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MBA FINANCE PROJECT-FUNDAMENTAL AND TECHNICAL ANALYSIS

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									                                  PROJECT REPORT
A STUDY ON PERFORMANCE EVALUATION OF ICICI AND
 SBI USING FUNDAMENTAL AND TECHNICAL ANALYSIS
       Report submitted in partial fulfillment of the requirement for the award of the degree of

                    MASTER OF BUSINESS ADMINISTRATION

 Sl.                                              Title                                     Page
 No.                                                                                         No


 1.                  Chapter – 1

 2.        1.1       Introduction                                                              1

 3.        1.2       Company Profile                                                           2

 4.        1.3       Product Profile                                                           3

 5.        1.3.1     The Industry Growth                                                       4

 6.        1.3.2     Background                                                                4

 7.        1.3.3.    Management                                                                5

 8.        1.3.4     Shareholding & Liquidity                                                  5

 9.        1.3.5     Key area of Operation                                                     6

 10.       1.3.6     Strategy & New Developments                                               8

 11.       1.3.7     ICICI Profile                                                             8

 12.                 Chapter - 2

 13.       2.1       Scope of the study                                                       11

 14.       2.2       Objective of the study                                                   11

 15.       2.3       Period of the study                                                      11

 16.       2.4       Limitation of the study                                                  11



                                                  1
17.   2.5      Methodology                             12

18.   2.6      Fundamental analysis                    13

19.   2.6.1    Economical analysis                     13

20.   2.6.2    Industrial analysis                     21

21.   2.6.3    Banking Industrial analysis             22

22.   2.7      Monitory Policy                         22

23.   2.8      CRR                                     23

24.   2.9      Liquidity Management                    26

25.   2.10     Indian Financial Sector SWOT analysis   27

26.   2.11     Budget 2007 -2008 overview              29

27.   2.12     Secure Banking                          34

28.   2.13     Key Ratio                               35

29.   2.13.1   Interpretation (SBI)                    35

30.   2.13.2   Interpretation (ICICI)                  36

31.            Chapter – 3

32.   3.1      Technical analysis                      39

33.   3.1.a    ICICI Bank Outlook                      39

34.   3.1.b    SBIN Outlook                            40

35.   3.2      Finding                                 41

36.   3.3      Suggestion                              42

37.   3.3.1    ICICI Bank                              42

38.   3.3.2    SBI Bank                                43

39.   3.4      Conclusion                              46

40.   3.5      Bibliography                            47



                                        2
                                        CHAPTER 1
1.1 INTRODUCTION

       With the economy surging, things are getting better in the Banking Industry. There are
plenty of changes occurs daily.

       According to Reserve bank of India’s banking review of 2004 – 2005 there was a notable
pick up in demand from industry for investments and a surge in exports. Evidently, the industry’s
focus now is on scaling up both domestically and in markets abroad, widening the product and
services port folio, and better using technology to make banking more accessible and efficient.

       Most of researcher’s conclusion is, Whether or not the sectors actually opens up in 2009,
banks should use that as an opportunity to get their growth strategies in place. Not Just through
organic growth, but growth through mergers and acquisition. What India need is not a large
number of small banks, but a small number of large banks.

       As the RBI’s deputy Governor, V.Leeladhar, said at Indian Banking Associations Jan 31
Seminar on “Indian Banks and the Global change” there is growing realization that the ability to
cope with possible downside risks would depend among others on the soundness of the financial
system and the strength of Individual participation”.

       India is still cagey about foreign investments in banks. Though a dramatic changes
sweeping through the industry for some years now in the rise of India’s Public sector bank and
private sector still it should fuel its grow to open up eyes towards open market.

       In this scenario, While we look at the sensex breach the 10,000 level for the first time it
was yet another sign the India as a market for global liquidity had arrived. When, We start co-
relating the Gross Domestic product (GDP) growth of emerging markets are supposed to reflect
the health of the economy where India emerges as a key player, India is arguably the best placed
amongst the entire emerging market lot.

                                                 3
       Form the Investors point of view earning growth, price-earning multiplies and of course
the performance of the economy matters.




1.2 COMPANY PROFILE

The Kotak Mahindra Group

       Kotak Mahindra is one of India's leading financial institutions, offering complete financial
solutions that encompass every sphere of life. From commercial banking, to stock broking, to
mutual funds, to life insurance, to investment banking, the group caters to the financial needs of
individuals and corporates.
       As on December 31, 2006, the group has a net worth of over Rs.3,100 crore, and the AUM
across the group is around Rs. 225 billion and employs over 9,600 employees in its various
businesses. With a presence in 282 cities in India and offices in New York, London, Dubai and
Mauritius, it services a customer base of over around 2.2 million.
       The group specializes in offering top class financial services, catering to every segment of
the industry.The various group companies include:
Kotak Mahindra Capital Company Limited
Kotak Mahindra Securities Limited
Kotak Mahindra Inc
Kotak Mahindra (International) Limited
Global Investments Opportunities Fund Limited
Kotak Mahindra (UK) Limited
Kotak Securities Limited
Kotak Mahindra Old Mutual Life Insurance Company Limited
Kotak Mahindra Asset Management Company Limited
Kotak Mahindra Trustee Company Limited
Kotak Mahindra Investments Limited
Kotak Forex Brokerage Limited
Kotak Mahindra Private-Equity Trustee Limited
Kotak Mahindra Prime Limited

                                                 4
Kotak Securities Ltd. is India's leading stock broking house with a market share of around 8.5 %
as on 31st March. Kotak Securities Ltd. has been the largest in IPO distribution.
The accolades that Kotak Securities has been graced with include:
Prime Ranking Award (2003-04)- Largest Distributor of IPO's
Finance Asia Award (2004)- India's best Equity House
Finance Asia Award (2005)-Best Broker In India
Euromoney Award (2005)-Best Equities House In India
Finance Asia Award (2006)- Best Broker In India
Euromoney Award (2006) - Best Provider of Portfolio Management: Equities
The company has a full-fledged research division involved in Macro Economic studies, Sectoral
research and Company Specific Equity Research combined with a strong and well networked
sales force which helps deliver current and up to date market information and news.


Kotak Securities Ltd is also a depository participant with National Securities Depository Limited
(NSDL) and Central Depository Services Limited (CDSL), providing dual benefit services
wherein the investors can use the brokerage services of the company for executing the
transactions and the depository services for settling them.


Kotak Securities has 195 branches servicing more than 2,20,000 customers and a coverage of 231
Cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet
Broking services and also online IPO and Mutual Fund Investments.


Kotak Securities Limited manages assets over 2500 crores of Assets Under Management (AUM)
.The portfolio Management Services provide top class service , catering to the high end of the
market. Portfolio Management from Kotak Securities comes as an answer to those who would like
to grow exponentially on the crest of the stock market ,with the backing of an expert.



1.3 PRODUCT PROFILE

State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest
commercial bank in India and accounts for approximately 18% of the total Indian banking
business and the group account for 25% of the total Indian banking business. The central bank,
Reserve Bank of India (RBI) is the largest shareholder in the bank with 59.7% stake followed by


                                                 5
overseas investors including GDRs with 19.78% shareholding as on September 06. RBIs stake in
the bank is likely to be transferred to the Government of India (GOI).

       SBI has the largest distribution network in India spread across every nook and corner of
India. As on September 06, the bank has 14,061 branches which include 4,755 branches of its
associated banks. The bank also has the largest network of 5,624 ATMs. Since the last 5 years the
bank has showed continued growth in its core business. The total asset size of the bank reported a
CAGR of 9.4% during the period FY01 –FY06 and stood at Rs. 4,938.69 bn as of September
2006. In HIFY07, the bank reported net interest income (NII) of Rs. 182.14bn, representing a
growth fo 2.74% over HIFY06 while the bank reported a net profit of Rs.19.8bn, registering a
decline of 18.67% during the same period. Credit off take of the bank has been lower than the
Indian banking industry during the past few years. The total credit book of the bank grew at a
CAGR of 18.2% over the past years stood at Rs. 2,832.68bn at the end of September 2006.

1.3.1 THE INDUSTRY GROWTH

The industry growth during the same period was around 28%

   •       The bank’s asset quality has improved over the past few years. Gross NPL of gross
           loans stood at 3.57% as of Sep-end 2006 while net NPLs stood at 1.67% The bank has
           provided for 54.06% of its NPLs as on Sep- end 2006, which is below the industry
           average of around 68%

   •       Total deposits of the bank grew at a CAGR of 94% over the last. ve years to reach
           Rs3,800.5bn, with low cost deposits registering an impressive GAGR of 15.4% during
           the same period. Contribution of low cost deposit to total deposit during the period too
           has moved up sharply from 36.3% in FY 01 to over 47.6% in FY06. However,
           currentand saving account (CASA ) contribution in HIFY07 has declined to 43.65%
           thereby, signi.cantly increasing cost of funds and hensce margin contraction. On a
           sequential basis, margins of the bank declined by 8bps to 3.32

   •       The capital adepuacy ratio of the bank stood at 12.63% (Tier –I of 8.74% and Tier –II
           of 3.89 %) at the end of HIFY07. To augment its CAR to provide a stable platform for
           further growth, the bank the plans to raise upto Rs.100bn as subordinate debt during
           the next few months. The bank also has cushion to raise RS40bn in the form of hybrid.

   1.3.2 BACKGROUND




                                                 6
   State Bank of India is the largest and one of the oldest commercial bank in India, in
existenxe for more than 200 years. The bank provides a full range of corporate, commercial
and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI)
is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extend
of Rs.646bn with the public holding (other than promoters) at 40.3%.

   SBI has the largest branch and ATM network of over 14,000 branches (including
subsidiaries) Apart form Indian network it also has a network of 73 overses of. ces in 30
countries in all time zones, correspondent relationship with 520 International banks in 123
countries. In recent past,

   SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff
strength of 198,774 as on 31 st March, 2006. Of this, 29.51% are of.cers, 45.19% clerical staff
and the remaining 25.30% were sub-staff. The bank is listed on the Bombay stock Exchange,
Kolkata stock Exchange, Chennai Stock Exchange and Ahmedaoad stockeExchange while its
GDRs are listed on the London stock Exchange.

   SBI group accounts for around 25% of the total business of the banking industry while it
accounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has
displayed a continued performance in the last few years in scaling up its ef. ciencly levels. Net
Interest Income of the bank has witnessed a CAGR of 13.3% during the last years. During the
same period, net interest margin (NIM) of the bank has gone up from as low as as2.9% in
FY02 to 3.40% in FY06 and currently is at 3.32%

1.3.3 MANAGEMENT

   The bank has 14 directors on the Board and is responsible for the management of the
bank’s business. The board in addition to monitoring corporate performance also carries out
functions such as approving the business plan, reviewing and approving the annual budgets
and borrowing limits and axing exposure limits. Mr.O.P.Bhatt is the Chairman of the bank.

