Current State of Banking in

India

Industry Report
Analyst Report
Table of Contents

Table of Contents
Executive Summary....................................................................................................................4
Introduction………………………………………………………………………………………………………………………….5
Role of Banking...........................................................................................................................6
Market structure and segmentation..........................................................................................7
Type of product and services...................................................................................................12
Usage segment.........................................................................................................................13
Usage behaviour trend.............................................................................................................13
Market Share............................................................................................................................14
Distribution Network...............................................................................................................15
Key players...............................................................................................................................18
Bank role in financial inclusion.................................................................................................19
Competition situation..............................................................................................................21
Key Drivers………………………………………………………………………………………………………………………….23
Key Challenges / Barriers.........................................................................................................24
Key Opportunity..……………………………………………………………………………………………………………….26
Country Advantage………………..…………………………………………………………………………………………..30
Regulatory Advantage & legal frameworks……………………………..………………………………………….31
SWOT Analysis..........................................................................................................................32
PEST Analysis………………………………………………………………………………………………………………………33
Analysis of consumer perspective on Indian banks……………………………………………………………..45
Suggestion………………………………………………………………………………………………………………………….50
Bibliography:............................................................................................................................52
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About EPR and disclaimers

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Executive Summary:

The India economy is very large and diverse, comprising of a number of major sectors
including manufacturing industries, agriculture, textiles and handicrafts, and services.
Without a sound and effective banking system in India it cannot have a healthy economy. To
cater all the sectors Indian banking sector have diverse banks to satisfy the credit need of all
segments. All the guiding and regulating the banking system of India is done by Reserve
bank of India. RBI does not deal with the general public. It acts essentially as Government’s
banker; maintain deposit accounts of all other banks and advances money to other banks,
when needed.
Moreover with the growing expectations of the customers, banks are providing diverse
services, combining innovation, quality, personal touch and flexibility in delivery. Now banks
are moving to Tech banking which is easy to use, less time consuming and help in reduction
in processing cost. The consumer segment and their behavior trend are very critical for
banks to decide which product, service or branch they should start. In India public sector
banks capture more than 50% of Indian banking sector revenue but individually SBI bank
holds maximum revenue in Indian in comparison to other banks in India. India is big and
diverse country to meet the banking requirement of each and every individual in Indian the
banking sector has develop a robust distribution network comprise of 74,112 bank branches
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and 63,543 ATMs. The penetration level of banks is highest in south India and the
penetration level is lowest in North East state. Indian banking sector is facing several
challenges but at the same time they are also enjoying country advantage and have plenty
of opportunity like implementation models such as Bancassurance.
To find out the new avenues a survey was conducted among 200 users of banking services.
The users comprised of people who were students, employed, unemployed, retired and
Housewives. In the survey we are trying to understand the consumer perspective on Indian
banking sector and what opportunities lay ahead for the banking sector.

INTRODUCTION

Banking in India on modern lines started with the

establishment of three presidency banks under Banking Regulations Act was
passed in 1949 which gives
Presidency Bank's act 1876 i.e. Bank of Calcutta, authority to RBI as central
Bank of Bombay and Bank of Madras. Reserve Bank banking authority.
The amendment of Banking
of India Act was passed in 1934 & Reserve Bank of Regulation Act took place in
India (RBI) was constituted as an apex bank without 1993 which result into entry
of new private sector banks.
major government ownership. Banking Regulations This increased competition
Act was passed in 1949. The major steps to regulate result into providing diverse
services, combining
banking included: innovation, quality, personal
 The Reserve Bank of India, India's central touch and flexibility in
delivery.
banking authority, was nationalised on
January 1, 1949 under the terms of the
Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
 In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
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 The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors
This regulation brought Reserve Bank of India under government control. Under the act, RBI
got wide ranging powers for supervision & control of banks. The Act also vested licensing
powers & the authority to conduct inspections in RBI. 
Till 1969 banks in India except the State Bank of India , continued to be owned and
operated by private persons. But in 1969 the Government of India issued an ordinance and
nationalised the 14 largest commercial banks. Another such step of nationalization of 6
more commercial banks followed in 1980.

The amendment of Banking Regulation Act in 1993 saw the entry of new private sector
banks. Licenses were issued to a small number of private banks, such as Global Trust Bank
(the first of such new generation banks to be set up)which later amalgamated with Oriental
Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. These
banks also came to be known as new generation tech-savvy banks because of their
improved service condition and their extensive use of IT in the operations.

Some are of Indian origin and some are foreign players. India’s economy has been one of
the stars of global economics in recent years. It has grown by more than 9% for three years
running. The economy of India is as diverse as it is large, with a number of major sectors
including manufacturing industries, agriculture, textiles and handicrafts, and services.
Without a sound and effective banking system in India it cannot have a healthy economy.
The banking system of India should not only be hassle free but it should be able to meet
new challenges posed by the technology and any other external and internal factors. For the
past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach.
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Role of Banking

In India the banks are being segregated in different groups. Each group has their own
benefits and limitations in operating in India. Each has their own dedicated target market.
Few of them only work in rural sector while others in both rural as well as urban. Many even
are only catering in cities. Banks provide funds for
business as well as personal needs of individuals. With increased competition
They play a significant role in the economy of a the role of banks are
nation. Some traditional roles of banks: changing from tradition role
of depositing money and
1. It encourages savings habit amongst people giving credit to one which is
and thereby makes funds available for customer friendly
productive use. customers banks are
2. It acts as an intermediary between people providing diverse services.
having surplus money and those requiring
money for various business activities.
3. It facilitates business transactions through
receipts and payments by cheques instead of currency.
4. It provides loans and advances to businessmen for short term and long-term
purposes.
5. It also facilitates import export transactions.
6. It helps in national development by providing credit to farmers, small-scale
industries and
7. Self-employed people as well as to large business houses which lead to balanced
economic development in the country.
8. It helps in raising the standard of living of people in general by providing loans for
purchase of consumer durable goods, houses, automobiles, etc.

With the growing expectations of the customers banks are providing all services, combining
innovation, quality, personal touch and flexibility in delivery. Now banks are moving to Tech
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banking. Apart from the Mobile Banking, including of SMS Banking, Net Banking and ATMs
are the major steps taken by the banks in India towards modernization. With all these
devices and systems, there is a complete freedom to experience. We can check our account,
transfer our fund, make payments and do anything of everything what has been followed in
physical banking since ages. But this times no standing for hours in front of cash counter and
no time restriction in withdrawing our own money.

Market Structure & Segmentation

The Indian Banking system comprises the following institutions:

Figure 1: Shows type of banks present in India

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a) Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system
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of a country is known as its Central bank. Such a bank does not deal with the general public.
It acts essentially as Government’s banker; maintain deposit accounts of all other banks and
advances money to other banks, when needed. The Central Bank provides guidance to other
banks whenever they face any problem. It is therefore known as the banker’s bank. The
Reserve Bank of India is the central bank of our country. The Central Bank maintains record
of Government revenue and expenditure under various heads. It also advises the
Government on monetary and credit policies and decides on the interest rates for bank
deposits and bank loans. In addition, foreign exchange rates are also determined by the
central bank.
Another important function of the Central Bank is the issuance of currency notes, regulating
their circulation in the country by different methods. No other bank than the Central Bank
can issue currency.

b) Commercial Banks
Commercial Banks are banking institutions that accept deposits and grant short-term loans
and advances to their customers. In addition to giving short-term loans, commercial banks
also give medium-term and long-term loan to business enterprises. Now-a-days some of the
commercial banks are also providing housing loan on a long-term basis to individuals. There
are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,
Private sector banks and foreign banks.

(i) Public Sector Banks: These are banks where majority stake is held by the Government of
India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,
Corporation Bank, Bank of Baroda and Dena Bank, etc.

