Indian Banking System 201 0

A PROJECT REPORT ON COMPREHENSIVE STUDY OF “INDIAN BANKING SYSTEM”

PREFACE
The introduction and application of the concept of customer services entered in a welcoming way in India only after independence. The banking system in India has come a long way during the last two centuries. Its growth was faster and the coverage wider since 1969. In 1969a major position of banking sector was entrusted to the public sector. This process continued and embraced few private banks in 1980. The transfer of ownership of banks from the public to private was aimed at entrusting the banks with greater responsibilities for the economic development of India by taking banking services to the masses and taking special care of the weaker section of the society and the priority sector of the economy. Though the number of banks offices magnitude and the variety of their operations has grown considerably during the period of near about three decades, but it appears that the banking sector has entered into serious among customers. For overcoming this problem, banking industry should seek introspection and adopt refined management techniques. It has been endeavor of this study to analyze the present state of various banks keeping in view the primary data has been collected regarding the present state of loan schemes in various banks by using a questionnaire.
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Indian Banking System 201 0

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Table of contents
S. No. 1. 2.
EXECUTIVE SUMMERY INTRODUCTION:  REVIEW OF LITERATURE  OBJECTIVES OF THE STUDY  SIGNIFICANCE OF THE STUDY  CONCEPTULIZATION
 FOCUS OF THE PROBLEM

Indian Particulars

Banking SystemPages 201 0 07-08
09-19

 LIMITATION OF THE STUDY

3.

RESEARCH METHODOLOGY:  RESEARCH DESIGN  SAMPLING: DESIGN AND PROCEDURE

20-24

4.

INDIAN ECONOMY:
 MACRO FACTORS AFFECTING INDIAN BANKING

25-31

SECTOR

5.

INDIAN BANKING INDUSTRY:  NEED FOR BANKS  INDIAN BANKING SECTOR EXPERIENCE
 INDIAN FINANCIAL SERVICES SECTOR SWOT

32-37

6.

STRUCTURE OF THE INDIAN BANKING SECTOR  CREDIT GROWTH

38-41

7.

MICRO FACTORS AFFECTING INDIAN BANKING INDUSTRY:  LOAN DEMAND  RISING FUNDING  NON-PERFORMING LOANS  TECHNOLOGY
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42-48

8.

VALUATION TOOLS:  ICICI BANK

49-57

Indian Banking System 201 0 4 .

Indian Banking System 201 0 EXECUTIVE SUMMARY 5 .

This will improve trade and other ties between two of the fastest growing economies. High Credit growth at 30%. it continued the trend of last 5 years where it has averaged around 25% and lastly M&A activity which was at its peak with sectors beyond IT and Pharma making global & domestic acquisitions. As such. 6 .  Banking in which Banks are allowed to raise hybrid capital which opens new avenues for funding credit growth.000 + (50% higher) compared to FY 05-06. On political front.  Retail . In Capital Market. the report focus on change factors in Banking Industry as this industry is expected to have major impact on Indian Economy.  The high growth sectors are Power where power ministry and local private players announce 9 ultra mega projects (4.Indian Banking System 201 0 EXECUTIVE SUMMARY The Indian Economy is driven by strong fundamentals with GDP growth at 9. Chinese President Hu is expected to visit India. entry of world majors like Wal-Mart & foreign investment allowed in single brand retail and Real Estate with major huge build-out plans and Special Economic Zone policy of government is major driver of growth. the Indian Government has signed nuclear deal with America indicating India’s importance in the global context opening up many opportunities.1% for H1 FY07 – strongest growth in any six months since H1 FY04 and uptrend in Industrial Cycle with Average Index of Industrial Production growth at 10. The Indian corporate raised USD 6bn by issuing Initial public offer in India and abroad. Along with this.2bn took BSE Sensex to 14.000 MW each) provides visibility on power & infra front.a Point of inflection with major Indian corporate announcing plans. Strong foreign inflows with Portfolio flows of nearby USD 9.2% being the strongest run in the past 11 years.

