Group Members ADITI NAG - 1021137 APOORV JHUDELEY-1021207 VINUTHA JOIS - 1021154

SWOT Analysis of Indian Banking Industry

The accelerating shift in economic power from the developed to emerging economies is dramatically changing the banking industry across the world. The international banking scene has in recent years witnessed strong trends towards globalization and consolidation of the financial system. Stability of the financial system has become the central challenge to bank regulators and supervisors throughout the world. The multi-lateral initiatives leading to evolution of international standards and codes and evaluation of adherence thereto represent resolute attempts to address this challenge. The Indian banking scene has witnessed progressive deregulation, institution of prudential norm and an emulation of international supervisory best practices. The supervisory processes have also concomitantly evolved and have acquired a certain level of robustness and sophistication in the banking industry.

Strengths of Indian Banks
In the short-term, most developed economies experienced a significant economic slowdown or recession in 2008-9, reducing significantly the growth of domestic banking assets. ‡ Emerging economies such as India by contrast tended to maintain relatively high growth rates, although some temporary economic slowdown was experienced in certain cases. In 2010, however, emerging economies grew strongly in general, while the recovery in Europe in particular remained relatively weak. y High standard regulatory environment. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related overnment and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. y Bank lending has been a significant driver of GDP growth and employment y Presence of more number of Smaller banks that would likely to be impacted adversely.

y Approximately 53000 networks of branches spread all over the country provides easy access to entire spectrum of customers. y Diversification in their operations ± Banks offer an entire gamut of services including insurance, investment banking, asset management, private equity, foreign exchange, payment of utility bills to customers, mobile and internet banking.

y Large manpower with relevant banking skills to manage the operations.

y Technological up gradation changing the way the banking is done. Anywhere banking and anytime banking has become a reality and thus making service faster, error free and competitive.

y Banks have gained financial strengths in terms of Productivity and Profitability.

Weakness of Indian Banks
Indian commercial banks, particularly PSBs have been witnessing the following challenges which have become bottlenecks in achieving competitive edge over their rivals. y y y y y y y y Low operating size High operating costs Inadequate deposit mobilization efforts High level of nonperforming assets Financial exclusion Complex and non-responsive organizational structures Credit to non-productive sectors like commercial estate Poor customer service

Underutilized capacity particularly in rural areas Unsatisfactory work culture Feudalistic attitude of thee staff Ethnocentric and action flippant management Absence of organizational focus on the employees leading to their de motivation y Inadequate access to global financial system y The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets y y y y y y Inadequate risk management skills particularly to cope with market risks and per Basel II norms

y Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs) y The inability of bank managements (with some notable exceptions) to improve capital allocation, increase the productivity of their service platforms and improve the performance ethic in their organisations could seriously affect future performance

Opportunities for Indian banks
y Increase the profitability by accessing international financial market for procuring funds cheaply and deploy funds prudently. y The emerging economies¶ banking sectors are expected to outgrow those in the developed economies.

y As per the PWC projection in Banking 2050 By 2050 the leading µE7¶ emerging economies could have domestic banking assets and profits that exceed those in the G7 by around 50%.
y y y y G7 countries: US, Japan, Germany, UK, France, Italy, Canada E7 countries: China, India, Brazil, Russia, Mexico, Indonesia, Turkey Other developed economies: Australia, Republic of Korea, Spain Newly emerging economies:Argentina, Vietnam, Nigeria, Saudi,Arabia, South Africa4

Figure 1: Projections of domestic banking assets in the E7 and G7

y India has particularly strong long-term growth potential and PWC projections suggest it could become the third largest domestic banking sector by 2050 after China and the US, but ahead of Japan, the UK and Germany. Brazil could also rise strongly up the global banking league table over this period.

y Dates at which E7 economies overtake G7 in terms of the size of their domestic banking assets


To acquire any company, non-bank finance company, housing finance or other businesses to increase their balance sheet size and go into areas where there is lot of potentials.

