Doing Business in India The Big Picture
A Banker‟s Perspective
US – India Business Summit
November 29, 2006 Dr. Anil K Khandelwal Chairman & Managing Director Bank of Baroda
February 1, 2009 US – India Business Summit, 2006 1
Indian Economy – A Snapshot
One of the fastest growing in the world Consumption growth fuelling economic growth – consumption expenditure forming 78% of GDP Services sector contributing over 60% to GDP Emerging as a hub of manufacturing excellence. new growth
engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses Where forces of competition are at work Innovation driving enterprises
Economic reforms well on course – entering second phase
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Indian Economy – A Snapshot
“Inclusive growth” occupying central place High untapped potential in rural / agri - economy
Indian companies on acquiring spree and going global
Indian companies pursuing global best practices and producing world-class managers
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Improved Ranking on Business Front
World Bank – IFC Report on Doing Business in India for 2007 has given a higher rank to India compared to last year because :
- India has cut the time to start a business from 71 to 25 days - Reduced the Corporate Income Tax rate from 36.59% to 33.66%
- Supreme Court’s decision has made enforcing collateral simpler –
easing access to credit - Reforms to Stock Exchange Regulations have toughened investor protection
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The Indian Financial Sector
Robust financial system Well established institutions Strong supervisory system Progressive integration of financial markets - banking, insurance, mutual funds, securities, commodities High competition marked by innovation
High technology absorption
Rediscovery of the Indian customer 21st century customer driving innovations in banking
Banking plus financial services becoming the new offerings
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The Indian Financial Sector
Alternate e-delivery channels becoming popular with Indian customers Financial sector bracing to meet life cycle and life style needs of the great Indian middle class “Cradle to Grave” becoming the new spectrum of life cycle needs Banking graduating beyond traditional boundaries of vanilla
banking
Indian customer demanding TOTAL FINANCIAL SOLUTIONS Banking sector bracing itself to offer customized and structured products
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The Indian Financial Sector
Banking sector entering newer areas like wealth management, private banking, doorstep banking, electronic banking, credit cards, investment advisory services, etc. Indian banks in a war game to acquire and retain customers Indian middle class being reached out and wooed by banks Indian middle class and financial sector beginning to dream together and weave a new bond of relationship Financial products like mutual funds, life policies, non-life policies competing with traditional banking products Banking sector fully geared for helping Indian middle class realize its dream Banking sector in good health – with low non-performing assets and prudential accounting standards in place Indian banking entering the phase of consolidation (2nd Phase of Reform) – on way to acquire global size
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Robust & Resilient Banking Sector
A free & open banking sector where most businesses are now covered at the market-determined rates Full banking license system Highly Stable Sector despite a series of Exogenous Shocks like the Asian
Crisis, Sanctions due to Nuclear Explosions, Record High Oil Prices and
Large Corrections in Stock Markets Significant improvement in the Asset Quality: Net NPAs (%) have decreased from 8.1% at end-March 1997 to 2.0% at end-March 2006 despite tightening of
prudential norms
Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% at end-March 1997 to 12.8% at end-March 2006 Operating Expenses of SCBs have declined from 2.1% of Total Assets in 1992 to 1.8% in 2005 indicative of improved efficiency Intermediation costs of SCBs have declined from 2.9% in 1995-96 to 2.1% in 2005-06
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Indian Banks – in good health…
Strong Regulatory & Supervisory system RBI has strengthened prudential norms with respect to income recognition, disclosures and capital adequacy India complies with BIS 26 norms of best practices of supervisory criteria, country risk & convertibility Indian banks are well on road towards BASEL II compliance Credit Deposit Ratio is increasing – PSB : 66.2%, Pvt. Banks : 76.3% Bank credit is growing by about 30% Indian banks compare favourably with its Asian peers in asset quality Indian banking sector grew by 6 times in the last decade – from Rs. 5,984 bn in 1995 to Rs. 36,105 bn. KYC norms and Anti Money Laundering regulations in force Indian banks are serving the “Two Faces” of India – the Underprivileged, the Progressive & the Opulent – with equal aplomb