   Prior to this appointment, Mr.Bhatt was Managing Director at State Bank of Travancore
Mr.T.S. Bhattacharya is the managing Director of the bank and known for hisvast experience
in the banking industry. Recently, the senior management of the bank has been broadened
considerably. The Positions of CFO and the head of treasury have been segregated, and new
heads for rural banking and for corporate development and new business banking have been
appointed. The management’s thrust on growth of the bank in terms of network and size
would also ensure encouraging prospects in time to come.

                                             7
1.3.4 SHAREHOLDING & LIQUIDITY

   Reserve Bank of India is the largest shareholder in the bank with 59.7% stake followed by
overseas investors including GDRs with 19.78% stake as on September 06. Indian financial
institutions held 12.3% while Indian public held Just 8.2% of the stock. RBI is the monetary
authority and having majority shareholding re.ects con.ict of interest. Now the government is
rectifying the above error by transferring RBI’s holding to inself. Post this, SBI will have
afurther headroom to dilute the GOl’s stake from 59.7% to 51.0% Which will further improve
its CAR and Tier I ratio.



Shareholding Pattern of the Bank as on 30th September 2006

Source : SBI

   As of Sep 2006, SBI the 526.3 mm shares outstanding and going by the actual trading
volume, the Stock’s liquidity seems to have decreased in the past two years. In the first half of
FY2007, 93mm shares exchanged hasnds. The daily share turnover during the year 2006 was
0.22% down from 0.39% witnessed in 2005. But the sentiment in the sock market improved in
the first six months of the current. Scale with the bank clocking further gains. as of January
12,2007 bank’s market capitalization stood at Rs.643.6bn.

1.3.5 KEY AREAS OF OPERATIONS

   The business operations of SBI can be broadly classed into the key income generating
areas such as National Banking, International Banking, Corporate Banking, & Treasury
operations.

Key Business Areas of the Bank


a) Corporate Banking

   The corporate banking segment of the bank has total business of around Rs.1,93bn. SBI
   has created various Strategic Business Units (SBU) in order to streamline its operations.

       a. Leasing

       b. Project Finance

       c. Mid Corporate Group



                                             8
b.   National Banking

     The national banking group has 14 administrative circles encompassing a vast network
     of 9,177 branches, 4 Sub-of.ces, 12 exchange bureaus, 104 satellite of.ces and 679
     extension counters, to reach out to customers, even it. the remotest corners of the
     country. Out of the total branches, 809 are specialized branches. This group consists of
     four business group which are enumerated below:

     b.1. Personal Banking SBU

     b.2. Small & Medium Enterprises

     b.3. Agricultural Banking

c.   International Banking

     SBI has a network of 73 overseas of.ces in 30 countries in all time zones and
     correspondent relationship with 520 international banks in 123 countries. The bank is
     keen to implement core banking solution to its international branches also. During
     FY06, 25 foreign offices were successfully switched over to Finacle software. SBI has
     installed ATMs at Male Muscat and Colombo of.ces. In recent years. SBI has installed
     ATMs at Male, Muscat and Colombo Of.cex. In recent years, SBI acquired 76%
     shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank
     Ltd. In Indonesia. The bank incorporated a company SBI Botswana Lte. at Gaborone.

d.   Treasury

     The bank manages an integrated treasury covering both domestic and foreign exchange
     markets. In recent years, the treasury operation of the bank has become more active
     amidst rising interest rate scenario, robust credit growth and liquidity constraints. The
     bank diversified it operations more actively into alternative revenue streams in order to
     offset the losses in.xed income portfolio.

     Reorganisation of the treasury processes at domestic and global levels is also being
     undertaken to leverage on the operational synergy between business units and network,
     The reoganization seeks to enhance the efficiencies in use of manpower resources an
     increase maneuverability of banks operations in the markets both domestic as well as
     international.

e.   Associates & Subsidiaries


                                           9
              The State Bank Group with a network of 14,061 branches including 4,755 branches of
              its seven Associate Banks dominates the banking industry in India. In addition to
              banking, the Group, through its various subsidiaries, provides a whole range of
              financial services which includes life Insurance, Merchant Banking, Mutual Funds,
              Credit card, Factoring, Security trading and primary dealership in the Money Market.




e.1. Associates Banks

e.2. Non – Banking Subsidiaries/ Joint Ventures

       i.        SBI life

       ii.       SBI Capital Markets Limited (SBICAP)

       iii.      SBI DFHI LTD

       iv.       SBI Cards & Payments Services Pvt.Ltd. (SBICSPL)

       v.        SBI Funds Management (P) Ltd. (SBIFMPL)_

       f.        Human Resources

1.3.6 STRATEGY AND NEW DEVELOPMENTS

       Though a publis sector bank, it has set in motion a series of steps to transform itself into a
modern, technology enabled customer-centric, world-class banking organiztation, meeting best
global practices and standards in bankings and service delivery. The bank has maintained its
record of profitability, while adjusting to the changing circumstances and interest rate
environment. Despite intense competition and pressure on spreads it has maintained and Improved
its NIM. Major innovations and initiatives are in the arena of technology, banking products and
processes, service delivery channels and human resource to efficiently serve bank customers
across the globe The bank maintains its drive on the technology front to enhance customer
service, increase productivity, and manage risk better. After having computerized all its branches,
it has been moving swiftly to implement real time on-line banking. As a part of its strategy to stay
ahead of the competition, SBI had increased its benchmark lending rates by 50 basis points to
11.5 percent; this lending rate increase is dure to the rising cost of funds for banks, which are
paying more for deposits as a way of encouraging investors to save.



                                                  10
1.3.7 ICICI BANK PROFILE

       ICICI Bank is India’s second-largest bank. It has a network of about 614 branches and
extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking products
and financial services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-
life insurance, venture capital and asset management. ICICI Bank set up its international banking
group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic
banking strengths to offer products internationally.

       ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada,
branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre
and representative offices in the United States, United Arab Emirates, China, South Africa and
Bangladesh. Our UK Subsidiary has established a branch in Belgium. ICICI Bank is the most
valuable bank in India in terms of market capitalization.

       ICICI Bank’s equity shares are listed in India on the Bombay stock Exchange and the
National Stock Exchange of India Limited and its

American Depositary Receipts ((ADRs) are listed on the New York Stock Exchange (NYSE).
       ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and
employees.

               At June 5, ICICI Bank, with free float market capitalization* of about Rs. 480.00
billion ranked third amongst all the companies listed on the Indian Stock exchanges.

               ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI’s shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in Indian fiscal 1998, an equity offering in the
form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank’s acquisition of Bank of Madura
Limited in all-stock, amalgamation in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002.

       ICICI was formed in 1955 at the initiative of the World Bank, the Government of India
and representatives of Indian industry. The principal objective was to create a development
financial institution for providing medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services group offering a wide variety of
products and services, both directly and through a number of subsidiaries an affiliates like ICICI
                                                  11
Bank. In 1999, ICICI become the first Indian company and the first bank or financial institution,
from non-Japan Asia to be listed on the NYSE.

       After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards universal
banking, the managements of ICII and ICICI Bank formed the view that the merger of ICICI with
ICICI Bank would be the optimal strategic alternative for both entities, and would create the
optimal legal structure for the ICICI group’s universal banking strategy.

       The merger would enhance value for ICICI shareholders through the merged entitty’s
access to low-cost deposits, greater opportunities for earning fee-based income and the ability to
participate in the payments system and provide transaction-banking services. The merger would
enhance value for ICICI Bank shareholders through a large capital base and scale of operations,
seamless access to ICICI’s strong corporate relationships built up over five decades, entry into
new business segments, hither market share in various business segments, particularly fee-based
services, and access to the vast talent pool of ICICI hand its subsidiaries. In October 2001, the
Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI Personal Financial
Services Limited and ICICI Capital Services Limited, with ICICI Bank

       The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, and
by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002.
Consequent to the merger, the ICICI group’s financing and banking operations, both wholesale
and retail, have been integrated in a single entity.

       *Free float holding excludes all promoter holdings, strategic investments and cross
holdings among public sector entities. ICICI Bank disseminates information on its operation and
initiatives on a regular basis. The ICICI Bank website serves as a key investor awareness facility,
a’ lowing stake holders to access information on ICICI Bank at their convenience. ICICI Bank’s
dedicated investor relations personal play a proactive role in disseminating information to both
analysts and investors and respond to specific queries.




                                                  12
                                         CHAPTER 2


2.1 SCOPE OF THE STUDY :

       The project entitled “A Study on the performance evaluation of SBI and ICICI based and
fundamental and technical analysis” will enable from the investors point of view to refer the
performance of the Banks, their relative growth and thereby decide on to buy or sell the particular
slab. This study will also help to identify the bank that is lagging behind in its performane.



2.2 OBJECTIVES OF THE STUDY:

   PRIMERY OBJECTIVE

   •       To analyse the various factors which influence the share price of SBI and ICICI bank

   SECONDREY OBJECTIVE

   •       To analyze the market value of SBI and ICICI bank

   •       To offer suggestions and recommendations based on the findings.

   •       To study the performance of ICICI and SBI

2.3 PERIOD OF THE STUDY:

       For the purpose of the study 5 years period starting from the financial year mar 2002 to
march 2006 in considered. The year 2005-2006 is chosen as a terminal year since only upto this
period reliable time series data were available for the variables dealt in the study.

2.4 LIMITATIONS OF THE STUDY:

   •   This study is based on the secondary data collected form the kotak securities. com no other
       efforts have been made to verify their correctness.

   •   Due to paucity of time important factors has been analysed and discussed.

                                                  13
  •    The approach to behavior of share price is based on long time view.

  •    There limitations do not undermine either the scope of the study on the analysis and
       inference.



2.5 METHODOLOGY

  DATA COLLECTION

  Secondary data:

       All secondary data has been collected from the kotak securities. The required information
  are also collected form respective bulletins of RBI, website of government of India, website of
  stockcharts.com, Global research study is also adhered.

  Analysis Overlook:

       Fundamental analysis and technical analysis are taken into consideration.

  Ration analysis

       The ratio analysis expresses the relationship of the financial ratios in percentages which
  are collected form the Balance sheet and profit and loss account.