(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the
bank is held by private individuals. These banks are registered as companies with limited
liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd.,
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Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global
Trust Bank, Vysya Bank, etc.
(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign
country but operate their branches in our country. Some of the foreign banks operating in
our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American
Express Bank, Standard & Chartered Bank, etc. The number of foreign banks operating in
our country has increased since the financial sector reforms of 1991.

c) Development Banks
Business often requires medium and long-term capital for purchase of machinery and
equipment, for using latest technology, or for expansion and modernization. Such financial
assistance is provided by Development Banks. They also undertake other development
measures like subscribing to the shares and debentures issued by companies, in case of
under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI)
and State Financial Corporation’s (SFCs) are examples of development banks in India.

d) Co-operative Banks
People who come together to jointly serve their common interest often form a co-operative
society under the Co-operative Societies Act. When a co-operative society engages itself in
Banking business it is called a Co-operative Bank. The society has to obtain a license from
the Reserve Bank of India before starting banking business. Any co-operative bank as a
society is to function under the overall supervision of the Registrar, Co-operative Societies of
the State. As regards banking business, the society must follow the guidelines set and issued
by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary
credit societies, central co-operative banks and state co-operative banks. These banks are
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organized at three levels, village or town level, district level and state level.

(i) Primary Credit Societies: These are formed at the village or town level with borrower and
non-borrower members residing in one locality. The operations of each society are
restricted to a small area so that the members know each other and are able to watch over
the activities of all members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level having some of the
primary credit societies belonging to the same district as their members. These banks
provide loans to their members (i.e., primary credit societies) and function as a link between
the primary credit societies and state co-operative banks.

(iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all
the states of the country. They mobilize funds and help in its proper channelization among
various sectors. The money reaches the individual borrowers from the state co-operative
banks through the central co-operative banks and the primary credit societies.

e) Specialised Banks
There are some banks, which cater to the requirements and provide overall support for
setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples
of such banks. They engage themselves in some specific area or activity and thus, are called
specialized banks. Let us know about them:

i) Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting
products abroad or importing products from foreign countries for sale in our country, EXIM
bank can provide you the required support and assistance. The bank grants loans to
exporters and importers and also provides information about the international market. It
gives guidance about the opportunities for export or import, the risks involved in it and the
competition to be faced, etc.
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ii) Small Industries Development Bank of India (SIDBI): If you want to establish a
Small-scale business unit or industry, loan on easy terms can be available through SIDBI. It
Also finances modernization of small-scale industrial units, use of new technology and
market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale
Industry.
iii) National Bank for Agricultural and Rural Development (NABARD): It is a central or apex
institution for financing agricultural and rural sectors. If a person is engaged in agriculture or
other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-
term and long-term, through regional rural banks. It provides financial assistance, especially,
to co-operative credit, in the field of agriculture, small-scale industries, cottage and village
industries handicrafts and allied economic activities in rural areas.

Types of Products /Services /Solutions

1. Bank Account
a) Bank Savings Account
b) Bank Current Account
c) Bank Term Deposits Account
d) Bank Account Online

2. Loans
a) Foreign Currency Loans
b) Short term loans
c) Long term loans
3. Finance/Services to Exporters
4. Finance/Services to Importers
5. Remittances
6. Forex & Treasury Services
7. Resident Foreign Currency (Domestic) Deposits
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8. Correspondent Banking Services

9. Plastic Money
a) Credit Card
b) Debit Card.
10. Money Transfer: Banks generally issue Demand Drafts, Banker's Cheques, Money Orders
or other such instruments for transferring the money. This is a type of Telegraphic Transfer
or Tele Cash Orders.

11. ATMs and Online banking.

Usage segment
The four consumer segments identified are:

(1) Traditional: Those customers who had not progressed beyond basic banking services.
They are least risk taker.
(2) Active: Customers who actively used banking services other than basic ones. Like use of
products such as credit cards and mutual funds.
They are usually high risk taker.
(3) Exporter/Importer: They have specific Semi-urban and urban India

requirement like mode of payment, currency etc. consumers are more risk
averse than rural India
(4) Technology savvy: Those customers who use
consumers
net banking and mobile to cater banking services

Usage behavior trend

With years, banks are also adding services to their customers. The Indian banking industry is
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passing through a phase of customers market. The customers have more choices in
choosing their banks. A competition has been established within the banks operating in
India. With stiff competition and advancement of technology, the services provided by
banks have become more easy and convenient. But, the penetration of different financial
products and services is lower in rural India than in semi-urban and urban India. Semi-urban
and urban India consumers are more risk averse and have relatively high purchasing power
than rural India consumers thus use of plastic money (Credit card, debit card) are more
prominent. More use of internet and mobile banking in urban India because of High literacy
level and better availability.

Market Share

Table 1: shows the market share of Banks in India for 2009-10 (All amount in rupees crore)

SBI & its Nationalised Private Sector

  Associates Banks Banks Foreign Banks
Deposits 1108086 2583716 822801 237853
Advances 858198 1843102 632494 163260
Total Revenue 1966284 4426818 1455295 401113
(Source RBI)

Figure 2: shows the market share of Banks in India for 2009-10 in the form of Pie-chart

Total Revenue (2009-10)

(All amount in rupees crore )
5%

24% SBI & its Associates

18% Nationalised Banks
Private Sector Banks
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Foreign Banks

54%
Nationalised banks capture more than 50% of Indian banking sector revenue. Followed by
SBI and its associates banks capture close to one forth of banking industry revenue rest is
shared by private sector banks and foreign banks.
Thus 78% (slightly more than three forth) revenue is capture by public sector and only 22%
revenue is acquired by private sector.

Distribution Network
At present the goal for banks’ is to turn branch network into highly differentiated system for
delivery of multiple products. In order to cater vast population of India and to have financial
inclusion banks should have robust distribution network.
In India we have 74,112 bank branches and 63,543 ATMs.
Table 2: Shows number of Bank branches and ATMs in India (As on March 2010)

Name of Branches ATMs Per Per

the Bank cent cent
of of
Off- ATMs
site to
to Branc
total hes
ATM
s
Rural Semi- Urban Metro- Total On- Off- Tota
urban politan site site l
Schedule
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Commerc
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comprise
of public
sector,
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private
sector
and
Foreign 17,63 16,00 69,16 32,67 27,47 60,1
Banks 20,773 8 7 14,742 0 9 4 53 45.7 87
Public 19,567 14,59 12,92 11,743 58,82 23,79 16,88 40,6 41.5 69.2
 Sector
Banks 5 0 5 7 3 80
Private
Sector 10,02 18,4
Banks 1,201 3,037 3,027 2,762 7 8,603 9,844 47 53.4 184
Foreign 1,02
Banks 5 6 60 237 308 279 747 6 72.8 333
Old
Private
Sector 3,39
Banks 861 1,626 1,435 1,030 4,952 2,266 1,124 0 33.2 68.5

(Source RBI)

In India we have 74,112 bank branches and 63,543 ATMs. Thus the India Per cent of ATMs
to Branches is 85.7%. Public sector banks has least percent ratio of ATMs to bank and
foreign banks has highest percent ratio. The main reason is Public sector banks are more
active in rural area, lack of infrastructure, illiteracy and behavior of consumer (depends on
relationship established with banks) are the main reason of less number of ATMs. Whereas
foreign banks are highly active in Metropolitan where infrastructure is developed, literacy
level is high, behavior of consumer is seeking maximum benefit are main reasons for highest
percent ratio of ATMs to banks in India.