Indian Banking System 201 0 INTRODUCTI ON 7 .

largely. financial intermediaries can broadly be categorized as institutional and non-institutional.Indian Banking System 201 0 INTRODUCTION In India. other financial institutions (FIs). FIs provide mostly medium and long-term funds. In terms of supply of credit. on financial intermediaries to meet their fund requirements. While banks and NBFCs predominantly cater for short-term needs. firms and economic entities depend. given the relatively underdeveloped capital market and with little internal resources. Information about the unorganized sector is limited and not readily available. An important feature of the credit market is its term structure: (a) Short-term credit (b) Medium-term credit (c) Long-term credit. The non-institutional or unorganized sources of credit include indigenous bankers and money-lenders. development financial institutions or DFIs). The major institutional suppliers of credit in India are banks and non-bank financial institutions (that is. and non-banking finance companies (NBFCs). 8 .

2000 (ESOS). ICICI Bank allots equity shares ICICI Bank allotted 17.9. India is one of the biggest destinations for foreign remittances. which will provide expanded services to Indus American Bank customers can expect service at over 14. or 1.ICICI Bank (ICICIBANK) was promoted in 1994 by ICICI.000 branch locations of State Bank of India within India.800 equity shares of face value of Rs 10 each on Sep.38%. to settle at Rs 569. State Bank of India offers excellent exchange rates which are now available to Indus American Bank customers. 18. Shares of the company gained Rs 7. Under the new money transfer service.Indian Banking System 201 0 REVIEW OF LITERATURE IA Bank ties up with SBI for money transfers NEW JERSEY: Indus American Bank has tied up with State Bank of India to offer money transfer services to India for its clients.(Tuesday) HDFC Asset Management to launch debt fund on Sept 27 9 . As the largest bank in India.000 additional RTGS participating banks. The total volume of shares traded was 173. and at over 14. 2007 under the employees stock option sceme. an Indian development financial institution.655 at the BSE. Funds remitted from Indus American Bank would reach recipients typically within 24 hours.75. The two entities subsequently merged to become the largest commercial bank in the private sector.

The fund. The report also quoted HDFC Managing Director Keki Mistry as saying the company was looking at a half percentage point cut and that the new rates would be announced next week. the fund house said.HDFC Asset Management Co Ltd said on Tuesday that it will launch a close-ended debt fund on Sept.Indian Banking System 201 0 MUMBAI (Reuters) . OBJECTIVES OF THE STUDY 10 ." HDFC Chairman Deepak Parekh was quoted as saying. HDFC FMP 18M September 2007. "The cost of wholesale funding has come down and we are taking a look at passing on the benefits to borrowers. 27. will be open for subscription till Oct. 8. the Economic Times reported on Saturday. It will invest at least 60 percent of the assets in debt and money market instruments and the rest in government securities. HDFC to cut interest rates Mortgage lender Housing Development Finance Corp is likely to cut its interest rates next week.

 To find out what are the policies that we have to be adopted to increase the goodwill of the company.  To provide suggestions for better functioning of business. ICICI & SBI.Indian Banking System 201 0  Today’s banking sector play a dominant role regarding investment decision. It basically tells about how these funds are effectively and efficiently utilized in order to maximize profits. SIGNIFICANCE OF THE STUDY 11 .e.  To study the growth and performance of banking company.  To know about the various loan schemes of these two banking companies i.

 To find out the rate of interest of banks and reaction of customers on it. CONCEPTUALIZATION 12 .  Suggest the investors whether to invest in shares of Banking Companies.Indian Banking System 201 0  To make a detailed study of various financial services provide by the different banks.  To make analysis on the economic benefits provided by various banks.  To analyze customers view point regarding their banks.  To study effective and most popular bank among the customers regarding its services.