  The key ratios considered of SBI and ICICI Bank considered includes

  1. Investment/deposit (%)

  2. Cash / deposit (%)

  3. Interest expended / interest earned (%)

  4. Other income / total income (%)

  5.   Operating expenses / total income (%)

  6. Interest income / total funds (%)

  7. Interest expended / total funds (%)

  8. Net interest income / total funds (%)

  9. Non interest income / total funds (%)

  10. Operating expenses / total funds (%)

  11. Profit before provision / total funds (%)

                                                  14
   12. Net profit / total funds (%)




Technical Analysis

       It is the process of identifying trend reversal at an earlier stage to formulate the buying and
selling strategy. With the help of several indicators they analysis the relationship between price –
volume and supply-demand for the overall market and the individual stock. Volume is favorable
on the upswing, the number of shares traded is greater than before and on the downside the
number of shares traded dwindles. If it is the other way round, trend reversals can be expected.


2.6 FUNDAMENTAL ANALYSIS

INTRODUCTION

                 Fundamental analysis is the study of economic factor industrial environment and
the factor related to the company. This chapter of fundamental analysis consists of
Economic analysis
Banking industry analysis
Profile of SBI
Profile of ICICI
Ratio analysis of SBI
Ratio analysis of ICICI


Economic analysis with favorable GDP with savings, investment, stable prices, balance of
payment, and infrastructure facilities which provides a best environment for common stock
investment


Industrial analysis growth follow a pattern. This replicates the banking industry monitory policy,
CPR, SLR, and the flow of the industry.


Company analysis explains of the profile of SBI and ICICI bank and then deals with the ratio
analysis of both the banks


                                                 15
2.6.1 ECONOMIC ANALYSIS


               The level of economy has an impact on investment in many ways. If the economic
growth rapidly, the industry can also be expected to show rapid growth and vice versa. When the
level of economic activity is low, stock price are low, and when the level of economic activity is
high, the stock price are high reflecting the prosperous outlook for sales and profit of the firms.
Vigorous growth with strong macroeconomic fundamentals has characterized developments in the
Indian economy in 2006-2007 so far. However, there are some genuine concerns on the inflation
front. Growth of 9.0% and 9.2% in2005-2006 and 2006-2007 shows a positive sign, the surging
pattern in agriculture continued with growth estimated at 6.0% and 2.7% in the two resent year,
and services maintained on the industrial segment. The higher growth trends, particularly in
manufacturing boosted sentiments with in the country and abroad. The overall macro economic
fundamentals are robust, particularly with tangible progress towards fiscal consolidation and a
strong balance of payment position. With an up surge in investment, the outlook is distinctly up
beat.
The ratcheting up of growth observed in recent years in reflected in the eleventh five year target
of an average annual growth of 9.0% relative to 8.0% targeted by the tenth plan (2002-2003 to
2006-2007). Services contributed as much as 68.6% of the overall average growth in GDP in the
last five years. The entire residual contribution came from industry. As a result, in 2006-2007,
while the share of agriculture in GDP decline to 18.5%, the share of industry and service
improved to 26.4% and 55.1%, respectively.



SAVINGS AND INVESTMENT

        The gross domestic savings as a proportion of GDP shows an increasing trend with the
saving ration rising from 26.4 per cent in 2002-03 to 29.7 per cent in 2003-04, 31.1 per cent in
2004-05 and 32.4 percent in 2005 – 06. The rise in the savings rate in 2005-06 was due to private
corporate and the household sector, which as proportion of GDP, increased by 1.0 percentage
point and 0.7 percentage points, and made a negative contribution to the overall saving rate.
However, a redeeming feature of recent years is that the savings of the public sector, which had
been negative until 2002-03, was positive for the third successive year in 2005-06. The positive
saving of Rs. 71,262 crore in 2005-06 (QE) is largely attributable to the higher savings of non-
departmental as well as departmental enterprises. The Indian economy has shown a sharp rise in
the savings rate of the private corporate sector for tour years. The savings rate for 2005-06, as per

                                                 16
the quick estimates, has been placed at 8.1 per cent. The private corporate sector has financed a
large part of its investment in the on-going long capex cycle from such retained earnings or
savings.



       As much as 0.7 percentage point of the 1.3 percentage points increase in gross domestic
savings rate between 2004-05 and 2005 – 06 has come from the household sector. a construction
boom with residential buildings financed from housing loans form banks and the progressive
maturing of the domestic financial markets. While Housing loans from banks has tended to
increase household savings in physical form and depress financial savings, Progressive maturing
of the domestic financial markets has provided shift in the household portfolio in the three years
ending in 2005-06. Physical savings as a proportion GDP has declined steadily from a high of
12.4 percent in 2003-04 to 10.7 per cent in 2005-06. Financial savings, on the other hand, after
declining from 11.3 per cent to 10.2 per cent between 2003-04 and 2004-05, more than recovered
to 11.7 per cent in 2005-06.

       The increase in savings rate is what is to be expected with higher growth rate of the
economy and a declining dependency ratio. with the proportion of population in the working age
group of 15-64 years increasing steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026, the
demographic dividend in the form of high savings rate is likely to continue. As the savings rate
has gone up, private final consumption expenditure (PFCE) at current prices as a proportion of
GDP, has shown a declining trend particularly from 2001-02. PFCE as a proportion of GDP
declined from 63.1 per cent in 2002-03 to 62.1 per cent in 2003-04, 60.0 per cent in 2004-05, and
further to 58.7 per cent in 2005-06. This decline has also been accompanied by substantial
changes in terms of the shares of different commodity groups. In PFCE, the share of food,
beverages and tobacco came down from 43.3 per cent in 2002-03 to 39.4 per cent in 2005-06. The
other major items of importance, namely, transport and communication, as a proportion of PFCE,
rose from 15.8 per cent in 2002-03 to 19.1 per cent in 2004-05. Government final consumption
expenditure GFCE), after declining from 11.9 per cent in 2002-03 to 11.0 per cent in 2004-05,
increased to 11.5 per cent of GDP in 2005-2006.

       with the rise in the rate of gross domestic savings between 2003- 04 and 2004-05, there
was a step up in the rate of gross domestic capital formation (GDCF) or investment from 28 per
cent of GDP to 31.5 per cent of GDP leading to a savings investment gap or a current account
deficit of 0.4 percent of GDP in 2004 – 05 . GDCF at constant prices base: 1999-200) as a
proportion of GDP is consistently lower than the corresponding proportion at current prices. This
                                               17
differential may reflect the greater increase in the prices of capital goods relative to the general
price level, with growing technological sophistication of the production processes in the economy
in general and manufacturing in particular. But, irrespective of the choice of constant or current
prices as the weights, the direction of change from year to year remains unaltered. This may
indicate a recent pick up in fresh investment for creating additional capacity through fixed capital
formation, particularly in the private sector.

       GDP growth in India in the post-reform period was driven mostly by Private final
consumption expenditure or PFCE growth. PFCE Contributed more than one half of the growth
every year until 2001-02. After falling below one half in 2002-03, it had again dominated GDP
Growth in 2003-04. But this appears to have undergone a virtuous Transformation with
investment rather than private consumption being he Main source of GDP growth in the latest two
years of 2004-05 and 2005- 06 .. Data on consumption and investment in the national accounts
available until 2005-05 show that the 6.8 percentage point contribution of investment to 13.1 per
cent growth in GDP at current market prices in 2004-05 exceeded the corresponding contribution
of private final consumption expenditure at 6.1 percentage point for the first time in recent years.
In terms of contribution to growth of GDP at current market prices, from the demand side,
investment continued to provided the lead during 2004-05 and 2005-6. The percentage point
contribution of investment in the growth of GDP at current market prices of 13.1 per cent and
14.1 per cent in 2004-05 and 2005-06, respectively, were 7.6 per cent and 7.0 per cent,
respectively. With imports growing faster than exports, the external balance continued to have a
negative contribution to GDP growth in recent years.



AGRICULTURE

       After an annual average of 3.0 per cent in the first five years of the New millennium
starting 2001-02, growth of agriculture at only 2.7 per Cent in 2006-07, on a base of 6.0 per cent
growth in the previous year, is a Cause of concern. Low investment, imbalance in fertilizer use,
low seeds Replacement rate, a distorted incentive system and low post-harvest value Addition
continued to be a drag on the sector’s performance. . with more Than half the population directly
depending on this sector, low          Agricultural    growth has serious implications for the
‘inclusiveness’ of Growth. Furthermore, poor agricultural performance, as the current year Has
demonstrated, can complicate maintenance of price stability with Supply-side problems in
essential commodities of day-to-day Consumption. The recent spurt of activity in food processing
and Integration of the supply chain from the farm gate to the consumer’s plate Has the potential
                                                 18
of redressing some of the root causes such as low Investment, poor quality seeds, and little post-
harvest processing.

       Prices of primary commodities, mainly food, have been on the rise In 2006-07 so for.
Wheat, pulses, edible oils, fruits and vegetables, an Condiments and spices have been the major
contributors to the higher Inflation rate of primary articles. Within the primary group, the mineral
Subgroup recorded the highest year-on-year inflation at 18.2 per cent, Followed by food articles at
12.2 per cent and non-food articles at 12.0Per cent. Food articles have a high weight of 15.4 per
cent in the WPI Basket. Including manufactured products such as sugar and edibleoils, Food
articles contributed as much as 27.2 per cent to overall inflation of6.7 per cent on February
3,2007. Starting with a rate of 3.98 per cent, the in flation rate in 2006-07 has been on a general
upward trend with intermittent decreases. However, average inflation in the 2 weeks ending on
February 3, 2007 remained at 5 per cent.

       Government closely monitored prices every week and initiated Measures to enhance
domestic availability of wheat, pulses, sugar and Edible oils by a combination of enhanced
imports, export restrictions and Fiscal concessions. In wheat, State Trading Corporation, the
parastatal, tendered overseas for 55 lakh tonnes of wheat; private trade as permitted to import
wheat at zero duty from September 9; and exports were banned from February 9, 2007. The
minimum support price (MSP) of wheat raised by Rs.50 Per quintal and announced well in
advance of the sowing season to bring additional acreage under wheat. In pulses, imports were
allowed at zero duty from June 8, 2006; export was banned from June 22, 2006; and National
Agricultural Cooperative Marketing Federation (NAFED) purchased urad and moong overseas.
Regulation of commodity futures markets was strengthened for wheat, sugar and pulses; and as a
matter of abundant precaution, futures trading was banned in urad and tur from January 24, 2007.
Duty on palm group of oils, which meets more than a half of the domestic demand –supply
shortfall in edible oils, was reduced by 20-22.5 percentage points in a phased sequence, first in
August 2006 and later in January 2007. Further, tariff values of these oils for import duty
assessment were frozen. On January 22. 2007, further duty cuts were announced for Portland
cement, various metals and machinery items. With a firming up of international prices, the impact
of duty-free import of wheat and pulses in rolling the domestic prices back was limited. But such
imports unproved domestic market discipline.

