Banking Consolidation in India by kow12589

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									                         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
January 5, 2011   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, bio-

    technology, nano technology, agri. businesses

 Where forces of competition are at work

 Innovation driving enterprises

 Economic reforms well on course – entering second phase


January 5, 2011       US – India Business Summit, 2006              2
                  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




January 5, 2011      US – India Business Summit, 2006          3
        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



January 5, 2011        US – India Business Summit, 2006           4
                      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



January 5, 2011       US – India Business Summit, 2006             5
                       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



January 5, 2011       US – India Business Summit, 2006              6
                             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

 January 5, 2011             US – India Business Summit, 2006                     7
                  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

January 5, 2011          US – India Business Summit, 2006                  8
                            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

January 5, 2011           US – India Business Summit, 2006                      9
                         Indian Banks – in good health…
 About 70000 strong branch network – More                • PSBs      : 72%
                                                          • Pr.Bks    : 19%
  than 60% presence in Rural areas                        • Fgn. Bks.:    7%
                                                          • Others include UCBs,
                                                            RRBs, LABs & NBFCs
 Consistent growth in profitability – Spread is
                                                          • Spread    : 3.2%
  getting healthier – from 3.1% in 2004-05 to             • CAR       : 12.0%
  3.2% in 2005-06                                         • ROA       : 1.0%+

 NPL Ratios compare favourably with global               • Gross NPA : 3.34%
                                                          • Net NPA      : 2.00%
  trends
                                                          TRS Apr 01 – Apr 05
                                                          • PSU Banks      : 61.2%
 Consistently out-performing stock indices –
                                                          • India Banking : 51.3%
  Total Return to Shareholders continues to be • Old Private               : 40.0%
  attractive                                              • New Private    : 33.9%


 January 5, 2011       US – India Business Summit, 2006                              10
                  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


January 5, 2011       US – India Business Summit, 2006              11
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%)


January 5, 2011     US – India Business Summit, 2006       12
               Financial Sector Reforms – Going Ahead
        Requirements                                  Fulfillments
 Banking Regulations             •   Deregulated Interest rate
                                  •   Greater freedom to banks
                                  •   Significant steps towards Full capital
                                  •   Account Convertibility
 Credit & Recovery               •   SARFAESI Act 2002
                                  •   Debt Recovery Tribunal (DRT)
 Payment Systems                 •   Real Time Gross Settlements(RTGS)
                                  •   Electronic Clearing System (ECS)
                                  •   Electronic Fund Transfer (EFT)
                                  •   Cheque Truncation - in the pipeline
 Communications &                •   Internet Banking, E-Banking, On-line
   Infrastructure                 •   Tax Payment / Utility Payments,
                                  •   ATM, Mobile Banking


 January 5, 2011        US – India Business Summit, 2006                       13
                     Significant Steps for Improvement…
              Area                                            Status
 Capital Norms                    -   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
 Credit Information
                                   -   List of defaulters on RBI website
 Financial Track record           -   No financial crisis – escaped contagion
                                       effect of South East Asian meltdown
 Other Regulatory Initiatives     -   Strong Regulatory Practice & Prudence in
                                       place for “Managing Affluence”
                                   -   Regulatory provisions to bring NBFCs &
                                       UCBs under uniform prudential norms



January 5, 2011            US – India Business Summit, 2006                       14
                  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


January 5, 2011      US – India Business Summit, 2006             15
                                      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    • Estimated 4.6* million Indian Internet

         2500                                                    users are Banking Online today

                                                              • Indians paying bills online is expected to
         2000
                                                                 increase from the current 0.3 million in
         1500                                     2300
Rs. CR




                                           1180                  2005-06 to 1.8 million by 2007-2008.

         1000                                                 • E-commerce transactions will cross the Rs
                                    570                          2000 crore mark (2006-2007) which
         500                  255
                    130                                          translates into an increase of over 300%
           0                                                     from financial year 2004-05.




            January 5, 2011                   US – India Business Summit, 2006                           16
                                  Doing Business in India …



    Is there any Untapped Potential in Indian

         Financial Market ?

    What is the „Big Picture‟ ?




January 5, 2011     US – India Business Summit, 2006    17
                                                                                         The Big Picture…
Consumption boom in India
      Consumer Loans /                                                       Mortgages / GDP(%)
      GDP(%)
                                                                        40
 60                                                 58                                                                       37
                                                                        35
 50
                                                                        30
                                                                                                                                      India
 40                                                          India      25
                                          36                                                                                          Thailand
                                                             Thailand
                                                                        20                                                            Malaysia
 30                                                          Malaysia                                             17
                              26                                                                                                      Taiwan
                                                             Taiwan     15                             13
 20                                                                                                                                   Korea
                                                             Korea      10                 9
                  13
 10      8                                                              5        4
                                                                        0
  0                                                                            India    Thailand    Malaysia     Taiwan     Korea
      India    Thailand    Malaysia     Taiwan     Korea




