Banking Sector and Opportunities in India

March 2004

Agenda
Economic backdrop

Banking sector - overview & opportunities

In summary

Indian economy - Strong fundamentals

Forex reserves

Exports

US$ 90 billion

GDP growth

US$ 50 billion in FY2003

Ten year average of 6.0%

Indian economy - Strong fundamentals

Interest rates

6.5% decline in last five years

Short term debt

0.8% of GDP

External debt

20% of GDP

Diversified composition, robust growth

Sector Sectoral share of GDP 56.1 21.8 22.1 Projected growth FY2004 (%) 7.3 5.0 10.7 7.4

Services Industry Agriculture GDP

Strong growth drivers

Services

Information technology Business process outsourcing Financial services Entertainment, media, travel & tourism

Industry

Strong domestic demand Improving competitiveness lower interest rates, increased productivity, better working capital management, deleveraging Export thrust

Agriculture

Favourable climatic conditions with good monsoon Modernisation of agriculture scale and farming methods

underpinned by strong infrastructure growth

Roads

Construction of Golden Quadrilateral and North-South, East-West corridors 13,000 km long - worlds largest single highway project Boosting demand for steel, cement, commercial vehicles

Industry

Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years Positive impact on efficiency of firms and services exports

though certain areas require close attention

Power

Certain mis-steps have constrained development in this sector Now being corrected through policy initiatives Electricity Act passed by Parliament New focus on creating capacities as well as enhancing transmission and distribution efficiency

Urban infrastructure

Need for urban rejuvenation housing, roads, utilities Local bodies in several cities taking initiatives in this area

Changing demographic profile

> 50 years 14% < 14 years 34%

35 - 49 years 17%

15 - 35 years 35%
Source: Ministry of Home Affairs, Government of India

high proportion of younger, working population driving growth

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Robust household savings pattern

23%

Household savings as a % of GDP

22.5%

17%

11%

10.1%
5% 1970-71 1985-86 2000-01 2001-02
Source: Economic Survey 2002-2003, Ministry of Finance

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Large inflows of foreign currency

Gross forex inflows (US$ billion)
100

95.23

79.44
75

67.13 58.25

50 25 1990- 91

25.60

M erchand ize exp o rts

Source: Economic Survey 2002-2003, Ministry of Finance; RBI

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~ ~
1997- 98 1999- 00 2001- 02 2002- 03 Services exp o rts NRI remittances etc

Strong external position

Forex reserves & external debt (US$ billion)
100 75 78.00 50 25 0 104.23 83.80 74.81 External debt Forex reserves Gap 5.80 1990-91 29.42

Source: RBI

~ ~
1999-00 2002-03

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Enhanced corporate competitiveness

Return on Equity (PAT / Equity)
21% 14%

1.6 1.3 0.9

Asset turnover (Revenue / Assets)

7% 0% 1997-98 1998-99 1999-00 2000-01

0.6 0.2 1997-98 1998-99 1999-00 2000-01

India Shanghai A (Chinese cos. listed in Shanghai SE) H-shares (Chinese cos. listed in HK SE) Red chips (Chinese Govt. controlled cos. listed in HK SE)
Source: Deutsche Bank

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The above developments are the result of a decade of reform

Focus on globalisation

Opening up of the economy Thrust on export led growth Deregulation to encourage technology & capital flows Integration with international financial markets

Key reform measures

Lowering of tariff barriers and liberalised imports

Average tariff reduced from 53% to 18% in last 5 years

Full convertibility of the rupee on current account Permitting domestic companies to access foreign capital markets Substantial liberalisation of restrictions on foreign investment
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..driving transformational change

Dramatic growth of services sector

Over 50% of GDP Significant contributor to exports

Restructuring of manufacturing sector over the past decade

Early 1990s: capitalising on domestic demand Mid- to late 1990s: restructuring to achieve worldclass efficiency 2000: Articulation of international competitiveness

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The underlying fundamentals are based on a deep structural change in the economy and provide a sustainable platform for continued growth. The opportunities in the banking sector have to be viewed in this context.

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Agenda
Economic backdrop

Banking sector - overview & opportunities

In summary

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A decade of change and evolution

Pre-reform

The 1990s

Today

Indian economy

Extensive regulation Focus on industrial sector Highly segmented Public sector dominance

Financial sector

Liberalisatio n Globalisation Structural change services Opening up of various sub-sectors Private sector participation

Resilient industry Buoyant services sector Diversified financial groups Globally benchmarke d

..financial sector mirroring macro-economic change

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The banking sector today

Depth

Diversification

Countrywide coverage Large number of players Increasingly sophisticated financial markets

Emergence of integrated players Diversifying capital deployment Leveraging synergies

Technology

Regulation

Increasing use of technology in operations Poised to expand and deepen technology usage

Robust regulatory system aligned to international standards Efficient monetary management