INFLATION

       with a shortfall in domestic production vis-à-vis domestic demand and hardening of
international prices, prices of primary commodities, mainly food, have been on the rise in 2006-07
                                                19
so far. Wheat, pluses, edible oils, fruits and vegetables, and condiments and spices have been the
major contributors to the higher inflation rate of primary articles.. Within the primary group, the
mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food
articles at 12.2 per cent and non-food articles at 12.0 per cent. Food articles have a high weight of
15.4 per cent in the WPI basket. Including manufactured products such as sugar and edible oils,
food articles contributed as much as 27.2 per cent to overall inflation of 6.7 per cent on February
3, 2007. Starting with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general
upward trend with intermittent decreases. However, average inflation in the 52 weeks ending on
February 3, 2007 remained at 5 per cent. A spurt in inflation like in the current year has been
observed in the recent past in 1997-98, 2000-01, 2003-04, and 2004-05.

FOREIGN IMPACT

oil prices

       The international annual average price of the Indian basket of crude (about 60 per cent of
Oman/Dubai and 40 per cent of Brent), after remaining more or less stable in 2002-04 at around
US$27- 28 per barrel,      on August 8, 2006. To stop the hemorrhaging of public sector oil
companies’ finances, there was an unavoidable upward revision of retail selling prices of petro-
products on June 6, 2006. The pass –through to consumers was restricted to just 12.5 per cent in a
three way burden sharing arrangement among consumers, Government and oil marketing
companies. With the softening of international petroleum prices, domestic prices of petrol (motor
spirit) and high diesel were reduced by Rs. 2 and Re.1, respectively with effect from November
30, 2006, and again by the same amounts with effect from February 16, 2007 .

Balance of payment

       In the balance of payments, in 2005-06 and in the first half of 2006-07, capital flows more
than made up for the current account deficits of US$9.2 billion and US$11.7 billion, respectively,
and resulted in reserve accretion. The current account deficit reflected the large and growing trade
deficit in the last two years. Exports grew fast, but imports grew even faster, reflecting in part the
ongoing investment boom and the high international petroleum price. In 2005-06, imports (in US
dollar terms and customs basis) had grown by 33.8 per cent. In the first nine months of the current
year, imports grew by 36.3 per cent. While petroleum imports continued to grow rapidly, non-oil
import growth decelerated to a moderate 18.7 per cent in the first nine months of the current year,
primarily because of high bullion prices leading to a decline in import balance, after remaining in
surplus till 2003-04, has turned negative since 2004-05. India’s exports (in US dollar terms and

                                                 20
customs basis) have been growing at a high rate of more than 20 per cent since 2002-03. During
205-06, growth of 23.4 per cent, India’s exports crossed the US$100 billion mark. During 2006-
07, after a slow start, exports gained momentum to grow by an estimated 36.3 per cent in the first
nine months to reach US$89.5 billion. Buovancy of exports was driven from major trading
partners.



FDI and FII

       Capital flows into India remained strong. The composition of flows, however, fluctuated
from year to year. In the three-year period, 2002-05, there were large ‘other flows’ (delayed
export receipts and others) accounting for a sizeable proportion of net capital flows. After being
outflows in the previous two years, external assistance and external commercial borrowing
(ECBs) –two major debt-creating flows- picked up in 2004-05. These debt flows, as a proportion
of total capital flows, were 25 per cent in 2004-05 and 18 per cent in 2005-06. Foreign
investment, as a proportion of capital flows, has remained in the range of 39.1 per cent to 79.3 per
cent in the last four years ending in 2005-06. There was strong growth in foreign direct
investment (FDI) flows (net), with three-quarters of such flows in the form of equity. The growth
rate was 27.4 per cent in 2005-06 followed by 98.4 per cent in April –September 2006. This was
even after gross outflows under FDI with domestic corporate entities seeking a global presence to
harness scale, technology and market access advantages through acquisitions overseas. FII flows,
the dominant variety of portfolio flows, after remaining buoyant until 2005-06, turned into net
outflows in the first half of 2006-07. Fill flows are reported to have turned positive again in the
second half of the current year.

THE CAPITAL MARKET

       Bullish sentiments in the domestic capital market is foreseen. The BSE sensex, stock-
index of the Bombay Stock Exchange (BSE), rallied from a low 8,929 on June 14, 2006 to an all-
time intra-day high of 14,724 on February 9. 2007. The rally from the 13,000 mark to the 1400
mark in only 26 trading from the fastest ever climb of 1,000 points. India with a market
capitalization of 91.5 per cent of GDP on January 12, 2007 the strength of the market micro-
structure from large retail participation continued. The positive sentiments were manifest also in
most indicators such as resource mobilized through the primary market. Aggregate mobilization,
especially through private placements and Initial Public Offerings (IPOs), grew by 30.5 per cent
to RS. 161,769 crore in calendar year 2006, with about 6 IPOs every month, on average. Net

                                                21
mobilization of resources by mutual funds increased by more than four-fold from Rs. 25,454 crore
in 2005 to Rs. 1,04,950 crore in 2006. The sharp rise in mobilization by mutual funds was due to
buoyant inflows under both income/debt-oriented schemes and growth/equity oriented schemes.
The negative inflows in 2004 turned positive for the public sector mutual funds in 2005 and
accelerated in 2006.      other indicators of market sentiments, such as equity returns and
price/earnings ratio also continued to be strong and supportive of growth.



       The upbeat mood of the capital markets. Reflecting the improved growth prospects of the
economy was partly also a result of steady progress made on the infrastructure front. Overall
index of six core industries – electricity, coal, crude oil, petroleum refinery products, and cement,
registered a growth of 8.3 per cent.



INFRASTRUCTURE

       On the transport and communication front, railways maintained its nearly double-light
growth in the first nine months of the current year. There was, however, a growth declaration in
cargo handled at major maritime ports (both exports and imports) and airports (exports). The
news of gas discoveries in the Krishna Godavari (KG) basin under New exploration and
Licensing Policy (NELP) in recent months was an encouraging development in the country’s
pursuit of reduced impot dependence in hydrocarbons. Investment requirements for infrastructure
during the Eleventh Five Year plan are estimated to be around US$ 320 billion. While nearly 60
percent of these resources would come from the public sector and/or through public-private
partnership (PPP). The potential benefits expected from PPP are : cost-effectiveness, higher
productivity, accelerated delivery, clear customer focus, enhanced social service, and recovery of
user charges. Further, the additionally of resources that PPP would bring, along with the ‘value
for money’ continues to remain critical. Based on the number of projects that have been approved
or are under consideration, it is estimated that a leveraging of nearly six times could be achieved
through this route.
       Services sector growth has continued to be broad-based. Among the three sub-sector of
services, ‘trade, hotels, transport and communication services’ has continued to boost the sector
by growing at double-digit rates for the forth successive year (table 1.2). impressive progress in
information technology (IT) and IT-enabled services, both rail and road traffic, and fast addition
to existing stock of telephone connections, particularly mobile, played a key role in such growth.

                                                 22
Growth in financial services (comprising banking, insurance, real estate and business services),
after dipping to 5.6 percent in 2003-2004 bounced back to 8.7 percent in 2004-05 and 10.9
percent in 2005-2006. the momentum has been maintained with a growth of 11.1 percent in
2006-2007.


2.6.2 INDUSTRY ANALYSIS


                The lower contribution of industry to GDP growth relative to services in recent
year is partly because of its lower share in GDP, and does not adequately capture the signs of
industrial resurgence.
       Growth on industrial sector, from a low of 2.7% in 2001-2002, revived to 7.1% and 7.4%
in 2002-2003 and 2003-2004, respectively, and after accelerating to over 9.5% in the next two
years, touched 10.0% in 2006-2007.
       The growth of industry, as a proportion of the corresponding growth in services, which
was78.9% on the average between 1991-1992 and 1999-2000, improved to 88.7 % in the last
seven years.
       Within industry, the growth impulses in the sector seem to have spread to manufacturing.
Industrial growth would have been even higher, had it not been for a relatively disappointing
performance of the other two sub-sector, namely mining and quarrying, and electricity, gas and
water supply.
       Since 1951-1952, industry has never consistently grown at over 7.0% per year for more
than three years in a row before 2004-2005.
YoY, manufacturing, accounting to the monthly index of industrial production (IIP) available
until 2006, has been growing at double digit rates every month since march 2006, with the solitary
exception of the festive month of October.
       The current growth phase shows a sharp rise in the rate of investment in the economy.
Investment reflect a high degree of business optimism. The revival in gross domestic capital
formation (GDCF) that commenced in 2002-2003 has been followed by a sharp rise in the rate of
investment in the for four consecutive years. The earlier statement of GDCF for 2004-2005 of
30.1%, released by CSO in their advance estimates,
Now stand upgraded to 31.5% in the quick estimates. This sharp increase in the investment rate
has sustained the industrial performance and reinforces the outlook for growth




                                               23
2.6.3 BANKING INDUSTRY ANALYAIS


       Bank credit has continued to grow at a pace. Sustained Growth of bank credit was
accommodated by acceleration in deposit       Growth. Concomitantly, broad many growth has
remained above the Indicative trajectory , reflecting strong demand conditions. Banks’ SLR
Investments, as a proportion of their net demand and time liabilities (NDTL), have declined
further from their end-March 2006 levels. The Reserve Bank continued to modulate market
liquidity with the help ofLAF repo and reverse repos and issuance of securities under the Market
Stabilisation Scheme (MSS). Furthermore, the Reserve Bank raised cash Reserve ratio (CRR) by
50 basis points in two phases with effect from the Fortnight beginning December 23, 2006


2.7 MONETARY POLICY


       Broad money (M3) growth, year-on-year (Y-o-Y), accelerated to 20.4 per cent as on
January 5, 2007 from 17.0 per cent t end-march 2006 and 16.0 per cent a year ago. On a fiscal
year basis too, M3 growth during 2006-07 so far (January 5, 2007 over March 31, 2006), at 11.9
per cent, was higher than that of 8.8 per cent in the corresponding period of 2005- 06 (January 6,
2006 over Apirl1, 2005). Taking into account, inter alia, these trends in monetary aggregates,
sustained growth in credit offtake, and additional absorption of liquidity under the MSS, the
Reserve Bank, on December 8, 2006, decided to increase the CRR by 50 basis points in two
stages – 25 basis points each effective the fortnights, beginning December 23, 2006 and January
6, 2007. Other development in the Domestic economy impacting upon the decision to increase the
CRR Included growth in real GDP, acceleration in inflation, expectations of the Private corporate
sector of higher increase in prices of both inputs and Outputs, reports of growing strains on
domestic capacity utilization, and Challenges emanating from capital flows and consequent
impact on Increasing liquidity.


