament

New
Newfocus
focuson
oncreating
creatingcapacities
capacitiesas
as
well
wellas
asenhancing
enhancingtransmission
transmissionand
and
distribution
distributionefficiency
efficiency

Need
Needfor
forurban
urbanrejuvenation
rejuvenationhousing,
housing,

roads,
roads,utilities
utilities

Local
Localbodies
bodiesin
inseveral
severalcities
citiestaking
taking
initiatives
in
this
area
initiatives in this area

Changing demographic profile

35 - 49 years
17%

> 50 years
14%
< 14 years
34%

15 - 35 years
35%
Source: Ministry of Home Affairs, Government of India

high proportion of younger, working

population driving growth
9

Robust household savings

pattern
23%
Household savings as a % of GDP

22.5%

17%

11%

10.1%
5%
1970-71

1985-86

Source: Economic Survey 2002-2003, Ministry of Finance

10

2000-01
200102

Large inflows of foreign

currency
Gross forex inflows (US$ billion)
100
75

58.2
5

50
25

25.6
0

~
~

67.1
3

1990-91

1997-98

Merchandize exports

1999-00
Services exports

Source: Economic Survey 2002-2003, Ministry of Finance;

RBI
11

79.4
4

95.2
3

2001-02

2002-03

NRI remittances etc

Strong external position

Forex reserves & external debt (US$ billion)
100

104.23
83.80
74.81

75
78.00

External debt

50
25

Gap
5.80
1990-91

Source: RBI

12

29.42

~
~

Forex reserves

1999-00

2002-03

Enhanced corporate
competitiveness
Return on Equity (PAT /
Equity)
21%

Asset turnover (Revenue /

Assets)
1.6
1.3

14%

0.9
7%

0.6
0.2

0%
1997-98 1998-99 1999-00 2000-01

1997-98 1998-99 1999-00 2000-01

India
Shanghai A (Chinese cos. listed in Shanghai SE)
H-shares (Chinese cos. listed in HK SE)
Red chips (Chinese Govt. controlled cos. listed in HK SE)
Source: Deutsche Bank

13

The above developments are

the result of a decade of
Focus on globalisation
reform
Opening up of the economy
Thrust

on export led growth

Deregulation to encourage technology & capital flows
Integration with international financial markets

Key reform measures

Lowering

of tariff barriers and liberalised imports

Average

Full

tariff reduced from 53% to 18% in last 5 years

convertibility of the rupee on current account

Permitting domestic companies to access foreign
capital markets
Substantial liberalisation of restrictions on foreign
investment

14

..driving transformational
change

Dramatic growth of services sector

Over

50% of GDP
Significant contributor to exports

Restructuring of manufacturing sector over

the past decade
Early

1990s: capitalising on domestic demand

Mid- to late 1990s: restructuring to achieve
world-class efficiency
2000: Articulation of international
competitiveness

15

The underlying fundamentals are

based on a deep structural change
in the economy and provide a
sustainable platform for continued
growth. The opportunities in the
banking sector have to be viewed in
this context.
16

Agenda
Economic backdrop

Banking sector - overview & opportunit

In summary

17

A decade of change and

evolution
Pre-reform

Indian
economy

Financial
sector

Extensive
regulation
Focus on
industrial
sector
Highly
segmented
Public
sector
dominance

The 1990s

Liberalisatio
n
Globalisation
Structural
change
services

Opening up of
various subsectors
Private sector
participation

..financial sector mirroring

macro-economic change
18

Today

Resilient
industry
Buoyant
services
sector
Diversified
financial
groups
Globally
benchmarked

The banking sector today

Depth

Diversification

Countrywide coverage
Large number of players
Increasingly sophisticated
financial markets

Technology

Regulation

19

Increasing use of technology

in operations
Poised to expand and
deepen technology usage

Emergence of integrated
players
Diversifying capital
deployment
Leveraging synergies

Robust regulatory
system aligned to
international standards
Efficient monetary
management

Sector snapshot
Size

Number of
banks

Branch
network

20

Total
Totalassets
assetsof
ofUS$
US$335
335billion
billion

Total deposits of US$ 279 billion

Total deposits of US$ 279 billion

Over
Over290
290scheduled
scheduledbanks
banks

Public sector: 27

Public sector: 27

Private
Privatesector:
sector:new
new9;
9;old
old

Foreign: 37

24
24

Foreign: 37

Over
Over190
190regional
regionalrural
ruralbanks
banks

Over
Over66,000
66,000branches
branches

Public
Publicsector:
sector:46,000
46,000

Private
Privatesector:
sector:5,500
5,500

Foreign:
190
Foreign: 190

Regional
Regionalrural:
rural:14,400
14,400

Structural issues

Non-performing assets

Legacy systems
Low

levels of technology

Sellers market mindset

Low

level of innovation in products and

services

Limited

responsiveness to customers needs

The Indian banking sector has responded to

these structural issues by adopting certain
strategic imperatives
21

Legacy issues addressed

Challenges of a changing competitive

environment
Small

and unviable pre-liberalisation units

Large investments post-liberalisation impacted by
global commodity cycles and high interest rates

Supportive legal and regulatory changes

Setting

up of Debt Recovery Tribunals and

enactment of SARFAESI Act, reducing delays in
enforcement of security and creating effective legal
deterrent
Corporate Debt Restructuring Forum for
restructuring viable companies
Enabling framework for asset reconstruction
companies