Ministry of Finance and related government and financial sector regulatory entities. an enabling policy and regulatory framework will also be critical to their success. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. we emphasize the need to act both decisively and quickly to build an enabling. This is reflected in their market valuation. which comprise the Reserve Bank of India (RBI). growth and value creation. While the onus for this change lies mainly with bank managements. In this “white paper”. A few banks have established an outstanding track record of innovation. The policy makers. growth and value creation in the sector remain limited to a small part of it. which has harmed the long-term health of their economies. India’s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. The sector now compares favourably with banking sectors in the region on metrics like growth. have made several notable efforts to improve regulation in the sector.Indian Banking System 201 0 The last decade has seen many positive developments in the Indian banking sector. The failure to respond to changing market realities has stunted the development of the financial sector in many developing countries. innovation. rather than a limiting. profitability and non-performing assets (NPAs). banking sector in India FOCUS OF THE PROBLEM 13 . However. improved regulations. A weak banking structure has been unable to fuel continued growth.

Banking Challenges It is expected that the Indian banking and finance system will be globally competitive. The banking and finance system will improve competitiveness through a process of consolidation. Technology would be the key to the competitiveness of banking and finance system. either through mergers and acquisitions through strategic alliances. For this the market players will have to be financially strong and operationally efficient. 2. In this context.Indian Banking System 201 0 The research report concentrates on macro and micro factors affecting Banking Industry. 1. Banking Evolution & Regulatory Framework 14 . Various regulatory and reform processes also affect banking industry. on-line accessibility will be available to the customers from any part of the globe. In such a scenario. ‘Anywhere’ and ‘Anytime’ banking will be realized truly and fully. The report also throws a light on them. The report finally ends with valuation of major players in banking Industry and the major challenges faced by this industry. Capital would be a key factor in building a successful institution. Evolution of Banking Industry and its current status. Indian players will keep pace with global leaders in the use of banking technology. the research paper approached “Indian Banking System” as the shape of the banking sector will be the result of a strong interplay between the decisions taken by policy makers and actions of bank managements.

A few banks have established an outstanding track record of innovation. In this context the need for drawing up a Road Map to the future assumes relevance. India’s banking industry must strengthen itself significantly. profitability and non-performing assets (NPAs). 15 . However. growth and value creation. The sector now compares favorably with banking sectors in the region on metrics like growth. the Free Trade Agreements (FTAs) such as with Singapore. have made several notable efforts to improve regulation in the sector. if it has to support the modern and vibrant economy which India aspires to be. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. innovation. Ministry of Finance and related government and financial sector regulatory entities. The banking industry has moved gradually from a regulated environment to a deregulated market economy. In addition to WTO and Basel II. growth and value creation in the sector remain limited to a small part of it. Banks need to prepare for the changes. This is reflected in their market valuation. and enabling policy and regulatory framework will also be critical to their success. may have an impact on the shape of the banking industry. which comprise the Reserve Bank of India (RBI). The last decade has seen many positive developments in the Indian Banking Sector. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. greater challenges lie ahead.Indian Banking System 201 0 Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. Banks will also have to cope with challenges posed by technological innovations in banking. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel II. improved regulations. The pace of transformation has been more significant in recent times with technology acting as a catalyst. Financial sector would be opened up for greater international competition under WTO. The policy makers. While the banking system has done fairly well in adjusting to the new market dynamics. while the onus for this change lies mainly with bank managements.

It is wise for Indian banks to exploit this globally state-of-art expertise.  Third. Internal Hindrances to Banking Industry The research focuses on emphasizing the need of decisively and quickly to build and enabling. rather than a limiting. an area where India happens to be a world leader in information technology. a key to sustainability of bank profits as well as their long-term viability. Fifth. but its usage by our banking system is somewhat muted. which is a key to the stability of the banking sector. to their fullest advantage. on their part.Indian Banking System 201 0 3. cost management. domestically available.  Fourth. The major challenges ahead for bank management are as follows:  First. governance because the quality of corporate governance in the banks becomes critical as competition intensifies. technological intensity of banking. banking sector in India. business profile and risk appetite in order to better monitor and manage risks.  Second. Banks can. banks strive to retain their client base. 16 . recovery management. formulate ‘early warning indicators’ suited to their own requirements. risk management. and regulators move out of controls and micro-regulation.