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Indian Banks – in good health…
About 70000 strong branch network – More than 60% presence in Rural areas
• PSBs • Pr.Bks : 72% : 19% 7% • Fgn. Bks.:
• Others include UCBs,
Consistent growth in profitability – Spread is
getting healthier – from 3.1% in 2004-05 to 3.2% in 2005-06 NPL Ratios compare favourably with global trends
RRBs, LABs & NBFCs
• Spread • CAR • ROA • Net NPA : 3.2% : 12.0% : 1.0%+
• Gross NPA : 3.34% : 2.00%
TRS Apr 01 – Apr 05
• PSU Banks : 61.2% : 40.0% : 33.9%
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Consistently out-performing stock indices –
• India Banking : 51.3% • New Private
Total Return to Shareholders continues to be • Old Private
attractive
February 1, 2009 US – India Business Summit, 2006
Banks – Major Financiers of Growth
India has one of the strongest financial sector with low systemic risk Upturn in economic activity is mirrored in the sustained growth in
“Demand for Bank Credit”
Bank credit has increased sharply from 30% of GDP at end-March 2000 to 48% at end-March 2006 Non-food credit by SCBs increased by an average of 26.1% between 2002-2006 versus its long-term average of 17.8% from 1970 to 2006 Deployment of credit is quite broad-based with increasing flows going to infrastructure , SMEs, agriculture and retail sector (especially residential mortgages) during the past three years
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Indian Banks in the Best of the League of Asian Peers
According to Moody‟s Investor Services Analysis : Indian lenders have highest Return on Equity (ROE) in Asia (20.38%), followed by Indonesia (20.19%), New Zealand (18.83%), Japan (-6.42%) Average gross bad loans as share of total loans – India (8.18%), Philippines (15.05%), Thailand (13.08%), China (11.80%) and Malaysia (9.73%) Cost to Income Ratio in India at 44.56% is in line with the best regulated Asian countries like Singapore (44.15%),
Taiwan (42.61%) and Hong Kong (40.05%)
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Financial Sector Reforms – Going Ahead
Requirements
Banking Regulations • • • • Credit & Recovery • • Payment Systems • • • • Communications & •
Fulfillments
Deregulated Interest rate Greater freedom to banks Significant steps towards Full capital Account Convertibility SARFAESI Act 2002 Debt Recovery Tribunal (DRT) Real Time Gross Settlements(RTGS) Electronic Clearing System (ECS) Electronic Fund Transfer (EFT) Cheque Truncation - in the pipeline Internet Banking, E-Banking, On-line
Infrastructure
•
•
Tax Payment / Utility Payments,
ATM, Mobile Banking
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February 1, 2009
US – India Business Summit, 2006
Significant Steps for Improvement…
Area
Capital Norms -
Status
Min. Capital @ 9% as against 8% by BIS Indian Banks are ahead in Basel II readiness – implementation road-map targets March 2009 Min. Capital requirement for entry set @ Rs. 3 bn. for all banks in private sector Credit Information Bureau of India Ltd List of defaulters on RBI website No financial crisis – escaped contagion effect of South East Asian meltdown Strong Regulatory Practice & Prudence in place for “Managing Affluence” Regulatory provisions to bring NBFCs & UCBs under uniform prudential norms
Financial Track record -
Credit Information
Other Regulatory Initiatives -
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Indian Banks are on a high growth track… 1. Overall banking sector is growing by – 18% 2. Retail Sector (CAGR – 5 years)
- Housing Loan : 50.% - Consumer Durables : 16% - Credit Card : 45% - Two Wheeler Loan : 31% - Car Loans : 26% - Other Personal Loans : 38%
More than 25% of the Bank Loan Assets are in Retail sector ensuring high returns - likely to cross Rs. 5700 bn by 2010
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Indian Banks are on a high growth track…
Online Banking in India . . .
Growth of e-Commerce Transactions
2002-03 2003-04 2004-05 2005-06 2006-07 2500 2000
• Estimated 4.6* million Indian Internet users are Banking Online today • Indians paying bills online is expected to increase from the current 0.3 million in
Rs. CR
1500 1000 570 500 130 0 255
2300
1180
2005-06 to 1.8 million by 2007-2008.
• E-commerce transactions will cross the Rs
2000 crore mark (2006-2007) which translates into an increase of over 300% from financial year 2004-05.
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Doing Business in India …
Is there any Untapped Potential in Indian Financial Market ? What is the „Big Picture‟ ?