We have divided India into six major zones and find out the total scheduled commercial
bank branch in India:
Table 3: Shows the number of bank branches, population and penetration level of six zones
in India
North
  North South East West Central East
Total Branches zone
wise 20488 22394 13242 16239 5175 2197
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Average population
Zone wise(In
thousands) 290213 245206 257064 230511 95584 44211
Population per 14.165 10.95 19.412 14.195 18.47 20.12
branch(In
thousands)/Penetratio
 n
Level
From the above table we can conclude the penetration level
Public sector banks has least
of banks is highest in south India which is 10950 persons per
percent ratio of ATMs to
bank branch. Whereas, the penetration level is lowest in
bank and foreign banks has
North East state where we have only one bank branch per
highest percent ratio.
20120 persons.

The penetration level of

Increased in ATM also lead to more people are now moving banks is highest in south
towards using the automated teller machines (ATM) for their India and the penetration
level is lowest in North East
banking needs. Increased ATM usage is also helped by the state.
fact that customers have now the flexibility of Using ATMs of
Many vendors have installed
other banks, as most of the banks are part of major interbank
biometric devices for
networks like National Financial Switch (NFS), Mitr, BANCS,
authentication. Catering to
Cashtree and Cashnet. The interbank networks have brought
the rural population, these
together ATMs of several banks so that consumers would
machines have enabled
gain access to any of the participating banks’ ATMs. Banks
them to interact with the
find it cheaper to pay membership fees to these networks as
machine in their local
against setting up additional units in expensive-to-deploy
language and on a graphical
areas.

ATMs are now seen to be more than mere cash dispensing machines. Customers use ATMs
to recharge their mobile phone pre-paid connections, pay their utility bills, even mutual
fund transactions – making them at par with flexibility given in internet banking – only more
secure. Of the value-added services provided at ATMs, bill-payment is the most used
service, followed by prepaid mobile talk-time recharges. However, still about one third of
the respondents do not use any value added services at ATMs
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Many ATM vendors have devised specialized machines, embedded with biometric devices
for authentication. Catering to the rural population, these machines have enabled them to
interact with the machine in their local language and on a graphical user interface. The rural
customer has seemed to accept this new medium. This has the potential to further widen
the scope of ATM usage in the interior parts of the country.
There is also interest towards white-label ATMs. Many companies are interested in this
model, where the ownership of the ATM will not be with the banks but with third parties
who deploy them and make money on fees charged on every transaction. The concept is
prevalent in the American continent. Wide acceptance of ATMs by consumers, introduction
of biometric ATMs, and increasing scope of value-added ATM services will maintain growth
in the industry. Experts forecast that the growth rate (CAGR) is expected to grow 18 percent
up by 2013. Moreover banks going into a self service model can have huge saving potential
for banks and also increase the convenience for the customers.

Key Players

Following are the key players in Indian banking sector in 2009-10

(Amount in rupees crore)
Table 4: Shows top eight banking player’s revenue is arranged in increasing order

Bank Name Revenue

Axis Bank 245643
HDFC Bank 293235
IDBI Bank Ltd. 305869
ICICI Bank 383223
Canara Bank 403986
Punjab National Bank 435931
State Bank of India 1436030
(RBI data
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Figure 3: Shows top eight banking player’s revenue is arranged in a pie-chart.

 Revenue
Axis Bank HDFC Bank ICICI Bank
Bank of Baroda Canara Bank Punjab National Bank
State Bank of India IDBI Bank Ltd.

8% 6%
7%
10%
37%
11%

10%
11%

Figure 3

Role of Banks in Financial Inclusion:

Financial inclusion is the delivery of financial services at affordable costs to sections of
disadvantaged and low income segments of society. Unrestrained access to public goods
and services is the sign of an open and efficient society. It is argued that as banking services
are in the nature of public good, it is essential that availability of banking and payment
services to the entire population without discrimination is the prime objective of public
policy. Post-Nationalization (1969) leads to expansion of branch network to unbanked areas
increased lending to agriculture and increased access to basic banking services.
Reasons for Financial Exclusion in availing banking services:
• Remote, hilly & sparsely populated areas with poor infrastructure and difficult
physical access.
• Lack of a regular or substantial income. In most of the cases people with low income
do not qualify for a loan.
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• Lack of awareness, low income, social exclusion, illiteracy.

• Distance from bank branch, branch timings, cumbersome
documentation/procedures, unsuitable products, language, staff attitude are
common reasons – Higher transaction cost.
 • Ease of availability of informal credit.

Banks Initiatives in financial inclusion:

• Increased financial sector reforms like deregulation and increased competition result
in strengthening of banks through recapitalization. The Indian banking now become
robust.
• The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frill’
account. This will help the low income individual to open a ‘No Frill’ account without
identity proof and address proof.
• Access to banking system provided thru SHGs (groups pooling savings & providing
loans to members, a NGO nurturing) .NABARD supporting group formation, linking
with banks, promoting best practices leads to excellent recovery with 2.6 million
SHGs linked to banks touching 40 million households .SHGs given loans by banks
against group guarantees at reasonable rate of interest. Loan sizes are usually small
and mostly used for consumption purposes/ small business, for agricultural activities.
SHGs are mostly linked to PSBs
• Business Correspondents (BCs): Banks have limitations to reach directly to the low
income consumers they should tie up with Post offices, co-operative societies, NGOs
(trusts/societies) being used as BCs for branchless banking .Agency risk reduced
through local organization & IT solutions for tracking transactions leads to door step
banking at lower cost, viability & scalability dependent on lower interest rate &
service charges.
• The products designed by the banks are not satisfying the low income families. The
provision of uncomplicated, small, affordable products will help to bring the low
income families into the formal financial sector.
• IT Solutions: Essential for doorstep banking .Pilot projects by SBI using smart cards
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for opening account with bio-metric identification. Link to mobile/ hand held
connectivity devices ensures transactions getting recorded in banks’ books on real
time basis .The state governments making pension & other payments under NREGS
through smart cards. Other financial services (low cost remittances, insurance) are
 also provided through cards. The IT solutions thus enable large transactions like
processing, credit scoring, credit record & follow up etc.
• Role of Government: The Indian Government has a long history of working to expand
financial inclusion. Nationalization of the major private sector banks in 1969 was a
big step. In 1975 GOI established RRBs with the same aim. It encouraged branch
expansion of bank branches especially in rural areas. The RBI guidelines to banks
show that 40% of their net bank credit should be lent to the priority sector. This
mainly consists of agriculture, small scale industries, retail trade etc. More than 80%
of our population depends directly or indirectly on agriculture. So 18% of net bank
credit should go to agriculture lending. Also Proactive role of government by issuing
identity cards for account opening, through awareness campaigns by district/ block
level officials, meeting cost of cards and financial literacy drives.

Competition situation

The market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on the
retail side, and in fee-based income and investment banking on the wholesale banking side.
These require new skills in sales & marketing, credit and operations. There is a demographic
shifts resulting from changes in age profile and household income, consumers will
increasingly demand enhanced institutional capabilities and service levels from banks
making competition fiercer. The Banking industry is currently in a transition phase. On the
one hand, the Private sector banks (PSBs), which are the mainstay of the Indian Banking
system, are in the process of shedding their flab in terms of excessive manpower, excessive
non Performing Assets (NPAs) and excessive governmental equity, while on the other hand
the private sector banks are consolidating themselves through mergers and acquisitions. But
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PSBs face lack of modern technology and a massive workforce while the new private sector
banks are forging ahead and rewriting the traditional banking business model by way of
their sheer innovation and service.
While the private players however cannot match the PSB’s great reach, great size and
access to low cost deposits. Therefore one of the means for them to combat the PSBs has
been through the merger and acquisition (M& A) route. For example, HDFC Bank’s merger
with Times Bank; ICICI Bank’s acquisition of ITC Classic; Anagram Finance and Bank of
Madura.