 There may be other events during the Clean and Window Period which may distort the results.  Many of the respondents did not think hard enough while choosing the specific point.Indian Banking System 201 0 LIMITATION OF THE STUDY  The scope of the study will be restricted to selected Banks. This could have led to a biased view and thus affected the analysis. 17 .

Indian Banking System 201 0 RESEARCH METHODOLO GY 18 .

The methodology followed is Target Pricing. Then EPS is calculated which is multiplied to Historical P/E to forecast intrinsic value of share. which includes estimating growth rate by regression on historical sales to forecast next year sales. Result: 19 . Objective: Discover insights into and develop an understanding of the various Macro and Micro Economic Factors that have bearing on the functioning of the Banking sector. SBI and HDFC Bank. earning and Profit and Loss account. Evaluate the performance of some of the banks based on the past data and forecast the future prospects. Valuation: The project involves valuation of major Indian Banks including ICICI Bank.Indian Banking System 201 0 RESEARCH METHODOLOGY Problem Definition: To determine and analyze the hidden potential in Banking sector in India so as to suggest the investors whether to invest in shares of Banking Companies.

Since the intrinsic value is more than current market price for all the companies.  Company Reports 20 . 2005  FICCI Survey on status of Indian Banking Industry – Progress and Agenda Ahead  Indian Banks Association. Forecasts are done in relation to the future performance in terms of sales for HDFC Bank.  Reserve Bank of India. Resources and Constraints: Resources: Various Publications like  AT Kearney Report. RESEARCH DESIGN Exploratory Research Design because the problem required an in-depth study of all the related variables.Indian Banking System 201 0 All shares are undervalued and expected to give positive risk adjusted returns to investors. Various Years. including the sales for the past 10 years (1997-2006). Once the information was collected. the share can be recommended to conservative investors. Balance Sheet etc. Performance Highlights of Banks (Mumbai). Other forecasts include the EPS calculation and comparison of forecasted Future Target Price with the Current Market Price. ICICI Bank.). 2005. Past information and forecasts: Collected the past information in the form of details of the various accounting statements (Income Statement. “Annual Policy Statement for the year 2005-06” (Mumbai). the next step was to search for resources and constraints with respect to the area of research. and SBI.

Difficulty in making accurate forecasts because of presence of Economic impediments like inflation. Difficulty in application of Statistical Tools.   21 . RBI policies etc.Indian Banking System 201 0 Constraints:  Lack of time availability with the people involved in any manner with the research especially when decisions were to be made quickly.

Indian Banking System 201 0

SAMPLING: DESIGN AND PROCEDURE:
Sampling Technique: “Convenience Sampling” as a part of Non-Probability sampling by taking the three banks as the major performers in the Indian Banking Sector and highlighters of sector’s overall performance. Sample Size: Sample Size was restricted to 3, including ICICI Bank, HDFC Bank and State Bank of India. Executing the Sampling Process: Through making a comparison among the various key figures of sales, profits and accounting ratios deduced from accounting statements.

Method of Data Collection: Secondary Data is collected to carry out the study. To review the literature available regarding the subject; various journals, magazines, related research papers and Internet would be used

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Indian Banking System 201 0

INDIAN ECONOMY
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Indian Banking System 201 0