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The Big Picture…
Consumption boom in India
Consumer Loans / GDP(%)
60 50 40 30 20 13 10 0 8
India Thailand Malaysia Taiwan Korea
Mortgages / GDP(%)
58 40 35 30 India Thailand Malaysia Taiwan Korea India Thailand Malaysia Taiwan Korea 37
36 26
25 20 15 10 5 0 4
India Thailand Malaysia Taiwan Korea
17 13 9
Credit Cards / GDP (%)
140 120 100 80 60 40 20 0 0.4
India
Other Retail Loans / GDP (%)
45 40
121.9 India Thailand Malaysia Taiwan Korea
41
India Thailand Malaysia Taiwan Korea
82.4
35 30 25 20 15 10 5
16 4
India
17
2.8
Thailand
9.8
Malaysia Taiwan Korea
8
Thailand Malaysia Taiwan Korea
0
In each February 1, 2009
of the US – India Business Summit, 2006 area, huge untapped potential left
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The Big Picture…
Mutual Funds – Global Perspective
Mutual Funds as a % of GDP
100 90 80 70 60 50 40 30 20 10
Brazil
87 72
Global Investment Fund Asset Pool
30 23 21 6
UK Korea Australia India USA
1600
5
1400 1200
13711396
0
US$bn
Japan
1000 800 600 400 200 0
1 11 44 77 177 274 344 399 635 468 493 512
Low Penetration – Indian industry still in early stages
February 1, 2009 US – India Business Summit, 2006
Source : CLSA Asia Pacific Markets
Luxembourg
Philippines New Zealand India
Ireland
Hong Kong
Korea
Singapore
Australia
UK
Taiwan
Japan
Italy
France
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The Big Picture…
Insurance Penetration – Global Landscape
Life premium/ GDP (%)
10 9 8 7 6 5 4 3 2 1 0 8.9 8.32 7.27 7.08 4.14
Insurance density (US$ premiums per capita)
3.6 3.51 2.53 1.78
0.82
Country UK Japan France US
Life 3287 2954 2474 1753 1366 1211 188 18 13 10
Non Life 1311 790 1093 2122 1203 495 95 4.5 16 10
UK
Australia
Malasiya
India
Indonesia
US
South Korea
Japan
France
China
Non Life premium/ GDP (%)
6 5.01 5 4 3 2 1 0 3.55 3.13 3.09 2.98 2.22 1.82 0.92 0.7 0.61
Australia South Korea Malasiya India China Indonesia
Japan
Low Penetration – A large potential still untapped
February 1, 2009 US – India Business Summit, 2006
Source : Swiss Re Report 2005
Indonesia
France
Australia
South Korea
Malasiya
China
India
US
UK
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The Big Picture…
Growth of Card Spending in India . . .
Growth of Credit and Debit Cards in India
Increasing trend of Plastic Spend
8 7 6 5
NUMBER OF CARDS IN Cr
High Technology Banking Products
Need for value added services on card products
7.3 4.9 2.8
4 3 2 1 0 2004 2005 2006
Growth of ATMs in India
30000 25000 20000 15000 10000 5000 0
2000 2001 2002 2003 2004 2005 2006 No of ATMs
Larger Number of Access Points for Customers
Convenience to customer is the key
Shared network is the future
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Wealth Management & Private Banking – New Growth Opportunities… India - one of 10 fastest-growing population of HNWIs globally There are at least 23 Indian citizens amongst the richest people on the
planet
Non Resident Indians can invest in all Indian Asset Classes No. of HNWIs in India – 100,000 (19.3% growth in 2005) Salary increases in India – 13.9% is the highest in the world
Increasing Investment avenues – Art, Realty Funds, Commodities
Penetration level of wealth management services in India - 10% in comparison to European markets (60-90%) The number of companies listed on the Bombay Stock Exchange, at more
than 6,000, is second only to NYSE. Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.
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The Big Picture…
India is fast emerging as the “Back Office” of the World & the “Global Knowledge Hub”
100 Global Companies outsource from India Top Global Banks are present in India Largest talent pool World class educational / professional institutions Increasing Trade activities Cost of operations – low
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The Story Continues…
Savings Rate @ 29% is low – Offers high potential from an increasingly affluent community Less than 40% of Indian household has a bank account Bulging Middle Class – likely to exceed 300 mn Only 2% of the Indian population have insurance cover Less than 1% of the population is actively participating in the Stock market Number of high net worth households (> Rs. 500,000) is likely to grow from 200,000 to 400,000 by 2010 Consumer Finance stands at about 2% to 3% of GDP as compared to 25% in European market Real Estate Market is projected to touch USD 50 bn by 2008 SME Sector is catching up fast creating huge prospect of growth
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Challenges Ahead….
Capital Requirements – to compete with Foreign banks in the post 2009 phase Financial Inclusion – to remove imbalances in economic
growth
Banking Sector Consolidation – for improving competitiveness – need for a clear road-map for “Managed Consolidation”
HR Challenges – Changing working conditions, re-skilling,
compensation etc. Coping with the massive technology adoption programme – change management – from employees’ as well as customers’ perspectives
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Challenges Ahead….
High intermediation costs Low Productivity
Better Corporate Governance – higher level of accountability
Improvement in productivity and efficiency in line with advanced markets Transformation from Plain Vanilla banking’ to “multi-specialist” banking
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Thank You
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