22

Proactive approach to resolution and increase in

provisioning levels in the system

with significant success in

Gross NPAs as % of
resolution
GDP
(%)
50.0%

30%

20.0%

15%

10.0%

4%

Net NPL accretion

tapering off with
progress in asset
resolution and
increase in
provisioning
levels
Source:
E&Y, RBI

23

India

S. Korea

J apan

Malaysia

0.0%

US$ bn

40%

30.0%

Thailand

Position much
stronger than
other Asian
economies

43%

40.0%

China

43%

Net NPAs of banks &

FIs

12.0
10.0
8.0
6.0
4.0
2.0
0.0

1997

1998

1999

2000

2001

2002

A new orientation among

banks
Traditional/ public sector
New/ private sector

24

Sell products
Product research:
what will sell?
Product sales and
profitability targets
Product specialist
groups
Introduce new
offerings every few
years/months
Branch banking
Focus - customer
acquisition

Meet customers needs

Customer research:
what does the
customer want?
Customer segment
sales and profitability
targets
Customer owners
Customer specific new
offerings every
week/day
Customer convenience
Deepen relationships

Technology- the ICICI Bank

experience Share of
Channel

25

transactions
in March
2000

Share of
transactions
in July 2003

Branches

94%

28%

ATMs

3%

51%

Internet

2%

10%

Call centre

1%

11%

Retail credit opportunity

70
60

60
55

50

52

40
36

30

33

27

20
10

18
14

0
Korea

Taiwan

Consumer loans / GDP (%)

Malaysia

Thailand

India

Consumer loans / Total loans (%)

Source: SSKI, CLSA

..penetration currently low, with growth

driven by strong fundamentals
26

Retail credit drivers

Changing
demographic
profile
Declining
retail loan
interest rates
Increasi
ng
availabil
ity

27

Middle
Middle &
& high
high income
income

households
households increased
increased from
from
11.6
11.6 million
million in
in fiscal
fiscal 1995
1995 to
to
25.7
25.7 million
million in
in fiscal
fiscal 2002
2002

Interest
Interest rates
rates on
on residential
residential

mortgages
mortgages have
have reduced
reduced by
by
7%
7% over
over last
last 44 years
years

Entry
Entry of
of banks
banks has
has led
led to
to

increased
increased competition
competition and
and
coverage
coverage

Increasing
Increasing use
use of
of technology
technology
further
further enhancing
enhancing reach
reach and
and
accessibility
accessibility

Retail market size

18.0
16.0

Annual disbursement (US$

billion)
CAGR of
31%

14.0

16.5

12.9

12.0

9.4

10.0
8.0

7.3

6.0
4.0
2.0
0.0
1999-00
Housing finance
Commercial vehicle finance
Consumer durable finance

28

2000-01
Car finance
2-wheeler finance

2001-02

2002-03

Credit card spend

Personal loans

Changing profile of corporate

banking
Change in corporate focus - improving
efficiency
Better

asset utilisation and financial

management
Limited new capacity creation

Increasing disintermediation in top tier

segment
However, several opportunities for banks
Technology-driven

fee-based services
Treasury and risk management products
Facilitating resource raising by corporates
through syndication, securitisation and marketmaking
New approach to SME lending
Sophisticated

banking services
Scientific portfolio construction and management
29

Financial services potential:

insurance
16.0%
14.0%
12.0%

14.2
%

10.0%

Premium as a % of GDP

12.1
%
9.0%

8.0%
6.0%

5.2%

4.0%

2.9%

2.7%

2.2%

Thailand

India

China

2.0%
0.0%
United
Kingdom

South
Korea

United
States

Malaysia

Life insurance

General insurance

Source: Swiss Re, Economic Research & Consulting (June 2002)

30

the opening up of the sector provides

a major opportunity for financial
services
players

The international Indian

opportunity
Canada
(0.42 mn)

Area of large
NRI
population

UK
(0.72 mn)

US
(1.2
mn)

Number of
NRIs

GCC
West
Indies

Areas of
large PIO
population

Nepal

(4.1
mn)
Zimbabw
e/
Uganda
South
Africa

Singapor
e/
(0.14
mn
Malaysia
NRIs)

Fiji

Australia and
New Zealand
(< 0.1
mn)

the Indian diaspora, the emergence of

Indian multinationals and resultant
economic flows have created a new
opportunity
31

Agenda
Economic backdrop

Banking sector - overview & opportunit

In summary

32

In summary

The reform and liberalisation process has

transformed the Indian economy
Structural

shift with service sector growth

Immense

potential to leverage technology and

knowledge capital

Improved

competitiveness in manufacturing after

intermediate period of restructuring &
rationalisation
Growing international linkages
Exports,
India

manufacturing and distribution overseas

as a manufacturing base

Globally

benchmarked businesses, capable of

competing internationally

33

In summary (contd).

The banking sector has achieved significant

success in addressing legacy concerns
Resolution

of asset quality concerns through

recovery, restructuring and provisioning

Focus

on technology and customer orientation

The economic transformation provides major

opportunities for the banking sector
Retail

finance credit and banking services

Corporate

finance - banking services and

structured finance

34

The sector is poised to capitalise on these

opportunities

Thank you

35