       The increase in the CRR is estimated to have absorbed banks’ resources to the extent of
Rs. 13,500 crore. Expansion in the residency- based new monetary aggregate (NM3) – which,
inter alia does not directly reckon non-resident foreign currency deposits such as India
Millennium Deposits (IMDs) and FCNR           (B)-was lower than M3, partly Reflecting lower


                                               24
recourse to call/term funding from financial institutions. Growth in liquidity aggregate L 1 was
lower that that in NM3 on account Of decline in postal deposits.


2.8 CRR
       The Reserve Bank in its Mid-Term Review of Annual Policy Statement for the year 2006-
07 (October 31, 2006) noted, inter alia, that: “Furthermore, containing inflation expectations in
the current environment and consolidating gains achieved so far in regard to stability would
warrant appropriate, immediate measures and willingness to take recourse to all possible measures
in response to evolving circumstances promptly. The objective is to continue to maintain
conditions of stability that contribute to sustaining the momentum of growth on an enduring basis.
Towards this objective, the monetary policy stance and measures will need to be in a process of
careful rebalancing and timely adjustment”. Subsequent to the announcement of the Mid-term
Review, there were a Number of significant developments, particularly on the domestic front.
These included:


       1.Real GDP growth at 9.2 per cent during July-September 2006 and 9.1 per cent in the
first half of 2006-07. 2. Continued high growth in non-food bank, acceleration in money supply
(M3 ) growth and reserve money growth and absorption of additional liquidity under the market
stabilization scheme(MSS)
       3. Increase in WPI inflation, with inflation based on the various
consumer price indices being higher than WPI.
       4. As per the RBI s Industrial Outlook survey, a majority of respondents from the private
corporate sector expect higher increase in prices of both inputs and outputs.


       There were reports of growing strains on domestic capacity Utilization. There were also
reports that expansion of capacity is Underway but the realization could be constrained over the
next two years. A seasonal decline in prices of food articles could moderate the inflation Pressures
but the WPI inflation excluding food articles remains at Elevated levels. The reduction in prices
of petrol and diesel in end- November 2006 will moderate inflation, but the overall impact on
Inflation expectations requires to be monitored and moderated. The External sector continues to
be strong and current account deficit is likely To be close to the trend, and will continue to be
accommodated by net Capital flows. However, it is necessary to recognize the challenges
Emanating from capital flows and consequent impact on increasing Liquidity.


                                                25
       In view of the above, the Reserve Bank, on December 8, 2006, Decided to increase the
cash reserve ratio (CRR) of the scheduled Commercial banks, regional rural banks (RRBs),
scheduled state co- Operative banks and scheduled primary (urban) co-operative banking System
by 50 basis points of their net demand and time liabilities NDTL ) In two stages-25 basis points
each effective from fortnights beginning December 23, 2006 and January 6, 2007. As a result of
the ncreases in CRR on liabilities to banking system, an amount of about Rs. 13,500 crore Of
resources of banks would be absorbed,


       Amongst its major components, both currency and time deposits Contributed to
acceleration in growth in M3 year-year basis growth in Currency with the public increased from
15.4 per cent as on January 6,2006 to a peak of 19.4 per cent as on October 27, 2006 before
moderating to 16.8 per cent as on January 5, 2007. Acceleration in growth in October 2006 could
be partly attributed to the early onset of festival Season currency demand during the current year.


       Growth in aggregate deposits accelerated to 21.1 per cent, y-o-y, as On January 5, 2007
from 16.2 per cent a year ago, on the back of higher Accretion to time deposits. On a y-o-y basis,
growth in demand deposits (19.2 per cent) as on January 5, 2007 was of a lower order than a year
ago (28.7 per cent). Accertion to time deposits was, however, significantly higher than that in the
previous year. Growth in time deposits of scheduled commercial banks accelerated to 22.9 per
cent (y-o-y) as on January 5, 2007 from 15.0 per cent a year ago. This, apart from Acceleration in
economic activity, could be attributed to higher interest Rates on deposits as well as tax benefits.
Interest rates on time deposits of 1-3 years maturity offered by public sector banks increased from
a range of 5.75-6.75 per cent in March 2006 to 6.75-8.25 per cent in January 2007. Rates offered
by private sector banks on deposits of similar maturity increased from a range of 5.50-7.75 per
cent to 6.75-9.75 per cent over the same period.


       Growth in time deposits also appears to have benefited from the Recently introduced tax
benefits under section 80C for deposits with Maturity of five years and above. Concomitantly,
with unchanged interest Rates, postal deposits have witnessed a significant decline since end
march 2006. Commercial sector’s demand for bank credit has continued To remainstrong during
2006-07 so far. On a year-on-year asis, non-food Credit of scheduled commercial banks (SCBs)
registered a growth of 31.2 Per cent as on January 5, 2007- the same rate as a year ago. On a fiscal
Year basis, growth in non-food credit decelerated marginally to 16.9 per Cent as on January 5,
2007 from 7.5 per cent a year ago. In view of the Acceleration in deposits, the ncremental credit
                                                   26
deposit ratio of    SCBs, After remaining above/around 100 per cent for the most part since
October 2004, has exhibited some moderation in recent months. As on January 5, 2007, the
incremental redit-deposit ratio was around 93 per Cent (y-o-y) as compared with 108 per cent a
year ago scheduled Commercial banks’ food credit has recorded a modest rise (5.9 per cent)
During 2006-07 (up to January 5, 2007) reflecting lower order of Procurement of food grains.


       Disaggregated data available up to October 2006 show that credit
Growth has been largely broad-based. About 34 per cent of incremental Non-food credit was
absorbed by industry, 12 per cent by ‘other Retail loans’. Loans to commercial real estate, which
increased by 84 per Cent, y-o-y, absorbed 5 per cent of incremental non-food credit. Apart From
bank credit, the corporate sector continued to rely on non-bank.
Sources of funds financing their requirement.        Resources raised thorough domestic equity
issuances during the first nine months of 2006-2007 (Rs. 23, 843 crore) were more than double of
that in the corresponding period of 2005-2006. After remaining subdued during the second
quarter, amounts raised from the primary market picked up during the third quarter of 2006-2007.
Mobilisation of resources through equity issuances abroad ADRs /DGRs ) during April-December
2006 (Rs. 8,019 crore) were 55 percent higher than that in the same period of 2005. recouse to
external commercial borrowings (ECBs) during the first half of 2006-2007 was almost double of
that in the corresponding period of 2005-2006, with net disbursement under ECBs increasing
from Rs. 17,551 crore during April-September 2005 to Rs. 34,031 crore during April-September
2006. Mogbilisation theough issuances of commercial papers during April-December 2006 was
more than three times of that a year ago, now withstanding some sluggishness in the third quarter.
Finally, internal sources of funds continued to provide large financing support to the domestic
corporate sector during the first half of 2006-2007. Profits after tax of select non-financial
nongovernment companies during April-September 2006 were almost 40 percent higher than
those in the first half of 2005-2006. Profits after tax during the second quarter of 2006-2007 were
higher than those in each of the five preceding quarters.


       In the fiscal year 2006-2007 (up to January 5, 2007), commercial bank’s investments in
gifts witnessed a large expansion of Rs. 43,222 crore in contrast to a decline of Rs. 15,580 crore a
year ago, reflecting the need to meet statutory requirements. On a y-o-y basis, commercial banks’
investments in gilts increased by 5.6 percent as against a decline of 0.1 percent a year ago. Over
the same period, growth in commercial banks’ NDLT accelerated to 20.7 percent from 18.3
percent a year ago. With incremental investment in gilts not keeping pace with the high growth in
                                              27
NDLT, commercial bank’s holdings of Government securities declined to 28.6 percent of their
NDLT as on January 5, 2007 fron 31.3 percent at the end o-March 2006 and 32.6 percent a year
ago. Excess SLR investments of SCBs fell to Rs. 96.407 crore as on January 5, 2007 from Rs.
1,68,029 crore a year ago. Funds raised through equity issuances in the primary market as well as
higher internal reserves also enabled banks to fund strong credit demand.



Reserve Money

       Reserve money expanded by 20.0 percent, y-o-y, as on January 19, 2007 as compared with
14.9 percent a year ago. Adjusted for the first round effect of the hike in the CRR, reserve money
growth was 17.4 percent as on Janurary 29, 2007. Reserve money movements over the course of
the year reflected the Reserve Bank’s market operations. The Reserve Bank’s foreign currency
assets (net of revaluation) increased by Rs. 80,166 crore during the fiscal year 2006-2007 (up to
January 19, 2007) as compared with an increase of Rs. 11,185 crore during the corresponding
period of the previous year Mirroring the liquidity management operations through LAF, the
Reserve Bank’s holdings of Government securities increased by Rs. 10,615 crore during 2006-
2007 (up to January 19, 2007) as against an increase of Rs. 27,435 crore in the corresponding
period of 2005-2006. During 2006-2007 so far Central Government deposits with te Reserve
Bank have increased by Rs. 3,615 crore. The Reserve Bank’s net credit to the Centre, thus,
increased by Rs. 6,963 crore during the fiscal year 2006-2007 ( up to January 19, 2007) as against
an increase of Rs. 50, 622 crore during the corresponding period of 2005 –206

2.9 LIQUIDITY MANAGEMENT


       The Reserve Bank continued to ensure the appropriate liquidity is maintained in the
system so that all legitimate requirements of credit are met, particularly for productive purposes,
consistent with the objective of price and financial stability. Towards this end, the Reserve Bank
continued with its policy of active demand management of liquidity through OMO including
MSS, LAF and CRR, and using all the policy instruments as its disposal flexibly. However.
Liquidity management emerged to be more complex during the past year, with greater variation in
market liquidity, largely reflecting variations in cash balances of the Governments and capital
flows. During the first quarter, unwinding of the Center’s surplus balances with the Reserve
Bank’s purchase of foreign exchange from authorized dealers led to ample liquidity into the
banking system. This was mirrored in an increase in the LAF reverse repo balances.