But now better facilities and diverse product are given to customer. Banks in India are
adopting for more of defensive approach in credit disbursal. In order to safe guard their
interest; banks are following stringent norms for credit disbursal. There is more focus on
analyzing borrower financial health rather than capability. As far as private sector and
foreign banks are concerned, the reach in rural India still remains a challenge. In terms of
quality of assets and capital adequacy, Indian banks are considered to have clean, strong
and transparent balance sheets relative to other banks in comparable economies in its
region. The significant change in the policy and attitude that is currently being seen is
encouraging for the banking sector growth.

New private banks could reach the next level of their growth in the Indian banking sector by
continuing to innovate and develop differentiated business models to profitably serve
segments like the rural/low income and affluent/HNI segments; actively adopting
acquisitions as a means to grow and reaching the next level of performance in their service
platforms. Attracting, developing and retaining more leadership capacity.

Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the “race for the customer” and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009. At the same time, they
should stay in the game for potential acquisition opportunities as and when they appear in
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the near term. They have to maintain a fundamentally long-term value-creation mindset.
The most important thing is the tradeoff between to have strict credit policy or increase
market share.
Key Drivers

1. Retail Banking:
 Contribution of retail loans to GDP stands at only 6% so very good chances to
increase retail loans share.
 Housing Finance itself will require an estimated 3, 61,000 corer to meet the
shortfall of 5 million homes.
 Opportunities also lie in consumer finance and wealth management etc.

2. Wholesale Banking:
 Commercial lending and small businesses are expected to drive Wholesale
banking.
 Opportunities also lie in investment banking and structured finance.
 Wholesale Banking is highly profitable for top performing banks contributing
35-40% to PBT in 2009.

3. Infrastructure Financing:
 India currently spends 6% of GDP in infrastructure spending as against 9% in
China.
 Aggregate debt requirement is USD 247 billion, with an estimated availability
of 83.5%, more than half coming from bank credit.

4. Treasure:
 Treasury has been used to manage liquidity and resources as well as an
effective tool to make large profits in the last few years.
 Currently, with bond yields rising, profits from treasury operations have
Page23

fallen.
 Banks having advanced and integrated treasury management systems will be
in a better position to reap profits.
.
 5. Financial Inclusion:
 Large unbanked population with only 40% having access to banking services.
 Out of the 600,000 habitations in the country, only about 30,000 have a
commercial bank branch.
 RBI plans to provide villages having population over 2,000 banking access by
2012 and has asked banks to provide a roadmap

Key Challenges / Barriers

 Inflation: India is currently experiencing high inflation with food price rises hovering
around 17% and Wholesale Price Index around 9.9% in Feb’ 2010. Inflationary
concerns will force the Reserve Bank of India (RBI) to tighten monetary supply. This
in turn will raise interest rates and impact banks adversely.

 Inclusive growth: There are concerns that the benefits of economic growth are not
reaching the poor due to inadequate delivery mechanisms. Financial inclusion is one
of the key challenges for the economy and banks need to ensure that low,
affordable and cost-effective banking reaches the poor.

 Infrastructure development: India currently lacks the infrastructure required to

attract foreign capital vis-à-vis countries like China. While infrastructural
development requires huge capital, private sector participation and favorable
regulatory regime can help raise investment demand. Banks need to act as conduit
to attract more investment in infrastructure.
Page24

 Withdrawal of stimulus: The economic recovery in India in 2009 was aided by the
economic stimulus provided by government through interest rate subvention,
reduction in excise duty etc. The fiscal deficit moved up to 6.7% of the GDP which is
 unsustainable in the medium term. Withdrawal of stimulus will impact the economy
through rise in prices and reduction in demand. The banking sector will also face the
impact in their core business of lending.

 Enhanced Customer Experience: Banks are facing challenges as customers have

become demanding and the loyalties are diffused with low switching costs. High
service user charges are also concern.

 Asset Quality: Asset quality in the banking sector is set to be a key issue as Crisil
projects net NPA as a percentage of net Advances to touch 2.3% in FY11, as fallout of
the downturn and consequent restructuring of advances.

 Transparency and Supervision: The disclosure requirements have become stringent

over the years and covers Capital adequacy, Asset quality, Asset liability
management, Profitability, Country risk exposure, Risk exposures in derivatives,
Segment reporting and Related Party disclosures.

 New Accounting Standards: The impending implementation of IFRS in 2011 will have
a significant impact for the banking sector particularly in the area of treatment of
taxes. The core group of the ministry of corporate affairs extended the deadline for
banks and NBFCs to April 2013 at a recent meeting held on March 29, 2010. The top
five accounting challenges to be faced by banks are loan impairment, use of fair
value, derivatives and hedge accounting, de-recognition of financial assets and
consolidation of entities.

 Risk Management: Banks in India are also moving from the individual silo system to
Page25

an enterprise wide risk management system. Banks would be required to allocate

significant resources towards this objective over the next few years.
  Illiteracy: There are high levels of illiteracy among a large percentage of India’s
population. Increased penetration of banks in rural India is needed but very low
profitability is not allowing.

 Government policy: The government has refused to dilute its stake in PSU banks
3below 51% thus choking the headroom available to these banks for raining equity
capital.

 Others: PSBs need to fundamentally strengthen institutional skill levels especially in

sales and marketing, service operations, risk management. Need to control high
fiscal deficits and inflation. High fiscal deficits and fiscal deficits discourage
investment in India. Increase in the number of foreign players would pose a threat
to the PSB as well as the private players.

Key Opportunities

Compared to other emerging markets, India’s accelerated growth in the domestic economy
provided greater business opportunities to foreign banks here, resulting in higher
profitability. Apart from stable growth with relatively less volatility, India offers a matured
regulatory framework and a sizeable and addressable market. The growth in Indian
economy and the diversity of our income streams and product lines gave us the robustness
to grow. For private sector and foreign banks are concerned, the reach in rural India still
remains a challenge. With passing time, Indian economy is further expected to grow and be
strong for quite some time-especially in its services sector. Banks in India have an
opportunity to tap around 70% of population spread in several semi-urban and rural
Page26

centers. This can achieve by continuing to innovate and develop differentiated business
models to profitably serve segments like the rural/low income and affluent/HNI segments.
They need to adopt alternative approaches to win the loyalty of customer and build a value-
creating customer franchise. The demand for banking services, especially retail banking,
mortgages and investment services are expected to grow stronger. Therefore, it is not hard
to forecast few M&As, takeovers, and asset sales in the sector. The ongoing developments
in Indian industry and government and the integration of India with the global markets also
offer myriad opportunities to the banking sector. Companies and governments are
increasingly seeking high-quality banking services to improve their own operating efficiency.
Companies seek to offer better customer service and maximize shareholder returns and
governments seek to improve the quality of public services. The internationalization of India
offers banks the opportunity to service cross-border needs of Indian companies and India-
linked needs of multinationals.

In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate. Banks in India will adopt for more of
defensive approach in credit disbursal. In order to safe guard their interest; banks follow
stringent norms for credit disbursal. There is more focus on analyzing borrower financial
health rather than capability. Continuous GDP growth in the last 10 year reflects growing
economy which helps the growth of banking sector. In future banks have very good chances
to trade in commodities and commodity derivatives.

The biggest opportunity for the Indian banking system today is the Indian consumer.
Demographic shifts in terms of income levels and cultural shifts in terms of lifestyle
aspirations are changing the profile of the Indian consumer. This is and will be a key driver
of economic growth going forward. The Indian consumer now seeks to fulfill his lifestyle
aspirations at a younger age with an optimal combination of equity and debt to finance
Page27

consumption and asset creation. This is leading to a growing demand for competitive,
sophisticated retail banking services. The consumer represents a market for a wide range of
products and services – he needs a mortgage to finance his house; an auto loan for his car; a
credit card for ongoing purchases; a bank account; a long-term investment plan to finance
his child’s higher education; a pension plan for his retirement; a life insurance policy –the
possibilities are endless. The customer is present across cities, towns, and villages as
improving communications increases awareness even in small towns and rural areas.
Consumer goods companies are already tapping this potential – it is for the banks to make
the most of the opportunity to deliver solutions to this market.

