Indian Banking:Shaping anEconomic Powerhouse : Indian Banking:Shaping anEconomic Powerhouse Shri TS Bhattacharya
Managing Director
State Bank of India
Indian Banking Sector: Overview : Indian Banking Sector: Overview 222 commercial banks in India (of which 133 RRBs)
Operating with 68,681 branches (March 06)
Nearly 70% of branches are in rural/semi-urban areas
Bulk of commercial bank finance is for short-term working capital needs of industry, trade, agriculture & personal segment. Foray into project finance also.
Banks are supporting growth in the economy by financing productive sectors
CD Ratio increased to 72.5% against benchmark 60%. Incremental CD Ratio of over 100% reflecting the strong underlying credit momentum.
Vibrant Indian Banking Sector : Vibrant Indian Banking Sector Size of the banking sector has gone up over six times from Rs.5,984 bn in 1995 to over RS.36,105 bn in 2006
Due to growing competition, market share of various groups of banks has changed, though public sector banks still dominate the market.
Slide 4 : All Scheduled Commercial Banks
Changing Market Share of Banks (%) : Changing Market Share of Banks (%)
Banking Sector after reforms : Banking Sector after reforms 13 years of economic and financial sector reforms have strengthened the banking sector:
Widespread branch network, varied client base
Recapitalisation has bolstered bank balance sheets
Public confidence in PSBs
Risk averseness: limited exposure to risky sectors
Investment in retail branches in an earlier era has given PSBs competitive advantage of access to stable, low cost deposits
But the large staff strength, age profile, Government regulations (on loss making branches, CVC) and slow pace of change in PSBs could be a hindrance to dynamic growth in today’s fast paced world.
New Initiatives by PSBs : New Initiatives by PSBs Technology savvy: SBG daily 11 lakh ATM transactions amounting to Rs 140 crore per day
Specialised branches
New products targeted at specific groups
Change in structure, systems and procedures involving quick turnaround time to meet world standards
Marketing orientation
Change in ambience
Recruitment of specialists
Tie-ups, sharing networks, and strategic alliances
Product Innovation : Product Innovation Banks moving away from plain vanilla lending to commerce and industry.
More options for customers: cash management, channel financing, foreign currency loans.
New innovative products being introduced and fee based income increased to meet the challenges ahead.
Bancassurance and other products, outsourcing of some products, technology-based payment systems.
Product innovations and process re-engineering to meet customer requirements, reduce cost, improve efficiency.
International Competitiveness : International Competitiveness According to Moody’s Investor Services:
Indian lenders have highest 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%), Phillipines (15.05%), Thailand (13.08%), China(11.80%) and Malaysia (9.73%). Improvement in asset quality.
Cost to Income ratio in India is 44.56% with banks of only three countries with better ratio: Singapore(44.15%), Taiwan (42.61%) and Hong Kong (40.05%)
Technology in Banking : Technology in Banking IT spend by banking and financial services industry in USA is 7% of the revenue as against around 1% by Indian Banks.
Shared ATM network to reduce costs, increase reach.
SBI: Branch networking (CBS), ATM network, Internet banking and other facilities introduced in shortest time frame (Hewlett Packard)
Cheque truncation system to change the speed of banking transactions
RTGS system running since 2004 and covers 15,000 branches
Adoption of Technology to lead to business transformation and cost advantage in the long term.
Human Resources : Human Resources In order to meet the global standards and to remain competitive, banks are recruiting more specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM.
Fast track merit and performance based promotion from within would have to be institutionalized to inject dynamism and youthfulness in the workforce.
SBG treasury is as sophisticated and modern as that of Barclays and Natwest
Risk Management : Risk Management Under Basle II capital allocation will be based on risk of assets
Integrated approach to risk management: credit, market and operational risk
Risk adjusted return on capital will be used to drive pricing, performance measurement & portfolio management
Scenario Beyond 2009 : Scenario Beyond 2009 Foreign Banks allowed to set up fully owned subsidiaries
Foreign banks to be treated on par with Indian banks after 2009 to the extent appropriate
Competition to intensify
To achieve critical mass and long term profitability consolidation will be the trend
Response of Banks : Response of Banks Banks are expanding credit to support growth
High Credit Growth: The YoY deposit growth for ASCBs at 23% (as on 23rd June 06) was lower than credit growth at 30%.