                                                28
       However, in view of some build-up of Centre’s cash balances with the Reserve Bank
during August 2006, the absorption under LAF reverse repose witnessed some decline during the
second quarter. Beginning mid September 2006, liquidity conditions turned tight on account of
advance tax outflows and festival season currency demand. The Reserve Bank injected liquidity
through repo on eight occasions between mid September 2006 and end-October 2006. however,
net injection of liquidity was witnessed only on two occasions (October 20 and October 23, 2006).
Liquidity pressures eased by end-October 2006 following soje decline in Centre’s surplus cash
balances. Liquidity conditions eased during November 2006, partly reflecting market purchases
of foreign exchange by the Reserve Bank. This was mirrored in balances under LAF reverse
repos, which increased to Rs. 34.255 crore as on December 6, 2006. liquidity conditi8ons,
however, turned tight from the second week of December 2006 largely due to payments for
auctioned Central Government securities, advance tax outflows (with concomitant increase in the
Centre’s surplus cash balances with the Reserve Bank from Rs. 42, 716 crore as on December 15,
2006 to Rs. 73,634 crore on December 22, 2006), and the increase in the CRR by 501 basis points
in two phases. In view of the prevailing liquidity conditions, the Reserve Bank injected liquidity
into the system through repo operations from December 12, 2006.

       Average daily net injection of liquidity by the Reserve Bank increased from Rs. 5,615
crore during December 13-21, 2006 to Rs. 25,585 crore during December 22-29, 2006 in contrast
to the average daily absorption of Rs. 1,262 crore and Rs. 9,937 crore during October 2006 and
November 2006, respectively. Average daily net injection of liquidity by the Reserve Bank
moderated to Rs. 10, 814 crore during January 2007 (up to January 20, 2007), as liquidity
pressures eased partly on account of reduction in the Centre’s balance with the Reserve Bank
from Rs. 65,682 crore as on December 29,2006 to Rs. 48,528 crore as on January 19, 2007. Net
outstanding balance under LAF repos was Rs. 10,190 crore as on January 24, 2007.



2.10 INIDAN FINANCIAL SECTOR SWOT ANALYSIS

Strengths
   1. proven asses quality resilience in past downturns.

   2. Prove management teams, track record

   3. Stable industry dynamics

   4. Well – established regulatory frame work


                                               29
   5. Stable / low NPL formation rates.



Opportunities

   1. Improving secular GDP growth prospectus
   2. Establishment of special economic zone likely to promote further industrialization
   3. Years, if not decades, of catch-up economics – low per capita income, educated work
      force.
   4. Rapid financial deepening, i.e. loan growth as multiple of nominal GDP growth.
   5. Rising consumer spending, consumer credit business.
   6. Rising corporate capex, investments
   7. M&A optimality.

Key issues/swing factors

   1. Liquidity : Deposit growth sustaining momentum and loan growth moderating to 25%
      from the current level of 30%
   2. Policy risks: Moderating in inflation outlook. Potential for further tightening in the short
      term. Our echonomist believes that the risk is less.
   3. Interest rate outlook some headwind from policy rate hike but won,t be a shock factor.
   4. Loan growth : Moderation needed more for maintaining industry dynamics.
   5. Reduction in reserve requirements: key swing factor for liquidity and hence for sustaining
      growth momentum.

Key risk factors
   1. “Running on empty’ in terms of liquidity
   2. Tightening in global liquidity may trickle down to Inida
   3. Potentially hawkish RBI stant on inflation/monetary policy
   4. potential rise in long bond yields, MTM risk for banks
   5. potential for valuation pullback, should earnings delivery disappoint expectations.

Weakness, Key challenges
   1. Continued crowding out effect form Govt. budget deficit, combained with accelerating
      private credit demands
   2. Ownership restrictions

                                                30
   3. Constraints on state- owned banks micro including HR, staff cut, branch cut constraints.

2.11 BUDGET 2007-2008 OVERVIEW
BUDGET 2007-2008
       Improvement in GDP growth rate from 7.5% in 2004-2005 to 9% in 2006-2007; average
growth rate in the three ears of the UPA Government at 8.6% growth target for the Tenth Plan of
8% will be nearly achieved; during three year period, acceleration in growth rate inmanufacturing
from 8.7% to 9.1% and further to 11.3% and in services sector from 9.6% to 9.8% and further to
11.2%. average growth in agriculture during Tenth Plan estimated at 2.3%

Income and Savings :         per capita income in 2005-2006, in real terms, increased by 7.4%,
savings rate estimated at 32.4% and investment rate at 33.8%.

Inflation : Growth in bank credit, year on year, by 29.6% expansion in money supply (M3) by
21.3% foreign exchange reserves at US$ 180 billion; pressure on domestic pri8ces by global
commodity prices; and supply constraints in some essential commodities – consequently, average
inflation in 2006-2007 estimated at between 5.2 and 5.4% vis-à-vis 4.4% last year.

In 2006-2007, additional irrigation potential of 2,400,000 hectares to be created; until December
2006 drinking water provided to 55,512 habitation, 12,198 kilometers of rural roads completed
and 783,000 rural houses constructed with 914,000 houses under construction; 19,758 villages
covered so far under the Rajiv Gandhi Grameen Vidyutikaran Yojana; 15,054 villages provided
with telephone against target of 20, 000 villages, and balance to be covered by the end of the year.

ELEVENTH FIVE YEAR PLAN

Objectives : “Faster and more Inclusive Growth”, growth rate of approximately 10% by the end
of plan period; growth of 4% in the agriculture sector, faster employment creation, reducing
disparities across regions and ensuring access to basic physical infrastructure and health and
education services to all.

AGRICULTURE


Farm credit : Target of Rs. 225,000 crore for 2007-2008 with an addition of 50 lakh new farmers
to the banking system; provision of Rs. 1,677 crore for 2% interest subvention for short-tem crop
loans; a special plan being implemented over a period of three years in 31 especially distressed
districts in four states involving a total amount of Rs. 16,979 crore; of this, about Rs. 12,400 crore

                                                 31
to be on water related schemes; special plan includes a scheme with proposed provision of Rs.
153 crore for induction of high yielding milch animals and related activities.


Mission for Pulses : Integrated Oilseeds, oil palm, Pulses and Maize Development programme to
be expanded with sharper focus on scaling up the production of breeder, foundation and certified
seeds; Government to fund the expansion of Indian Institute of Pulses Research, Kanpur, and
offer the other producers a capital grant or concessional financing to double production of
certified seeds within a period of three years.
Plantation Sector :       Financial mechanisms for re-plantation and rejuvenation to be put in place
for coffee, rubber, spices, cashew and coconut.


Accelerated Irrigation Benefit Programme : 35 projects likely to be completed in 2006-2007
and additional irrigation potential of 900,000 hectares to be created; outlay to be increased from
Rs. 7,121 crore to Rs. 11,000 crore including grant component to State Governments of Rs. 3,580
crore, an increase from Rs. 2,350 crore. Rainfed Area


Development Programme: Proposed allocation of Rs. 100 crore for the new Rainfed Area
Development Programme.


Water Resources Management : Restoring Water Bodies : World Bank loan agreement signed
with TamilNadu for Rs. 2,182 crore to resore 5,763 water bodies having a command area of
400,000 hectares; agreement for Andhra Pradesh expected to be concluded in March 2007 to
cover 3000 water bodies with a command area of 250,000 hectares.


Extension System : New programme to be drawn up that will replicate earlier Training and Visit
(T&V) programme; Agriculture Technology Management Agency (ATMA) now in place in 262
districts to be extended to another 300 districts; provision for ATMA to increase from Rs. 50
crore to Rs. 230 crore.


Fertiliser Subsidies : Based on study to be conducted, a pilot programme to be implemented for
delivering subsidy directly to farmer.


Agricultural Insurance : National Agricultural Insurance Scheme to be continued for Kharif
and Rabi 2007-2008 with a provision of Rs. 500 crore; a weather based crop insurance scheme to
                                                  32
be started by Agricultural Insurance Corporation on a pilot basis as an alternative to NAIS
allocation of Rs. 100 crore to be made in 2007-2008
INVESTMENT :
Gross domestic capital formation in 2005-2006 grew by 23.7 percent in April-January, 2006-
2007, foreign direct investment amounted to US $ 12.5 billion and outpaced portfolio investment
of US$ 6.8 billion;
Central Public Sector
To invest Rs. 165,053 crore through internal and extra budgetary resources in 2007-2008;
Government to provide equity support of Rs. 16,361 crore and loans of Rs. 2,970 crore.


INFRASTRUCTURE :
Power : Seven more Ultra Mega Power Projects under process and at least two to be awarded by
July, 2007; other initiatives include facilitating setting up of merchant power plants by private
developers and private participation in transmission projects; Accelerated Power Development
and Reforms being restructured to cover all district headquarters and town with a population of
more than 501,000; budgetary support for APDRP to increase from Rs. 650 crore to Rs. 800
crore; Rajiv Gandhi Grameen Vidyutikaran Yojana; allocation to increase from Rs. 3,000 crore to
Rs. 3,983 crore.


Coal :   26 coal blocks with reserves of 8,581million tones and four lignite blocks with reserves
of 755 million tones allotted to Government companies and approved end users; definition of
specific end use to be enlarged to include underground coal gasification and coal liquefaction.


National Highways ; Provision for National Highway Development Programme to increase from
Rs. 9,945 crore to Rs. 10,667 crore; road-cum rail bridge at Bogibee, Assam, over Brahmaputra,
to be taken up as an national project.


Public Private Partnership and Vialibility Gap Funding :
Revolving fund with a corpus of Rs. 100 crore to be set up to quicken project preparation; fund to
contribute upto 75% of preparatory expenditure in the form of interest free loan to be recovered
from the successful bidder.
INDUSTRY
Petroleum and Naural Gas :162 production contracts awarded; investment of Rs. 97,000 crore
made in exploration; 23 coal bed methane blocks awarded for exploration.
                                                33
Textiles :     Provision for Scheme for Integrated Textiles Parks to increase from Rs. 189 crore to
Rs. 425 crore; echnology Upgradation Fund scheme to continue with provision of Rs. 911 crore.


Handlooms : Additional 100-150 clusters to be taken up in 2007-2008; health insurance scheme
to be extended to more weavers and also to be enlarge to include ancillary workers; allocation for
the sector to be enhanced from Rs. 241 crore to Rs 321 crore.


Small & Medium Enterprises : Increase in outstanding credit from Rs. 135,200 crore to Rs.
173, 460 crore at end December 2006.
Coir Industry :Scheme for modernization and technology upgradation with special emphasis to
major coir producing States announced with a proposed provision of Rs. 22.50 crore.


SERVICE SECTOR
Foreign Trade : Merchandise exports expected to cross US $ 125 billion by the end of the
current fiscal.
Tourism ; Provision for tourist infrastructure to increase from Rs. 423 crore to Rs. 520 crore.