y Projected changes in population havev an important effect on some countries¶relative growth rates. For instance, Russia, Japan and Republic of Korea are expected to experience population falls, depressing overall GDP growth. Nigeria, Saudi Arabia and India are all expected to experience strong population increases, thereby boosting overall GDP growth. Some advanced economies (e.g. US, Australia) are projected to have stronger population growth than some emerging economies (notably China due to its one child policy). y The emerging economies¶ market exchange rates are expected to appreciate over time in real terms due to relative stronger productivity growth (the socalled Balassa- Samuelson effect). This provides a boost to growth in all of the emerging economies when measured in real US$ terms. Note that this real exchange rate appreciation could arise due to nominal appreciation and/or higher inflation rates in the countries Concerned

y Freedom to pursue new lines of business as part of overall business stratergy. y Freedom in pricing and Structuring their products y Opportunities to access foreign market. y Robust economic health of the country and development in different sectors promises the growth opportunities. y Growing SME sector leading to greater demand of credit facilities. y High growth opportunities in Processing sector which at present processes only 2 percent of fruits and vegetables contributing only 1 percent to global food processing and 350$ billion worth is fruits and farm products are wasted. y Boom in Indian¶s consumer spending y Huge opportunities in rural area where people still depend of money lenders and relatives.

y Projection of Share of total global banking assets. Source: IMF data for 2009, PwC model projections for 2050


y Competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. Further, huge implementation cost may also impact profitability for smaller banks. y The biggest challenge is the re-structuring of the assets of some of the banks as it would be a tedious process, since most of the banks have poor asset quality leading to significant

y Proportion of NPA. This also may lead to Mergers & Acquisitions, which itself would be loss of capital to entire system y Huge surplus manpower, absence of good work culture, antiquated labour laws, inflexible and inefficient labour and existence of strong labour union. y High level of Non Performing assets(NPA). 6 percent of the advances are still blocked up which is about 58000 Crore. Therefore problem of non recognition of interest income and loan loss provisioning exists.

y The house hold savings comprising financial assets are moving away from bank deposits to more sophisticated form of financial assets such as mutual funds, stocks and derivatives. y Asset liability mismatch

y Demanding customers are ready to jump from one bank to another when they are not satisfied with the service provided. This causes major threat particularly to PSUs. y Competition from new players.

y Competition at global level in terms of product innovation and product mix. y Keep pace with the fast growing technology. y The current business environment demands

Stress Test Stress-test analysis indicates that the banking sector is by and large protected from the direct exchange rate risk, direct interest rate risk and the indirect credit risk through changes in the interest rates. Direct credit risk and the indirect exchange rate risk through foreign currency lending are handled satisfactorily by the banking sector, while for some particular banks these risks are quite significant. The application of the stress test methodology on banks¶ balance sheet helps to identify the plausible difficulties the banking system could be faced with as a result of extreme but plausible shocks. Among the possible risks are considered the exchange rate risk, credit risk, interest rate risk and the indirect credit risks through foreign currency lending and interest rates changes. Stress test is undertaken on a continuous basis in the Reserve Bank to assess the resilience of the financial system to exceptional but plausible stress events. The stress testing uses single factor sensitivity analysis. In addition, a stress testing model which assesses the impact of macroeconomic variables on the financial soundness indicators of banks has also been attempted. In formulating the quantum of shocks, judicious criteria on selected indicators based on the experience of the Indian financial system are applied. The methodologies used in these stress tests are described in Annex-1. The stress tests currently being conducted by the Reserve Bank on regular basis cover the following risks: ‡ Credit risk, which estimates the impact on capital adequacy by stressing the non performing advances for the entire credit portfolio. ‡ Interest rate risk, which estimates the erosion in economic value of the balance sheet for a given interest rate shock using the ³Duration of Equity´ method both at the system and the individual banklevels. ‡ Liquidity risk, under different scenarios, which include sudden withdrawal of deposits on account of loss of confidence due to adverse economic conditions

Interest Rate Risk Duration of Equity (DoE) of commercial banks shows an increasing trend in the recent quarters, pointing towards greater interest rate risk being assumed by banks

Liquidity Risk Commercial Banks : The liquidity stress tests assess the ability of a bank to withstand unexpected deposit withdrawal without recourse to any outside liquidity support. The scenarios have been developed based on stringent assumptions and assumes unexpected deposit withdrawals in different proportions (depending on the type of deposits). The tests assess the adequacy of liquid assets available to fund these withdrawals. The deposit run is assumed to continue for five days.

Management of financial institution ±RM Srivatsa and Divya nigam

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