Agricultural Credit: banks exceeded the target of Rs. 87,200 cr fixed for 2005-06 and disbursed Rs 1,07,900 cr (125% of the target).
Govt directed banks to double agl credit in 3 yrs but in 1 ½ yrs SBI agri credit up by 67% and 9.41 lakh new farmers covered.
Sectors driving credit growth: Agriculture, SME, Infrastructure, exports, industry.
Response of Banks : Response of Banks Large scope in retail: Share of organised retail: USA 85%, Thailand 40%, Brazil 36%, China 20%, India 5%.
Large scope for financing services sector
Ind Agl Ser
Bank Credit / GDP (%) 65.0 11.0 14.0
Share in GDP (%) 21.8 22.1 56.1
Rural India financing opportunities for banks. Strategies to tap rural customers: A recent survey shows that 53% of FMCG sales & 59% of consumer durables are in rural areas. Of the 2 mn BSNL mobile connections, 50% went to small towns and villages.
Blueprint for Banks : Blueprint for Banks A strong and resilient banking sector is necessary to support a vibrant economy and sustain growth. Banks will strive for :
Customer Service : single window, code for banks
Multiple channels for delivery
Focus on Fee-based Income/Non Banking financial services as well
Insurance, Credit cards
Derivatives
Financial Inclusion
Micro Finance and SHGs
Agricultural credit to be increased
Contract Farming Arrangements
Infrastructure Projects
India an Economic Powerhouse : India an Economic Powerhouse Service Sector leads growth
Global leadership in BPO/KPO and IT enabled industries
Retail Boom - The size of organised retail will grow three times in next 4-5 years
On the way to become an International Manufacturing Hub
Transformation in auto, auto-components, pharma, other industries
Good Q1 Results, 170 firms so far give sales growth 35%, net profit growth 54%
Indian Investments and acquisitions abroad
India an Economic Powerhouse : India an Economic Powerhouse Decreased dependence on monsoon
Continuing Reforms
Focus on SEZs for accelerating growth
Manufacturing Investment Regions to be set up
100% FDI in plantation, horticulture, etc.
Tapping rural markets
Bank outsourcing norms to be introduced by RBI
Growth Constraints
Improvements required in infrastructure
Global oil prices are a concern
Need capital to support growth (FDI)
Banks :Partners in Growth : Banks :Partners in Growth Credit to productive sectors.
Investment in bonds, commercial paper.
Payments, Collection, Remittances.
Foreign exchange services.
Specially tailored products for target groups
Advisory support.
Technology support: SBI’s Project Uptech
Reschedule repayments for borrowers with genuine problems.
Limit for FDI in private banks increased from 49% to 74%.
Slide 20 : Banks now enjoy greater managerial autonomy for sound banks in terms of area of business, opening and swapping of branches, recruitment.
Banks have also been allowed to set up Offshore Banking Units in Special Economic Zones.
Credit delivery mechanism has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups.
Policy package to step up credit to SMEs.
Securitisation of assets: The Indian securitisation market has come a long way since the first deal in1992 (autoloan securitisation by Citibank). Banks: Partners in Growth
Going Ahead : Going Ahead Indian economy is poised to move into a higher growth trajectory. 11th Plan Projection 8% GDP (12% manufacturing)
Rapid growth of services sector
Leveraging high quality education and vast talent pool
Tapping India’s knowledge capital to create economic value
Rising affluence and growth of the consuming class
NCAER data for top 24 cities in India shows migration to higher income levels growing at over 40% per annum
Going Ahead : Going Ahead Consumer finance, robust industrial investment outlook, increasing internationalisation of India and rural banking will drive growth in the economy.
Upward migration of incomes, demographic patterns and access to finance will act as change agents.
The banking sector is gearing itself to support growth.
Competition, consolidation and convergence will transform banking.
Technology will be the key and drive the change.
Banks strengthening capital base, risk management & skills
Slide 23 : THANK YOU