FINANCIAL SECTOR
Banking : Under Differential Rate of Interest scheme providing finance at a rate of 4% to weaker
sections of the community engaged in gainful occupations, limit of loan to be raised from Rs.
6,500 to Rs. 15,000 and limit of housing loan to be raised from Rs. 5,000 to Rs. 20,000 per
beneficiary.


Regional Rural Banks : To open at least one branch in 80 uncovered districts in 2007-2008 \;
Securitisation and Reconstruction of Financial Assets and Enforcement of Securitisation of
Interest (SARFAESH) Act to be extended to loans advanced by RRBs; to be permitted to accept
NRE/FCNR deposits; and those which have a negative net worth to be recapitalized.


Housing Loans : National Housing Bank to introduce ‘reverse mortgage’ under which a senior
citizen who is owner of a hose can avail of a monthly stream of income against mortgage of
his/her house, while remaining the owner and occupying the house throughout his/her lifetime,


                                                 34
without repayment or servicing of the loan; regulations to be put in place to allow creation of
mortgage guarantee companies.


Insurance : Exclusive health insurance scheme for senior citizens offered by National Insurance
Company; other three public sector insurance companies to offer a similar product to senior
citizens; Micro Financial Sector (Development and Regulation) Bill and a comprehensive Bill to
amen insurance laws to be introduced in Budget Session.


Financial Inclusion: A Financial Inclusion Fund to be established with NABARD for meeting
cost of development and promotional interventions; a Financial Inclusion Technology Fund to be
also established to meet costs of technology adoption; each fund to have an overall corpus of Rs.
500 crore, with initial funding to be contributed by Government. RBI and NABARD.


Capital Markets : PAN to be made sole identification number for all participants in securities
market with an alpha-numeric prefix or suffix to distinguish a particular kind of account; idea of
self Regulating Organisations (SRO) to be taken forward for different market participants under
regulations to be made by SEBI; mutual funds to be permitted to launch and operate dedicated
infrastructure funds; individuals to be permitted to invest in overseas securities through Indian
mutual funds; short selling settled by delivery, and securities lending and borrowing to facilitate
deliver, by institutions to be allowed; enabling mechanism to be put in place to permit Indian
companies to unlock a part of their holdings in group companies for meeting their financing
requirements by issue of Exchangable Bonds


Innovative Financing for Infrastructure : Funds from National Small Savings Fund may also
now be borrowed by India Infrastructure Finance Company Limited; suggestions of Deepak
Parekh Committee to be examined for establishment of two wholly owned overseas subsidiaries
of IIFCL with objectives to (i) borrow funds form RBI and lend to Indian companies
implementing infrastructure projects in India, or to co-finance their ECBs for such projects, solely
for capital expenditure outside India; and (ii) borrow funds from the RBI, invest such funds in
highly reated collateral securities and provide ‘credit wrap’ insurance to infrastructure projects in
India for raising resources in international markets.



SOLUTION OVERVIEW

                                                 35
                One of the biggest challenges for Financial was ensuring straight through
processing (STP) of most of the financial transactions. With the ICICI group having several
companies under its umbrella, Financial needed to seamlessly integrate with multiple applications
such as credit cards, mutual funds, brokerage, call center and data were housing systems. Another
key challenge was managing transaction volumes.

       ICICI Bank, underwent a phase of organic and inorganic growth, first by acquiring Bank
of Madura followed by a reverse merger of the bank with its parent organization, ICICI Limited.
The Scalable and open systems based architecture, enable Finance to successfully manage the
resultant increase in transaction levels from 400,000 transactions a day in 2000 to nearly 201
million by 2005 with an associated growth in peak volumes by 5.5 times. With Financial, the
bank currently has the ability to process 0.27 million cheques per day and manage 7000
concurrent users.

       Over the years, the strategic partnership between ICICI Bank and Infosys that started in
1994 has grown stronger and the close collaboration has resulted in many innovations. For
instantance, in 1997, it was the first bank in India to offer Internet Banking with Finacle’s e-
banking solution and established itself as a leader in the Internet and eCommerce space. The bank
followed it up with offering several e-Commerce services like Bill Payments, Funds Transfers and
Corporate Banking over the net. The Internet is a critical element of ICICI Bank’s award winning
multi-channel strategy that is one of the main engines of growth for the bank. Between 2000 and
2004, the bank has been able to successfully move over 70 percent of routine banking transactions
from the branch to the other delivery channels, thus increasing overall efficiency. Currently, only
25 percent of all transactions take place through branches and 75 percent through other deliver
channels. This reduction in routine transactions through the branch has enable ICICI Bank to
aggressively use its branch network as customer acquisition units. On an average, ICICI Bank
adds 300,000 customers as month, which is among the highest in the world.



2.12 SECURE BANKING

       ICICI Secure online banking experience

   •   It strives provide a secure banking environment, provided the customers.

   •   Do not share their User Ids, passwords, cards, card numbers on PINs with anyone, NOR
       from their consequent unauthorized use.


                                                 36
   •   ICICI Bank employs a range of security features for its Online Banking services.

   •   Firewall (Virtual electronic fence that prevents unauthorized access to the ICICI Bank
       server)

   •   Verisign Digital Certificate

   •   Two levels of passwords for executing Financial Transactions

   •   Secured Funds Transfer & Bill Payment.



2.13 KEY RATIOS

RATIO ANALYSIS [SBI]

       The financial statements of the company reveal the needed information for the investor to
make investment decision.

The ratio analysis helps the investor to study the individual parameters like profitability, liquidity
leverage and the value of the stock.



2.13.1 (A) INTERPRETATION

SBI-RATIO ANALYSIS
   •   Net interest incoming growth is due to Low cost deposits which helped the bank in
       containing its costs of funds. During 2006, low cost deposit grew by 19.3% on a year
       basis which helped contain the cost of funds.

   •   Interest expenses, to the interest income ratio declined consistently from 63.29% in 2004
       to 57% in 2005.

   •   The bank would sustain Net interest income ratio and can marginally improve on it
       because of its resource mobilization power and cost control measure..

   •   Credit off take of the bank has been lower than the Indian banking industry.

   •   Not interest income’s key contributor is the other income.

   •   Other income includes the fees and commission income. Incomes from foreign exchange
       transactions are also recorded.



                                                 37
  •   The ratio of non-interest income is on the decline trend excepting the year 2004. because
      its growth was not adequate enough to work the increase in the total funds.

  •   During 2005-2006, there has been a significant decline in profits from trading in
      investments to Rs. 5.9 bn compared to Rs. 17.75 bn in the previous.

  •   Investment/deposit ratio was on the declining trend excepting the year Mar 2004.

  •   The reduction in investment ratio was mainly due to deployment of funds under advances.
      The increase in investment during Mar 2004 was at 18.62% while increase in deposit was
      at 9.6%

  •   SBI group is continuously losing their market share in deposits since the opening up of the
      banking sector to their private counterparts.

  •   Operating expenses by 6% over the previous years (Mar 2005) which shows a decline
      (69%).

  •   Employee expenses, which always contributed substantial chunk of the total operating
      expenses, also grew. It is also note worthy that the bank has total staff strength of
      1,98,774 as on 31st Mar 2006. As of SBI launched VRS scheme, natural retirement, which
      shows reduction in, staff accounts nearly 5000 employees.

  •   A sizeable increase of operating expenses is being notices.

  •   RONW is very much declined to an extent of (12.3%) from March 2005-March 2005-
      March 2006, because of the stagnant net profit ratio.

  •   High investment is made in core banking facilities

  •   New technology products coupled with quick turn around time (TAT) have enabled mid-
      corporate group to increase its business substantially.

  •   New department growth in every branch by introducing new technologies with
      computerized improvement.



2.13.2 (A) INTERPRETATION

ICICI – RATIO ANALYSIS




                                               38
•   Net Interest Income / Total funds has increased primarily reflecting an increase of the
    average volume of Interest learning assets.

•   In Feb 2006, In accordance with RBI guidelines for Accounting for securitization of
    standard assets, ICICI accounts for any loss arising on Securitization immediately at the
    time of sale and the profit/premium arising on account of securitization is amortized over
    the life of the asset.

•   All direct marketing agency expenses, on automobile loans and other retail loans are
    reported separately under “Not interest expense”. These commissions are expended and
    not amortized over the live of the loan.

•   Interest income/total funds have increased from 6.39% to 6.56% in the end, 2006 is
    primarily due to an Increase in the average Interest earning assets. This is due to the
    increase in allowances (626) in spite of prime leading rate increase by 225 basic points in
    the period of 2005-2006, benchmark rate for floating home loans has increased by 150
    points in the same period.

•   Interest expenses has increase during 2005-2006 is primarily due to an increase of 55.2%
    in average interest-bearing liabilities to Rs. 2354.7 billion in the six-months period ended
    sep 30, 2006.

•   Cost of funds to 6.3% from 1511.3 billion in 2005 and an increase of 50 basic points in the
    six month period ended sep 30, 2006 from 5.8% in the six month period ended sep 30,
    2006.

•   Total deposits increased consequence to the general increases in interest rates reflecting a
    tight systemic liquidity scenario and increase in deposit rates for retail and other customers
    in Fiscal 2006.

•   Non interest has increased and is stable during 2005-2006 due to increase in commission,
    exchange and brokerage and a 12.5% increase in other income, offset, in part by a 22.5%
    decline in house income, due to growth in retail banking fee income arising form retail
    assets like home loans and credit cards and retail liability product income like account
    servicing charges, increase in transaction banking fee and fee income.

•   Other income decreased comparatively [25.41(2004) 27.33 (2005) 26.72 (2006)] which
    includes the unrealized gain/loss on certain derivative transaction. The lower capital gain



                                               39
    is a result of the sharp fall in the equity markets in May 2006 and adverse conditions in the
    debt markets.

•   Operating expenses increases are primarily due to the increased volume of business,
    primarily in retail banking and includes maintenance of ATMs, credit card related
    expenses; call centre expenses and technology expenses.

•   The number of branches excluding foreign branch and OBVSL and extension counter
    increased to 614 at March 31, 2006 from 562 at March 31,2005.

•   The number of savings deposit and deposits from outside India has increased to a good
    extent.

•   Provisions and contingencies (excluding provisions for tax) increases in primarily due to
    the significantly higher level of amortization of premium on government securities in
    fiscal 2006, investments in government securities and lower level of writ backs in fiscal
    2006.

•   With effect from the quarter ended Dec 31, 2005 RBI increased the requirement of general
    provisioning on standard loans (excluding loans to agriculture sector and small and
    medicines enterprises) to 0.40% compared to 0.25% applicable till September 30, 2005. in
    accordance with this, the bank has made general provision of Rs. 3.39 billion in fiscal
    2006.