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Sector snapshot
Size

Total assets of US$ 335 billion Total deposits of US$ 279 billion

Number of banks

Over 290 scheduled banks Public sector: 27 Private sector: new 9; old 24 Foreign: 37 Over 190 regional rural banks Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural: 14,400

Branch network

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Structural issues

Non-performing assets Legacy systems

Low levels of technology

Sellers market mindset

Low level of innovation in products and services Limited responsiveness to customers needs

The Indian banking sector has responded to these structural issues by adopting certain strategic imperatives

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Legacy issues addressed

Challenges of a changing competitive environment

Small and unviable pre-liberalisation units Large investments post-liberalisation impacted by global commodity cycles and high interest rates

Supportive legal and regulatory changes

Setting up of Debt Recovery Tribunals and enactment of SARFAESI Act, reducing delays in enforcement of security and creating effective legal deterrent Corporate Debt Restructuring Forum for restructuring viable companies Enabling framework for asset reconstruction companies

Proactive approach to resolution and increase in provisioning levels in the system

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with significant success in resolution Gross NPAs as % of GDP

(%) 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Jap an Chi na M a l a y si a T ha i l a nd S. Ko re a I nd i a

43%

43%

40% 30% 15% 4%

Position much stronger than other Asian economies

Net NPL accretion tapering off with progress in asset resolution and increase in provisioning levels

US$ bn

12.0 10.0 8.0 6.0 4.0 2.0 0.0 1997

Net NPAs of banks & FIs

1998

1999

2000

2001

2002

Source: E&Y, RBI

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A new orientation among banks

Traditional/ public sector Sell products Product research: what will sell? Product sales and profitability targets Product specialist groups Introduce new offerings every few years/months Branch banking Focus - customer acquisition

New/ private sector Meet customers needs Customer research: what does the customer want? Customer segment sales and profitability targets Customer owners Customer specific new offerings every week/day Customer convenience Deepen relationships

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Technology- the ICICI Bank experience

Channel Share of transactions in March 2000 94% 3% 2% 1% Share of transactions in July 2003 28% 51% 10% 11%

Branches ATMs Internet Call centre

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Retail credit opportunity

70 60 50
60 55

52

40 33 30 20 10 0 Korea Taiwan M alaysia Thailand India

36 27

18
14

Consumer loans / GDP (% )

Source: SSKI, CLSA

Consumer loans / Total loans (% )

..penetration currently low, with growth driven by strong fundamentals

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Retail credit drivers

Changing demographic profile Declining retail loan interest rates
Middle

& high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002 rates on residential mortgages have reduced by 7% over last 4 years

Interest

Entry

Increasing availabilit y

of banks has led to increased competition and coverage Increasing use of technology further enhancing reach and accessibility

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Retail market size

18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1999-00
Housing finance Commercial vehicle finance Consumer durable finance

Annual disbursement (US$ billion)

CAGR of 31% 9.4 7.3 12.9

16.5

2000-01
Car finance 2-wheeler finance

2001-02

2002-03

Credit card spend Personal loans

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Changing profile of corporate banking

Change in corporate focus - improving efficiency

Better asset utilisation and financial management Limited new capacity creation

Increasing disintermediation in top tier segment However, several opportunities for banks

Technology-driven fee-based services Treasury and risk management products Facilitating resource raising by corporates through syndication, securitisation and market-making New approach to SME lending

Sophisticated banking services Scientific portfolio construction and management

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Financial services potential: insurance

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% United Kingdom South Korea United States Malaysia Thailand India China

14.2% 12.1% 9.0%

Premium as a % of GDP

5.2%
2.9% 2.7% 2.2%

Life insurance

General insurance

Source: Swiss Re, Economic Research & Consulting (June 2002)

the opening up of the sector provides a major opportunity for financial services players
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The international Indian opportunity

Canada (0.42 mn) US (1.2 mn) UK (0.72 mn) GCC West Indies Nepal

Area of large NRI population Areas of large PIO population

()

Number of NRIs

(4.1 mn)
Zimbabwe/ Uganda

Singapore/ Malaysia (0.14 mn NRIs) Australia and New Zealand (< 0.1 mn)

Fiji

South Africa

the Indian diaspora, the emergence of Indian multinationals and resultant economic flows have created a new opportunity
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Agenda
Economic backdrop

Banking sector - overview & opportunities

In summary

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In summary

The reform and liberalisation process has transformed the Indian economy

Structural shift with service sector growth

Immense potential to leverage technology and knowledge capital

Improved competitiveness in manufacturing after intermediate period of restructuring & rationalisation Growing international linkages

Exports, manufacturing and distribution overseas India as a manufacturing base

Globally benchmarked businesses, capable of competing internationally

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In summary (contd).

The banking sector has achieved significant success in addressing legacy concerns

Resolution of asset quality concerns through recovery, restructuring and provisioning Focus on technology and customer orientation

The economic transformation provides major opportunities for the banking sector

Retail finance credit and banking services Corporate finance - banking services and structured finance

The sector is poised to capitalise on these opportunities

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Thank you

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