The prerequisite for capitalizing on these opportunities is technology. Technology is key to

servicing all customer segments offering convenience to the retail customer and operating
efficiencies to corporate and government clients. The increasing sophistication, flexibility,
and complexity of product and servicing offerings makes the effective use of technology
critical for managing the risks associated with the business. Developing or acquiring the right
technology, deploying it optimally, and then leveraging it to the maximum extent is essential
to achieve and maintain high service and efficiency standards while remaining cost-effective
and delivering sustainable returns to shareholders.

Early adopters of technology acquire significant competitive advantage. Managing

technology is, therefore, a key challenge for the Indian banking sector. Wide disparities exist
between various banks as far as technology capabilities are concerned; the sector as a
whole needs to make significant progress on this front. Like the institutional customers may
be regional cooperative banks, small foreign banks, private insurance companies, mutual
funds, trusts, NBFCs, and provident funds. These clients need access to places within the
country where their establishments have no network, foreign exchange market, money
market, and services related to management and processing of receivables and payables.
The expectations of the high net worth individuals are different and this has led to the
creation of personal banking divisions. This class of customers typically expects services at
their doorsteps and investment and advisory functions from their bankers. This has led the
bankers to turn to distribution of insurance and mutual fund products in a bid to woo these
Page28

clients into their fold.

Building knowledge-driven, learning organizations is important in the current scenario of

rapidly evolving operating environments. Building knowledge-driven, learning organizations
is important in the current scenario of rapidly evolving operating environments. Knowledge
and assimilation of new ideas and trends are essential to keep the organization ahead on
the curve. This is true for banking as it is for all other sectors. Banks must continuously seek
to be aware of cutting edge practices in banking internationally and institutionalize this
learning across the organization. This will prepare them for the future as Indian markets
become more sophisticated and integrated into the global financial markets. Banks have
now taken up the ‘second phase’ where they are aiming at achieving connectivity between
branches, setting up of Central Data Repository, generation of MIS, prevention of frauds,
evolving value-added products, reducing transaction costs, and new initiatives like cross
selling ,CRM, etc. The current emphasis is on providing alternative channels of delivery like
ATMs, tele-banking, internet banking, etc. The provision of a host of financial services
through a versatile technology platform will enable banks to acquire more customers, cut
costs, and improve service delivery.

Although Indian banks have adopted Bancassurance model but it does not mean that to
make the bank a mere vending machine of insurance products. To make it more relevant,
the banks will have to develop the skills and take up the challenges to exploit the
opportunities and multiply their revenues. For instance, a bank’s insurance team should
provide a specialist service and be prepared to work with the corporate to identify insurance
requirements and arrange comprehensive cover to protect their assets, liabilities, and cash
flow. This might help the corporate discover that their current insurance is inadequate or
that they are paying excessive premiums. Special insurance products for a selected pre-
approved client base of the bank need to be designed and aggressively marketed.

To sum up, Indian banks have adopted better operational strategies and upgraded their
skills. All these have made the operational environment more volatile and challenging. They
have, nevertheless, withstood all these initial challenges and have become more adaptive to
Page29

the changing environment.

Country Advantage
Economic Growth
India has witnessed GDP growth in the range of 8-9% from FY03-07, which slowed down in
FY08-09. However, in 2009-10 it is 7.2% and the forecast by IMF for 8% in 2011, supported
by increased private consumption and investment. India is set to experience real average
GDP growth of 5.8% between 2007-50 and PPP growth of 8.5%; likely to grow to almost 90%
of the size of the US economy by 2050.

Bank Credit
Total Credit stood at around 60% of GDP in 2009-10 YTD. Credit has seen an expansion of
around 25% from FY03-07; however, growth slowed down to 17.5% in FY09 and currently is
at 14.4%.

Demographic Advantage
India’s middle class segment is steadily rising and with 250-300 million people in this
segment, it is expected to double in the next two decades. Compared to other economies,
India has a relatively young population with around 35% of the population falling in this
category. The median age of the Indian population is 25.5 years which indicates that India is
in a good position to benefit from its demographic dividend.

Foreign Trade
The Indian economy is opening up at a steady pace. The quantitative restrictions on imports
ended in 2001, opening up the economy to foreign businesses, especially in consumer
goods. Gradually, barriers to trade and investment are coming down. The peak customs
duty rate was reduced to 10% in 2008 (for non-agricultural and other specified goods). In
August 2009, India signed Free Trade Agreements with the Association of Southeast Asian
Nations (ASEAN) nations and Korea, which is expected to boost trade.
Page30
Regulatory Advantage & legal frameworks

The Finance Ministry continuously formulated major policies in the field of financial sector
of the country. The Government accepted the important role of regulators. The Reserve
Bank of India (RBI) has become more Independent. Securities and Exchange Board of India
(SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important
institutions. Opinions are also there that there should be a super-regulator for the financial
services sector instead of multiplicity of regulators.

In the last ten years we have seen major improvements in the working of various financial
market participants. The government and the regulatory authorities have followed a step-
by-step approach, not a big bang one. Like in the 1980s commercial banks began to function
in a highly regulated environment, with administered interest rate structure, quantitative
restrictions on credit flows, high reserve requirements and reservation of a significant
proportion of lendable resources for the priority and the government sectors. The restrictive
regulatory norms led to the credit rationing for the private sector and the interest rate
controls led to the unproductive use of credit and low levels of investment and growth. The
resultant ‘financial repression’ led to decline in productivity and efficiency and erosion of
profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This was
worked out mainly with the help of the recommendations of the Committee on the Financial
System in 1991. The resultant financial sector reforms called for interest rate flexibility for
banks, reduction in reserve requirements, and a number of structural measures. Interest
rates have thus been steadily deregulated in the past few years with banks being free to fix
Page31

their Prime Lending Rates (PLRs) and deposit rates for most banking products. Credit market
reforms included introduction of new instruments of credit, changes in the credit delivery
system and integration of functional roles of diverse players, such as, banks, financial
institutions and non-banking financial companies (NBFCs). Domestic Private Sector Banks
were allowed to be set up, PSBs were allowed to access the markets to shore up their Cars.

The entry of foreign players has assisted in the introduction of international practices and
systems. Technology developments have improved customer service. Some gaps however
remain (for example: lack of an inter-bank interest rate benchmark, an active corporate
debt market and a developed derivatives market). On the whole, the cumulative effect of
the developments since 1991 has been quite encouraging. An indication of the strength of
the reformed Indian financial system can be seen from the way India was not affected by
the Southeast Asian and 2008 crisis. Foreign banks in India are taxed at an effective rate of
42.02 per cent. In contrast, domestic banks are taxed at 32.45 per cent. They attribute the
higher tax incidence to the fact that foreign banks opt to conduct business through a branch
model here. Moreover steps like allowing of Private sector banks to shed manpower and
dilution of equity are moves that help to lend greater autonomy to the industry.

Industry SWOT Analysis

SWOT Positive Negative

Internal Strength Weakness

factors • Bank lending has been a
significant driver of GDP
growth and employment
• The vast networking &
growing number of branches
& ATMs.
• Foreign banks will have the
• PSBs need to fundamentally
strengthen institutional skill levels
especially in sales and marketing,
service operations, risk management
• The cost of intermediation remains
high and bank penetration is limited
to only a few customer segments and
Page32

opportunity to own up to 74 geographies

per cent of Indian private • Refusal to dilute stake in PSU banks:
sector banks and 20 per cent The government has refused to dilute
of government owned banks. its stake in PSU banks below 51% thus
 • Indian banks have compared
favorably on growth, asset
quality and profitability with
other regional banks over the
last few years.
choking the headroom available to
these banks for raining equity capital.
• Sectoral growth is constrained by low
unemployment levels and
competition for staff.
• Cost of intermediation remains high
and bank penetration is limited to
only a few customer segments and
geographies.
• Periodic instances of failure of some
weak banks have often threatened
the stability of the system.