  Credit Cards / GDP (%)                                                      Other Retail Loans / GDP
                                                                              (%)
140
                                                 121.9                   45
120
                                                                         40
                                                                                                                               41
100                                                        India         35
                                      82.4                 Thailand      30                                                            India
80
                                                           Malaysia      25                                                            Thailand
60                                                                                                                                     Malaysia
                                                           Taiwan        20
                                                                                                        16          17                 Taiwan
40                                                         Korea         15
                                                                                                                                       Korea
20
                                                                         10                 8
                2.8
                            9.8                                          5        4
 0    0.4
      India   Thailand    Malaysia    Taiwan     Korea                   0
                                                                                India    Thailand     Malaysia     Taiwan     Korea




              In
  January 5, 2011each                             area, huge untapped potential left
                                           of the US – India Business Summit, 2006                                                          18
                                                                                                   The Big Picture…
Mutual Funds – Global Perspective
                  Mutual Funds as a % of GDP
100
      87
 90
 80                 72
 70
 60
 50                                                                                   Global Investment Fund Asset Pool
 40
                            30
 30                                  23   21
                                                                           1600
 20
                                                                                                                                                                                    13711396
 10                                                 6      5               1400

 0                                                                         1200
                            Brazil



                                     UK



                                          Korea



                                                   India
      Australia



                    USA




                                                                   US$bn
                                                           Japan           1000
                                                                           800
                                                                                                                                                 635
                                                                           600                                                                               468 493 512
                                                                                                                                         399
                                                                                                                             344
                                                                           400                                   274
                                                                                                         177
                                                                           200                  77
                                                                                      11   44
                                                                                  1
                                                                             0




                                                                                                                                                                                             Luxembourg
                                                                                  Philippines




                                                                                                                                                             Ireland

                                                                                                                                                                       UK
                                                                                                                             Hong Kong
                                                                                                         Korea
                                                                                        India




                                                                                                                                                 Australia
                                                                                                                 Singapore
                                                                                    Zealand




                                                                                                                                                                            Italy
                                                                                                Taiwan




                                                                                                                                         Japan




                                                                                                                                                                                    France
                                                                                       New




                          Low Penetration – Indian industry still in early stages
      January 5, 2011                             US – India Business Summit, 2006                                                                            Source : CLSA Asia Pacific
                                                                                                                                                                                                 19
                                                                                                                                                                               Markets
                                                                                                                                                        The Big Picture…
                                            Insurance Penetration – Global Landscape
                                  Life premium/ GDP (%)
    10     8.9                                                                                                                              Insurance density (US$ premiums per
     9                8.32
     8                               7.27        7.08
     7
                                                                                                                                            capita)
     6
     5                                                          4.14
                                                                          3.6          3.51
     4
                                                                                                        2.53
     3                                                                                                            1.78                         Country         Life           Non Life
     2                                                                                                                        0.82
     1
     0                                                                                                                                         UK             3287              1311
               UK




                                                                                                          India
                                                                           Malasiya


                                                                                           Australia




                                                                                                                                Indonesia
                                                                 US




                                                                                                                     China
                                    Korea
                          Japan




                                                     France
                                    South




                                                                                                                                               Japan          2954               790
                                                                                                                                               France         2474              1093
                                                                                                                                               US             1753              2122
                                                                                                                                               Australia      1366              1203
                           Non Life premium/ GDP (%)
                                                                                                                                               South Korea    1211               495

6                                                                                                                                              Malasiya        188               95
         5.01
5                                                                                                                                              India           18                4.5
4                   3.55
                                  3.13       3.09             2.98                                                                             China           13                16
3                                                                      2.22
                                                                                      1.82                                                     Indonesia       10                10
2
                                                                                                       0.92       0.7
1                                                                                                                             0.61

0
                                                                                                                               India
                                                                        Japan




                                                                                                                  Indonesia
                                                                                                        China
                                                              South
                                                              Korea
                                   France


                                              Australia




                                                                                       Malasiya
          US


                     UK




                                            Low Penetration – A large potential still untapped
                January 5, 2011                                                                        US – India Business Summit, 2006                                                   20
                                                                                                                                                                      Source : Swiss Re Report 2005
                                                                          The Big Picture…
      Growth of Card Spending in India . . .
        Growth of Credit and Debit Cards in India
                                                        Increasing trend of Plastic Spend

               8                                        High Technology Banking Products
               7                                        Need for value added services on card
               6                                         products
               5
NUMBER OF                                7.3
CARDS IN Cr    4
               3                4.9                                Growth of ATMs in India
               2      2.8                                      30000
               1
                                                               25000
               0
                     2004       2005    2006                   20000

                                                               15000
               Larger Number of Access Points for                                                                      No of ATMs


                Customers                                      10000

               Convenience to customer is the key              5000
               Shared network is the future                       0
                                                                       2000   2001   2002   2003   2004   2005   2006



              January 5, 2011          US – India Business Summit, 2006                                                    21
    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.

 January 5, 2011         US – India Business Summit, 2006                   22
                                                       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




January 5, 2011     US – India Business Summit, 2006                23
                                          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

 January 5, 2011    US – India Business Summit, 2006            24
                                                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

January 5, 2011       US – India Business Summit, 2006          25
                                               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




January 5, 2011      US – India Business Summit, 2006            26
                                Thank You

January 5, 2011   US – India Business Summit, 2006   27

								
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