INDIAN ECONOMY-MACRO FACTORS AFFECTING INDIAN BANKING
Major Changes in FY 2006-07
 Robust economic growth in FY07. GDP is increased by over 8% in FY07; Agriculture,

industry and services to grow at 1.7%, 10.5% and 10.7% respectively
 Rabi season experiences normal monsoon  IIP (Index of Industrial Production) growth dips in October 2006. The poor performance of

the manufacturing sector, which forms 80% of the IIP index lead to a blip in its robust growth trend for the past 9 months. Both mining and electricity grew faster than last year at 4% and 9.7% Vs – 0.1% and 7.7% respectively
 WPI (Wholesale Price Index) rose to 5.43% for the week ending December 16; higher

inflation in primary commodities remains. The inflation in the coming weeks may remain high due to lower base effect.
 CRR (Cash Reserve Ratio) hike of 50 bps to absorb Rs.135bn from the system. The CRR

rate hike of 50bps came as a surprise but it reflects that RBI’s intention of controlling credit off-take and liquidity management by raising repo and reverse repo rate could not achieve the desired results due to which RBI used CRR rate hike – a new instrument to control liquidity  Exports growth back on track in November 2006. On the basis of the BoP, in H1FY06 exports grew at 23%, imports at 25.3% resulting in the trade balance of US$35bn. Net invisibles grew by 17.6% to US$23.5bn and capital inflows (in the form of FDI, NRI deposits and ECB) at US$20.3bn (a yoy growth of 49%) brought the balance of payment to US$8.6bn, (a yoy growth of 33%).
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clocked a healthy growth of 9. The manufacturing sector – the key growth driver for banking credit. The Indian Economy has seen major Macro changes in: 1.in 25 .0% of GDP in 2001-02 to 30.8% vis-à-vis a basket of six currencies.org. The services sector recorded double digit growth to contribute nearly three-fourths of incremental GDP.4% 2005-06. A consistent increase in domestic investment rate from 23.rbi. Source: www. Gross Domestic Product: The Indian Economy is driven by the strong fundamentals and uptrend in industrial cycle.0% during FY06. In real terms.1% in 2004-05 supported a high credit growth witnessed during the past few years. The Indian economy maintained a strong growth momentum for the third successive year in 200506 with real GDP growth accelerating to 8. the rupee appreciated by 1. from April 2006 to October 2006.Indian Banking System 201 0  Rupee appreciates further against dollar and yen but continues to depreciate against Euro and pound on an YTD basis as on December 2006.

2006 after remaining in the range of 4. Source: AT Kearney Report.0% earlier.45% for the week ended November 18.7% Industry: 10. FY07 Vs Q2FY06.5% Service: 10. 2005 3. making them more NRI friendly. Inflation: Inflation remained largely benevolent due to investment driven nature of growth and subsidized nature of oil prices as pass-on of international crude price rise remained incomplete in India.7 2. services sector account for major 55% of India GDP followed by 25% in Industrial sector and 20% in agriculture sector.0-5. the growth rate in GDP components are as follows: Agriculture: 1. Indian rank 2nd among all countries in the world on FDI Confidence Index. FDI Confidence Index: Relaxation of foreign direct investment rules has expanded the mountain of capital in every sector of Indian economy. WPI Inflation has risen to 5. RBI has repeatedly cautioned that maintaining 26 . Mainly due to efforts taken by Indian Government.Indian Banking System 201 0 In FY 06-07. The government is making efforts in liberalizing the guidelines and norms for investment through FDI.

8% of BE and 99. Fiscal and revenue deficit for April-November 2006 widened to 72. 2006 during the current fiscal.5% of BE respectively in AprilNovember 2005. remained at budgeted level of 2.5%.0-5. The improvement in the GFD was facilitated by a decline in capital outlay and the availability of disinvestment proceeds. which poses a significant threat to RBI’s efforts of containing inflation in the desired range of 5. 4. The money supply has grown by 18.4% of BE.7% yoy till November 10. Source: RBI.Indian Banking System 201 0 inflation in the target range may call for substantial monetary tightening should crude prices persist at high level.7% of BE Vs 74. The revenue deficit. though lower in absolute terms.7% of BE and 91.7 per cent of GDP in 2005-06. Gross Fiscal Deficit: The gross fiscal deficit (GFD) to GDP ratio for 2005-06 was at 4.6% of BE and revenue deficit of79. The current levels are much higher than the last month’s fiscal deficit of 58.3 per cent.1 per cent as against the budget estimate of 4. Ministry of commerce and Industry 27 .