Externa Opportunity Threats

l factors • Can tap around 70% of • Need to control high fiscal deficits and
population spread in several inflation. High fiscal deficits and fiscal
semi-urban and rural centers deficits discourage investment in
• New private banks could India.
reach the next level of their • Increase in the number of foreign
growth in the Indian banking players would pose a threat to the
sector by continuing to PSB as well as the private players.
innovate and develop
differentiated business  High volume/low cost market is
models to profitably serve intensively competitive.
Page33

segments like the rural/low

income and affluent/HNI  Lack of infrastructure in rural areas
segments. could constrain investment.
• Adopt alternative approaches
 to win the customer loyalty  Vulnerable to reactive attack by major
and build a value-creating competitors.
customer franchise
• Permit banks to trade in
commodities and commodity
derivatives.
• Liberalization of ECB norms:
The government also
liberalized the ECB norms to
permit financial sector
entities engaged in
infrastructure funding to
raise ECBs

PEST ANALYSIS

PEST stands for Political, Economic, Social and Technological analysis. PEST analysis of any
industry investigates the important factors that affect the industry and influence the
companies operating in the sector PEST Analysis is a tool to analyze the forces that drive the
industry and how those factors can influence the industry.
Figure 4: Pest Analysis.
Page34
 ECONOMICAL

 GDP
 MONSOON
 INFLATION
 SAVINGS &
ACCOUNTS
 AGRICULTURE
CREDIT
 INTEREST RATES SOCIOCULTURAL

POLITICAL  RAISING LIVING

STANDRED
 CHANGES IN
 DISPOSABLE LIFE STYLE
 GOVERNMENT INCOME  LITERACY
POLICY & BUDGECT RATE
 BUDJECT  DEMOGRAPHIC
MEASURES OF LARGE
 MONATORY POLICY POPULATION
 FDI LIMIT  SHIFT
Banking Sector TOWARDS THE
NUCLEAR

LEGAL TECHNICAL

 RESERVE BANK OF  TECHNOLOGY IN

INDIA ACT BANKS
 BANKING  CORE BANKING
REGULATION ACT SOLUTIONS(CBS)
 ATM
 INTERNATE
 I.T SERVES AND
MOBILE BANKING
Page35

POLITICAL FACTORS
Government and RBI policies affect the banking sector. Sometimes looking into the political
advantage of a particular party, the Government declares some measures to their benefits
like waiver of short-term agricultural loans, to attract the farmer’s votes. The profits of the
bank get affected. Various policies are framed by the RBI looking at the present situation of
the country for better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT

Indian Banking is least affected as compare to other developed economy which is attributed
to Reserve Bank of India for its robust policy framework, stricter prudential regulations with
respect to capital and liquidity. This gives India an advantage in terms of credibility over
other countries. Government affects the performance of banking sector most by legislature
and framing policy government through its budget affects the banking activities
securitization act has given more power to banking sector against defaulting borrowers.

MONETARY POLICY
Monetary Policy 2009-2010
Bank Rate: The Bank Rate has been retained unchanged at 6.0%.
Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis
points from 5.0% to 4.75% with immediate effect.
Reverse Repo Rate: It has been reduced under LAF by 25 basis points from 3.5% to 3.25%
with immediate effect. RBI has retained the option to conduct overnight or longer term
repo/reverse repo under the LAF depending on market conditions and other relevant
factors.
Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.

Budget Provisions (2010-2011)

 The Government proposed to provide Rs 6000 crore to Public Sector Banks to ensure
that they are able attain the minimum 8% Tier I capital. During FY11, Government
has infused Rs 20157 crore in select PSU's to maintain Tier I Capital to Risk Weighted
Page36

Asset Ratio (CRAR) at 8% and increase its equity in some banks to 58%.
 RRB's (Regional Rural Banks) are also given Rs 500 crore in FY12 to maintain CRAA of
at least 9% as on March 31, 2012.
 The Finance Minister proposes to move Banking Laws Amendment Bill, 2011, The
State Bank of India (Subsidiary Banks Laws) Amendment Bill, 2009 in the financial
sector.
 Along with some amendments in Banking Regulation Act, RBI will issue the
guidelines for banking licenses before the close of this financial year.
 For helping handloom weavers facing economic stress, a provision of Rs 3000 crore is
provided to NABARD in phases. The details of this scheme would be worked out by
the Ministry of Textiles in consultation with planning commissions.
 Banks are also asked to increase lending to minority communities from current
13.6% to 15% at earliest.
 The Interest subvention of 1% on housing loans up to Rs15 lakh where the cost of
the house does not exceed Rs 25 lakh is extended from present limit of Rs 10 lakh to
Rs 20 lakh. Further, the priority sector limit for housing loans in urban regions is
increased to Rs 25 lakh from Rs 20 lakh earlier.
 Enhanced the provision under Rural Housing Fund to Rs 3000 crore from the existing
Rs 2000 crore, in order to provide housing finance to targeted groups in rural areas
at competitive rates.
 To set up Central Electronic Registry under the SARFAESI Act, 2002 for preventing
frauds in loan cases involving multiple lending from different banks on the same
immovable property. This Registry will become operational by March 31, 2011
 The budget unveiled a proposal to create Mortgage Risk Guarantee Fund under the
Rajiv Awas Yojana. This would guarantee housing loans taken by EWS (Economically
weaker section) and LIG (Lowe income group) households and enhance their credit
worthiness.
 Increased the credit target to farmers from Rs 3, 75,000 crore in FY11 to Rs 4, 75,000
crore in FY12. Banks have been asked to step up direct lending for agriculture and
Page37

credit to small and marginal farmers. On the other hand, the existing interest
subvention scheme of providing short term crop loans to farmers at 7% interest will
be continued during FY12. In addition, the subvention for the farmers repaying loans
 properly in time was increased to 3% in FY12, there by taking effective rate of
interest for timely repaying farmers 4% per annum.
 An infusion of Rs 3000 crore is proposed to strengthen NABARD's capital base to Rs
5000 crore, in a phased manner, as Government equity. Additionally, Rs 10000 crore
to be contributed to NABARD's Short-term Rural Credit Fund for FY12, to enable the
bank to refinance the short-term crop loans of the cooperative credit institutions
and RRBs at concessional rates. Corpus of RIDF XVII to be raised from Rs 16000 crore
to Rs 18000 crore.
 For refinancing incremental lending by banks to MSME (Micro small and Medium
Enterprises) Rs 5000 crore is provided for SIDBI.
 Budget has also taken initiative to put up 'India Microfinance Equity Fund' of Rs100
crore with SIDBI in the course of the year. It also proposed to create 'Women's SHG's
Development Fund' with a corpus of Rs500 crore to empower women and promote
their Self Help Groups (SHGs).
 To boost infrastructure development, tax free bonds of Rs 30,000 crore is proposed
to be issued by Government undertakings during FY12.
 Mutual funds allowed raising subscriptions from foreign investors who meet KYC
norms for equity schemes. Currently only FII's and sub accounts registered with SEBI
are allowed.

Budget Impact:
The recapitalization of banks will help the banks to shore up Tier I capital to 8% is a positive
move for the banks like Syndicate bank, Dena Bank etc. Increasing housing limit to Rs 25
lakh for dwelling units under priority sector lending will encourage mortgage lending.
Infusion of credit to financial intuitions like NABARD and SIDBI will enable to channelize
credit to Agriculture and MSME Segments. Entry of new private sector bank, post issue of
Page38

guidelines by RBI in FY11 will improve banking penetration. Per se, this move is marginally
negative for banks, as it will increase competition, but positive for eligible NBFCs and
probable candidates in this regard include Reliance Capital, IDFC, IFCI, India Bulls, Religare
etc.
FDI LIMIT
The move to increase Foreign Direct Investment limits to 49 percent from 20 percent came
as a boost to foreign players wanting to get a foot hold in the Indian Markets by investing in
willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII
investment in companies was also increased from 24.0 percent to 49.0 percent and have
been included within the ambit of FDI investment.