•   Operating profit before provision and tax ratio increase of 2.23% form 2.09% (2005) is
    primarily due to increase in net interest income, increase in fee income increase in treasury
    income and of operating expenses.

•   Employee expenses have been increased primarily due to the number of employees. But
    her profit per employee is being decreased (1,99,853) March 2006 to (1,115,157) March
    2005 to the extent 10.52% decreasing trend is foreseen.




                                             40
                                           CHAPTER 3


3.1 TECHINICAL ANALYSIS OF ICICI AND SBIN
3.1.a. ICICI BANK
Outlook

          I would recommend a buy only above 830 on close basis. The level of 920 is crucial since
the short term Bullish trend will be confirmed, only if the price sustains above 920. Major
support for the stock is at 800. If the stock slips below this support level, we can see further
levels of 730 – 630 – 597.
          The continuation pattern negates immediate bearish momentum on the stock and it’s
advisable to buy at declines. Short term investor can initiate a buy above 920 with a target of 995
– 1055.
          At present the stock trades in the Indecisive zone on intraday basis.
The above targets are fixed based on leading Indicator Analysis and the trend following.


Indicator Analysis:
          Moving Average (14 Day) is on positive note and RSI started moving towards North.
Since Moving averages being a lagging indicator, it has considered secondary in Analysis.




                                                   41
The above chart is the weekly chart for ICICI BANK.


4.2 SBIN
Outlook




The weekly pattern suggest a short term bullishness on the stock with a price target of 1300. The
current level is crucial for the stock to hold the support of 885. A close below 885 could drag the
stock towards south to the target zone of 660.


At current levels, there could be greater chances of bounce back from 885. This could become a
complete head and shoulder pattern in coming months. If that proves to be successful, it is
advisable to unwind all long positions at the right shoulder top (1330-1350)


Indicator Analysis:
       Moving Average (14 Day) is on positive note and RSI started moving towards North.
Since Moving averages being a lagging indicator, it has considered secondary in Analysis.




                                                 42
3.2. FINDINGS
  •   ICICI and SBI credit deposit ratio is on the side though ICICI banks shows a little
      decreasing trend to the exten of 2.24 % Over mar2005 _ mar 2006
  •   Both the bank investment deposit ratio is on the declining trend
  •   Both the banks has shown better utilization of cash portfolio
  •   ICICI bank Interest expences to interest earned remains the same Over 2 Years whereas
      SBI shows reduction
  •   Other Income ratio remains fluctuation in both the banks
  •   Operating expences to total income shows a decresing trend in ICICI bank whereas it was
      on the rising side in SBI
  •   Interest income to total funds shows rising mode in ICICI whereas In SBI more or less it
      remains at the level;
  •   The ratio of interest expences to total funds shows an increase in
  •   Value in ICICI Bank whereas in SBI interest expences shows a
  •   Rising mode
  •   The ratio of Non Interest income remains the same for ICICI for The past 2 Years whereas
      in SBI at shows a decline
  •   The stock witness some selling pressure in the coming days in
  •   ICICI Bank whereas the stock witnessed a huge selling pressure
  •   From the top and bounced back from the major support of 800
  •   The continuation pattern negates immediate bearish momentum on the stock and it’s
      advisable to buy at declines. Short term investor can initiate a buy above 920 with a target
      of 995 – 1055.




                                               43
3.3. SUGGESTIONS
3.3.a. ICICI BANK:


   1. Best play in a buoyant environment – Favorable macro, buoyant
   Market – related revenues and a benign environment for asset quality.
   •   ICICI –as a player focused on maintaining and /or improving Market share in key business
       segments, particularly retail lending- Will, in our view, benefit immensely form a positive
       operating Environment.
   •   ICICI is viewed as it is benefited from the procyclicality effect of The economic cycle as
       its borrowers in the legacy project financing Activity witnessed their debt servicing ability
       increasing considerably. It is believed that the profitability of this segment has improved
       as a Result of lower loan loss provisions and lower taxable rates of Income from this
       source. Expectations is on the procyclical benefit To continue and hence profitability of
       legacy lending to be sustained At levels seen earlier.


   •   Market related revenues is believed to contribute 14% - 15% to ICICIB’s operating
       revenues and have boosted its preprovision RoAA. Buoyant environment to sustain the
       contribution from market -related revenues is expected and hence the operating
       profitability.


   2. Pricing power in consumer financing segment profitability Against potential shocks.


   •   ICICIB enjoys a dominant market position across customer Categories in retail lending.
       The strong market position and robust Demand for consumer financing vests significant
       pricing power With ICICIB is believed either by allowing a hike in lending rats,
       Negotiating higher subvention form manufacturers of cutting Distribution costs.
   •   Strong pricing power and a balance sheet that is significantly Biased towards retail
       lending buffers ICICB’s profitability from Potential shocks in the bank’s funding cost.
   •   ICICB has an adverse mismatch profile between assets and Liabilities. High volatility in
       interest rates could adversely effect Profitability in the short term; however, as the back
       book gets Reprised at new lending rates upon maturity, the bank’s NIM will Likely show
       improvement. This phenomenon to play out through FY1002E and FY2009E is expected.

                                                44
   3. In line with consensus, but we recommend buy ICICIB for growth Reasons and not for the
       relative valuation appeal.
It is not so much about ICICIB versus HSFC or HDFCB, but about Their respective operating
metrics and growth conditions. Market Has rewarded both strategies:
ICICIB’s broad-based strategy allows capturing value across the Value chain in a customer
segment; and
ICICIB, like other large players in the private sector, enjoys Favorable conditions arising from a
restrictive regulatory/policy Environment towards new entrants and foreign banks and slow Pace
of reforms for state-owned banks is believed.


   4. Increasing contribution from strategic investments – Yet another driver
             •   The value accruing from subsidiaries to be 17% of ICICIB’s Current market
                 capitization. This to rise to 20% of ICICIB’s target Price over the next 12 months
                 is expected with banking and life Insurance being the key drivers.
             •   The life insurance business of        ICICIB has been incurring      losses On an
                 accounting basis due to continued investment in expznding The sacle and scope
                 of the business. The life insurance business is Believed in creating wealth for its
                 shareholders through market Share gains, increasing penetration of life insurance
                 and improving operating efficiency.
             •   The asset management and venture capital fund of ICICB makes A negligible
                 contribution currently; however, these businesses is Believed to hold significant
                 upside potential as they achieve scale Economies.


3.3.b. SBI


       1. Potential headwind to price performance from loss of market share and weaker RoAA
                 •   SBI’ has been losing market share, both in terms of loans and Deposits, for
                     quite some time. But , the extent of loss over the Past 18 months has been
                     staggering, particularly for deposits (2.2%)
                 •   In a bid to protect its profitability, SBI has embarked on a Selective growth
                     strategy. But given the bank’s spread and size, would be difficult to pursue a
                     selective growth strategy unless It reconciles to a significant loss a market
                     share over time.
                                                  45
               •   Challenges are compounded by weaker profitability. The Expectoration is the
                   core operating profits to rebound past Y2004 levels in FY2008 E. Non
                   recurring revenues and costs masked this condition in FY2005 and FY2006.
               •   SBI’s size and potential to improve efficiency may sway Consensus opinion;
                   the deep value inherent makes the Investment case compelling . Although
                   there is potential to Improve      performance, it remains unrealized thus far.
                   Convinced Size and potential is convincing.

        2.limited upside to growth expectations in the medium term Believe SBI’s growth will
remain volatile. Lack of exceptional Income/cost elements and need to raise loan loss provisions
from Very low levels will likely cause volatility in earnings growth Through FY2009E, in our
view.
The forecast says12% CAGR in net profit through FY2009E, However, on YoY basis, significant
volatility in net profit Growth is expected      The estimates are below that of consensus for
FY2009E and FY2009E by 10%. Consensus is overestimating revenues by Either assuming
higher loan growth or NIM. The latter is more Likely that the former, in research view.
Significant downward revision to consensus estimates for Operating revenues and profits over the
past 12 months.
Consensus appears     to be positive about excess liquidity that SBI Has reserve holding are
significantly higher than minimum Required level. SBI would likely utilize the excess liquidity
over The next 12 months. Excess liquidity provides upside only in the Short term is viewed.


3. Value inherent, but catalysts limited
        Investors will maintain a growth bias in the Indian market. Growth expectations for SBI
   are below that of consensus (21% CAGR through FY2009E versus consensus 15% CAGR) is
   Believed


News flow about reduction of government holding in SBI to 15% And amendment to the SBI
subsidiary act could be potential short- Term catalysts. However, the focus of the market will be
on Earnings is believed., there are no catalysts to drive earnings Strongly is viewed.




                                                 46
4. Reforms could be a trigger-assigning a low probability.
      •   SBI is viewed as it will need flexibility in reorganizing its Distribution network and
          human resources. As long as the
      •   Constraints remain, it will be at a disadvantage to peers in the Private sector is believed
      •   There have a few incremental changes such as introduction of Voluntary retirement
          scheme for employees. However, there Changes tend to drain the productive resources
          rather than Eliminating redundancy is viewed.
      •   The RBI has chalked out a roadmap for opening up the sector to Foreign banks in 2009.
          Should this come to fruition, it will leave State-owned banks, including SBIS,
          significantly disadvantages as We except to see consolidation within the private sector.




                                                 47
3.4. CONCLUSION


        This study on investment decision is conducted by analyzing and Comparing ICICI Bank
and SBI based on fundamental analysis and Technical Analysis.


        This indicates that, the key driver of stock performance of ICICI       Bank shows an
Increasing trend where as underperformance of SBIS hows a decreasing trend besides its high
potential.


        The initial investment summary cover with a Buy rating to ICICI Bank and a sell rating to
SBI based on strategic investment using the Analysis.




                                               48
3.5. BIBLIOGRAPHY


Books
   •    Punithiavathy pandian, “Security Analysis and portfolio Management” Vikas Publishing
        House Pvt. Ltd
   •    Book of Readings, “Security Analysis”, ICFAI university




Reports


   •    Report on Kotak Securities research on the ICICI Bank and SBI
   •    Report on “Indian Economic Survey 2006-2007”
   •    Goldmen sachs Global Investment Reasearch


Journal


   •    Ernst and Young, “India’s Best Banks”, The financial express
   •    Sanjoy Narayan “Indian’s Best Banks – KPMG Survey”




Website:
        www.rbi.org.in

        www.gov.in

        www.stockcharts.com

        www.nseindia.com




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