42% but reacted sharply thereafter to once again come down to 7. 28 . it continue to move up to 8.12%.50% but moved up quite sharply cut mode. Interest Rate: The yield on dated government securities (G-Sec) has been moving up since the beginning of FY05.4% at present as the market participants believed that US Fed and other central banks worldwide would not only pause rate hikes but soon get into rate the current fiscal at 7. The yield on 10 year paper began during Q1 to close the quarter at 8.Indian Banking System 201 0 5. During July 06.

Indian Banking System 201 0 Source: RBI Real interest rate indicated by spread between inflation and 10 year benchmark yield has trended in the range of 2-4%. The real interest rate in developed economies is normally in the range of 2-3%. Rising Oil prices and Exchange Rate: World over. The US Fed. 6. However. In response to the same. the central bankers led by US Federal Reserves embarked on withdrawal of monetary accommodation through a series of rate hikes as the rising oil and asset prices threatened the global economies with inflationary pressures. which embarked on an aggressive rate hike campaign through 17 consecutive rate hikes of the magnitude of 25 bps. real interest should be higher than those prevailing in more matured economies. Due to this. several economies including Euro-zone and Japan hiked their key policy rates. RBI has hiked the key policy Repo and Reverse Repo rates five times over the past 29 . the marginal productivity of capital being much higher in the developing economy like India.

IPOs.Indian Banking System 201 0 two years. demergers. 30 . interest rate and corporate bond markets are not free or well developed. stock markets will be the most impacted by negative news flows as other areas where shocks can be absorbed such as the currency. inorganic growth and extracting value thru the revenue statement. The Capital Market has seen balance sheet value being unlocked through monetization of embedded assets. This has led to a significant hardening of interest rates over the past 4-5 quarters. which has adversely impacted the cost of funds for banks. Capital Market: Financial markets in India and globally have seen little volatility over the last few Years. There have been only two spikes in India – in April 2004 when the UPA government came to power and in May 2006. In India. etc. Indian companies continue to build value in the balance sheet as newer opportunities emerge through smart capex. 7.

firms and economic entities depend. development financial institutions or DFIs). other financial institutions (FIs). on financial intermediaries to meet their fund requirements. largely. The major institutional suppliers of credit in India are banks and non-bank financial institutions (that is. The non-institutional or 31 . financial intermediaries can broadly be categorized as institutional and non-institutional. and non-banking finance companies (NBFCs). given the relatively underdeveloped capital market and with little internal resources. In terms of supply of credit.Indian Banking System 201 0 INDIAN BANKING INDUSTRY INDIAN BANKING INDUSTRY In India.

The commercial banks of the country including the IBI had till then confined their operations to the urban sector and were not equipped to respond to the emergent needs of 32 . While banks and NBFCs predominantly cater for short-term needs. An important feature of the credit market is its term structure: (a) Short-term credit (b) Medium-term credit (c) Long-term credit. there were 625 commercial banks in India.Indian Banking System 201 0 unorganized sources of credit include indigenous bankers and money-lenders. the development of rural India was given the highest priority. and disbursed credit primarily to large corporations. FIs provide mostly medium and long-term funds. Commercial banks mobilized household savings through demand and term deposits. Information about the unorganized sector is limited and not readily available. Need for Banks Role of Bank Channel household savings Risk Transformation Service Provider Indian Banking Sector Experience India inherited a weak financial system after Independence in 1947.51 billion. At end-1947. with an asset base of Rs. Following Independence. 11.