ECONOMIC FACTORS
Every year RBI declares its 6 monthly policy and accordingly the various measures and rates
are implemented which has an impact on the banking sector. Also the Union budget affects
the banking sector to boost the economy by giving certain concessions or facilities. If in the
Budget savings are encouraged, then more deposits will be attracted towards the banks and
in turn they can lend more money to the agricultural sector and industrial sector, therefore,
booming the economy. If the FDI limits are relaxed, then more FDI are brought in India
through banking channels

GROWING ECONOMY / GDP

Indian economy has registered a growth of more that 9 per cent for last three year and is
expected to maintain robust growth rate as compare to other developed and developing
countries. Banking Industry is directly related to the growth of the economy.
The contributions of various sectors in the Indian GDP for 2009-2010 are as follows:
Agriculture:14.6%
Industry:28.6%
ServiceSector:57.2%
Page39

It is great news that today the service sector is contributing more than half of the Indian
GDP. It takes India one step closer to the developed economies of the world. Earlier it was
agriculture which mainly contributed to the Indian GDP. The Indian government is still
looking up to improve the GDP of the country and so several steps have been taken to boost
the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to
the economy and hence the GDP.

LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary
policies. Recently RBI has reduced the interest rate which stimulates the growth rate of
banking industry. As on September 11, 2010 Bank Rate was 6.00 per cent, the same as on
the corresponding date of last year. Call money rates (borrowing & lending) were in the
range of 1.50/3.47 per cent as compared with 5.25/11.00 per cent on the corresponding
date of last year.

INFLATION RATES
Inflation represents a rise in general level of prices of goods and services over a period of
time. It leads to erosion in the purchasing power of money. Resultantly, each unit of
currency buys fewer goods and services. Different fiscal and monetary policies have curbed
the Inflation rate.

To fight against the slowdown of the Economy, Government of India & Reserve Bank of
India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions,
decreasing commodity prices, decreasing crude prices and lowering interest rate, the Indian
Economy could register a robust growth rate in the year 2009-10. Inflation stands at 3.92
per cent on 7th February 2009 against a high of 12.63 per cent on 9 th August 2008. Whereas
current inflation rate is 8.31%
Page40

SAVINGS AND ACCOUNTS

As stated earlier, India continues to remain one of the high savings economies among the
emerging market economies. Gross Domestic Savings (GDS) of the Indian economy
constitutes savings of public, private corporate and household sectors. In the recent period
the high growth performance of the Indian economy is driven by rise in savings

SOCIO CULTUREAL FACTORS

Socio culture factors also affect the business. They show in which people behave in country.
Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and
consumption habit of people, their language, beliefs and values affect the business. Banking
industry is also operates under this social environment and it is also affect by this factor.

These factor are changing continuously people’s life style, their behavior, consumption
pattern etc. is changing and also creating opportunities and threat for banking industry.
There is some socio-culture factors that affect banking in India have been analyzed below.

TRADITIONAL MAHAJAN PRATHA

After the emergence of banks attitude of people was changed. Traditional mahajan pratha
still exist in India especially in rural areas. This affects the banking sector. Rural people afraid
to go to bank to borrow money instead they prefer to borrow from shahukar with whom
they have relationships from the time of their fore fathers. Banking infrastructure is also
week in some interior areas of India. So, this is reason it still exist.

SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to remain separate
from their parents after they get married. Joint families are breaking up. There are many
reasons behind that. But banking sector is positively affected by this trend. A family need
Page41

home consumer durables like freeze, washing machine, television, bike, car, etc. so, they
demand for these products and borrow from banks. Recently there is boost in housing
finance and vehicle loans. As they do not have money they go for installments. So, banks
satisfy nuclear families wants.
CHANGE IN LIFE STYLE
Life style of India is changing rapidly. They are demanding high class products. They have
become more advanced. People want everything car, mobile, etc. what their fore father had
dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also
want to have well furnished home, television, mobile, vehicle and this has opened
opportunities for banking sector to tap this change. Everything is available so it has become
easy to purchase anything if you do not have lump sum.

POPULATION
Increase in population is one of the important factors, which affect the private sector banks.
Banks would open their branches after looking into the population demographics of the
area. Percentage of deposit in any branches of banks depends upon the population
demographic of that area. The population of India is about 119.70 cores in 2010. About 70%
of population is below 35years of age. They are in the prime earning stage and this increase
the earning of the banks.

LITERACY RATE
Literacy rate in India is very low compared to developed countries. Illiterate people hesitate
to transact with banks. So, this impacts negatively on banks. But there is positive side of this
as well i.e. illiterate people trust more on banks to deposit their money; they do not have
market information like opportunities in stocks or mutual funds. So, they look bank as their
sole and safe alternative. Literacy rate of India is around 65%

LITERACY RATE IN INDIA

Page42

Table 5: Shows Literacy percent of India

Year Persons Male Female
1951 18.3 27.2 8.9
1961 28.3 40.4 15.3
1971 34.5 46 22
 1981 41.4 53.4 28.5
1991 52.2 64.1 39.3
2001 65.4 75.8 52.1
2011 74.04 82.14 65.46

Indian literacy rate 1951-2011

74.04
65.4

52.2
41.4
34.5
28.3
18.3

1951 1961 1971 1981 1991 2001 2011

Figure 5

Continuous growth in literacy is a positive sign for banks to launch diverse services. Like
increase in ATM across the nation.

TECHNOLOGICAL FACTORS

TECHNOLOGY IN BANKS
Page43

Technology plays a very important role in bank’s internal control mechanisms as well as
services offered by them. It has in fact given new dimensions to the banks as well as services
that they cater to and the banks are enthusiastically adopting new technological innovations
for devising new products and services.
ATM
The latest developments in terms of technology in computer and telecommunication have
encouraged the bankers to change the concept of branch banking to anywhere banking. The
use of ATM and Internet banking has allowed ‘anytime, anywhere banking ‘facilities.

Automatic voice recorders now answer simple queries, currency accounting machines
makes the job easier and self-service counters are now encouraged. Credit card facility has
encouraged an era of cashless society. Today MasterCard and Visa card are the two most
popular cards used world over. The banks have now started issuing smartcards or debit
cards to be used for making payments. These are also called as electronic purse. Some of
the banks have also started home banking through telecommunication facilities and
computer technology by using terminals installed at customers home and they can make the
balance inquiry, get the statement of accounts, give instructions for fund transfers, etc.
Through ECS we can receive the dividends and interest directly to our account avoiding the
delay or chance of losing the post.

IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great
utility to its customers. For example SMS functions through simple text messages sent from
your mobile. The messages are then recognized by the bank to provide you with the
required information.
All these technological changes have forced the bankers to adopt customer-based approach
instead of product-based approach.
Page44

Technology advancement has changed the face of traditional banking systems. Technology
advancement has offer 24X7 banking even giving faster and secured service.

CORE BANKING SOLUTIONS

It is the buzzword today and every bank is trying to adopt it is the centralize banking
platform through which a bank can control its entire operation the adoption of core
banking solution will help bank to roll out new product and services.

Analysis of Consumer Perspective on the Indian Banking Sector

A survey was conducted to find out general sentiments among 200 users of banking
services. The users comprised of people who were students, employed, unemployed, retired
and Housewives. The purpose of the survey was to understand the consumer perspective on
the Indian banking sector and what opportunities lay ahead for the banking sector.
The survey was conducted by means of a questionnaire given to the users to complete.
The scaling technique used for most of the questions in the questionnaire was Likert scale.
An attempt has been made to understand the general sentiment of consumer towards
Banks in India. This information is categorized and summarized into various subheads.

