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


Ten year average of 6.0%

US$ 50 billion in FY2003

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 Strong domestic demand Improving competitiveness lower interest rates, increased productivity, better working capital management, deleveraging Export thrust Favourable climatic conditions with good monsoon Modernisation of agriculture scale and farming methods

Industry

 

Agriculture


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 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

Industry

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

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 67.13 58.25

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

1.6 1.3 0.9 0.6 0.2

Asset turnover (Revenue / Assets)

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% Japan Ch i n a M a l a y si a Th a ila nd S. K o r e a In d 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 Increasing availabilit y
 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

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 Kingdo m So uth Ko rea United States Malaysia Thailand Ind ia China 5.2% 2.9% 2.7% 2.2% 14.2% 12.1% 9.0%

Premium as a % of GDP

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) West Indies UK (0.72 mn) GCC (4.1 mn) Zimbabwe/ Uganda Nepal

Area of large NRI population Areas of large PIO population

()

Number of NRIs

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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