The top five banks which strike first in consumer mind are given below:

Figure 5: Shows the percentage response of five banks which strike first in consumer mind.

Top of Mind
46%
40%
36%
34%
30%
Page45

Axis Bank State Bank of India ICICI Bank HDFC Bank Punjab National Bank
A majority of the respondents, almost 46% have SBI as top of the mind followed by ICICI
40% and Axis bank 36%.Which shows SBI strikes maximum time when someone try to recall
any bank name in India.
This shows presence of banks in consumer share of mind.
According to the responses we get the top five banks which strike secondary in consumer
mind are given below: (Figure 6)

Spontaneous

31% 32%
29% 29%
24%

HSBC Bank Bank Of India Syndicate Bank IDBI Bank Bank of Baroda

Consumer is aware about these banks. If these banks put slight effort they have very good
chance need to make top of mind share among consumer.

Page46
Figure 7: Top five Banks to be used by consumer in future is shown below.

Future Use
54%
50%
46% 44% 42%

nk an
k
an
k
an
k nk
Ba B B s B Ba
BC te sa ila an
HS ica Vya iV ndi
nd r m h
I
Sy ru sh ut
Ka La
k So

Surprisingly majority of consumer would like to use less known banks in future. Like 54%
consumer prefers Lakshmi Vilas, 50% consumer prefer Karur Vyasa bank and 42% prefer
South India bank to be used in future. Most of the consumer are already availing know
banks thus they are more inclined towards less known banks. Moreover consumers believe
less know banks in order to expand their market size would like to give them better deals
and facilities.
On being asked which are the most important criteria for choosing particular bank/banks we
receive following responses which is shown below in the form of a pie-chart (Figure 8): Page47
 Reason for Choosing a Bank
Others High deposit Rate
5% 11%

Recommended by family or friend

28%
Proximity of bank branch
23%

 Availability of bank ATMs

33%

(Figure 8)
33% feel availability of ATM is most important criteria. 28% refer they are influenced by
family or friends and 23% prefer proximity of bank branch.
Other reason includes:
 Many business employees prefer easy and Hassle frees Transactions.
 In some cases banks have provide special services like no or minimal transaction
charges, easy forex transfer, no charge on DD and no constraint on minimum
balance.
 Many prefer good overall customer services, salary account, better internet banking
facility and hospitality of the nearby branch.

On rate of Interest 35% agree with the current rate of interest they earn on their deposited
money in banks. 37% are neutral and 26% are dissatisfied.
On satisfaction level of branch facility most of the consumer are satisfied with the bank
branch facility.
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Below shows the responses of consumer on bank branch satisfaction level in the form of bar
chart (Figure 9):
 Satisfied Level
ATM in convenient locations 45%

Pleasant & attractive decor 52%

Availability of information brochures 52%

No long line ups at counter 39%

Efficient, no wait service 51%

Clean & well cared facilities 63%

(Figure 9)

The Bank Insurance Model ('BIM'), also sometimes known as 'Bancassurance', is the term
used to describe the partnership or relationship between a bank and an insurance company
whereby the insurance company uses the bank sales channel in order to sell insurance
products.

On being asked whether consumers are availing any Bancassurance 61%are not availing and
only 39% are availing Bancassurance in the form of Medical Insurance, Life Insurance, and
Vehicle Insurance and housing loan insurance.

Thus India, being the second most populous country in the world with a huge potential for
insurance companies, has an envious chain of bank branches as the lifeline of its financial
system. Indian banking sector have 74,112 bank branches and huge potential to tap the
consumer which are not availing any Bancassurance.
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On satisfaction level of various banking services the consumer responses are tabulated
below: (Table 6)
  Very Satisfie Neutr Dissatisfi Very
Satisfie d al ed Dissatisfi
 d ed
Accounts 16% 62% 20% 1% 1%
and
Deposits
Loans 4% 17% 45% 32% 2%
Investmen 3% 24% 66% 7% 0%
ts and
Insurance
Cards 12% 72% 15% 2% 0%
Customer 10% 43% 32% 11% 5%
Center
Mobile 11% 42% 41% 6% 0%
Banking
Internet 23% 48% 24% 5% 0%
Banking

We can represent data in chart form by clubbing satisfied and Very satisfied together.
Similarly Dissatisfied and very dissatisfied are clubbed together. It will be easy to understand
the relative satisfaction level of various banking service among consumer. This is shown
below in the form of bar chart (Figure 10):

Consumer satisfaction level of various banking

services
Satisfy Neutral Dissatisfy

Internet Banking 71% 24% 5%

Mobile Banking 53% 41% 6%
Customer Center 53% 32% 16%
Cards 84% 15% 2%
Page50

Investments and Insurance 27% 66% 7%

Loans 21% 45% 34%
Accounts and Deposits 78% 20% 2%

From the above Chart except Loans, Investment and Insurance more than 50% consumer
are satisfied with rest of the services. In loan service 34% consumer are dissatisfied and 45%
are neutral which could likely to swing in any direction. Moreover majority neutral consist of
those who have not availed this facility yet. In Investment and insurance service only 27%
are satisfy and 66% are neutral. So, in this service also banks need to provide better deals.
On question such as satisfaction levels of current basket of services provided by the banks
73% are satisfy with their bank services and 22% are neutral. So we can deduce almost all
the banks are providing good and efficient banking services.

Following are the suggestion bank consumer would likely to see in their banking services:

1) Bank should make sure customer is well intimated, if there is any change in minimum
balance criteria on bank deposit.
2) Most of the consumer feels due to continuous use of ATM, it is not possible to update
the passbook. Bank should implement a mechanism to update passbook automatic
like online passbook or e-passbook.
3) Consumer also suggested the deposit Rate for saving bank account should be
quarterly instead of half yearly as applicable earlier.
4) Banks should work towards making Internet transactions charges minimum or nil,
irrespective of the amount of transaction.
5) Many consumers suggest there should not be any charges applied on cash deposits at
the branches (levied by certain banks).
6) More transparency requires in customer care and a feedback mechanism must be
present.
7) Many consumers feel there should be fast and efficient process of DD processing as
well as delivery at home.
8) Banks should work towards making use of other bank's ATMS completely free.
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9) Still some of the services (Like third party transaction via HDFC) have to be activated
via the bank branch, which makes it difficult for the professionals as they have to go
to bank for activation of these services. Even they must be available online.
10) Higher deposit rates, Lower interest rates for loans and more transparency regarding
the contents of the offer document.
 11) Banks should try to minimize the transaction cost between interbank transfer of
money.
12) Banks should be more transparent in their financial products as inadvertently all of
them have finer lines not understood in common parlance
13) The activation procedure for internet banking should be more convenient than the
current process followed.
14) Bank should incorporate commodity trading also.
15) Banks should try to reduce existing rate of interest in education loan which is very
high. Moreover, loan process need to be smooth and less cumbersome.
16) Banks usually show their best attitude to their customers when they are new to bank.
Consider customers as valuable and treat every customer as new customer. Good
customer satisfaction helps bank to grow better and faster.

Bibliography:

http://www.businessreviewindia.in/business-features/finance/india-s-top-10-business-banks
http://www.moneycontrol.com
http://www.rbi.org.in/scripts/Statistics.aspx
http://business.mapsofindia.com/india-gdp/sectorwise/
http://www.capitaline.com/new/index.asp
www.bseindia.com/downloads/BankingSector.pdf
www.mckinsey.com/.../india/mckinseyonindia/.../india_banking_2010.pdf
www.adb.org/Documents/Books/Rising_to_the.../India/india_bnk.pdf
finance.indiamart.com/investment_in_india/banks.html
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