the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank by taking over the IBI. the GoI nationalized 14 scheduled commercial banks (SCBs). The GoI also felt the need to bring about wider diffusion of banking facilities and to change the uneven distribution of bank lending. enabling the SBI to take over 8 former State-associate banks as its subsidiaries (later named Associates). Banks were characterized by low profitability. Poor internal 33 . However. This increase was at the expense of some crucial segment of the economy like agriculture and the small-scale industrial sector. Subsequently in 1959. In July 1969. high and growing non-performing assets (NPAs).5% of assets.000 million and above. • The nationalization of banks was the culmination of pressures to use the banks as public instruments of development. and perhaps the spate of bank failures during the sixties. Subsequently. More than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. In order to serve the economy in general and the rural sector in particular. an act was passed in Parliament in May 1955. forced the government to resort to nationalization of banks. Bank failures and mergers resulted in a decline in number of banks from 648 (including 97 scheduled commercial banks or SCBs and 551 non-SCBs) in 1947 to 89 in 1969 (comprising 73 SCBs and 16 non-SCBs). The GoI imposed `social control’ on banks. the former state-owned or state-associate banks. and capital aggregated an estimated 1. each having minimum aggregate deposits of Rs. Average returns on assets were only around 0. 1955.Indian Banking System 201 0 economic regeneration of the rural areas. in 1980. the State Bank of India (Subsidiary Bank) Act was passed (SBI Act). Accordingly. the GoI nationalised another 6 banks2. and low capital base. 500 million. it was generally perceived that the operational efficiency of banks was declining. 2. each having deposits of Rs. The lop-sided pattern of credit disbursal. State-control was considered as a necessary catalyst for economic growth and ensuring an even distribution of banking facilities.15% in the second half of the 1980s. The proportion of credit going to industry and trade increased from a high 83% in 1951 to 90% in 1968. by the 1980s. and the State Bank of India (SBI) was constituted on July 1. and integrating with it.

INDIAN FINANCIAL SERVICES SECTOR SWOT ANALYSIS 34 . a fresh era in Indian banking began. with the introduction of banking sector reforms as part of the overall economic liberalization in India. In 1991.Indian Banking System 201 0 controls and the lack of proper disclosure norms led to many problems being kept under cover. The quality of customer service did not keep pace with the increasing expectations.

i.e. staff cut. educated workforce  Rapid financial deepening. of catch-up economics— low per capita income. investments  M&A optionality Threats:  "Running on empty" in terms of liquidity  Tightening in global liquidity may trickle down to India 35 . combined with accelerating private sector credit demands  Ownership restrictions  Constraints on state-owned banks' micro reforms. loan growth as multiple of nominal GDP growth  Rising consumer spending. including HR. branch cut constraints Opportunities:  Improving secular GDP growth prospects  Establishment of special economic zones likely to promote further industrialization  Years.Indian Banking System 201 0 Strengths:  Proven asset quality resilience in past downturns  Proven management teams. track record  Stable industry dynamics  Well-established regulatory framework  Stable/low NPL formation rates Weaknesses:  Continued crowding out effect from govt budget deficit. consumer credit business  Rising corporate capex. if not decades.

Indian Banking System 201 0  Potentially hawkish RBI stance on inflation/monetary policy  Potential rise in long bond \ yields. MTM risk for banks  Potential for valuation pullback. should earnings delivery disappoint expectations 36 .

The Reserve Bank of India Act was passed in 1934 and the RBI was constituted in 1935 as the 37 . central bank.Indian Banking System 201 0 STRUCTURE Of banking STRUCTURE OF THE BANKING SECTOR The banking sector in India functions under the umbrella of the RBI—the regulatory.

and  Foreign banks No. inspection of banks. mergers and amalgamations of banks.  Private sector banks (old and new). opening and closing of branches of banks. maintaining certain standards of banking business. scheduled commercial banks or SCBs. The scope of the report includes the SCBs only3. and co-operative banks. This Act brought the RBI under government control. The Banking Regulations Act was passed in 1949.Indian Banking System 201 0 apex bank. and nationalized banks). etc. Under the Act. the RBI received wide-ranging powers in regards to establishment of new banks. Banks in India can broadly be classified as regional rural banks or RRBs. The SCBs for the purpose of this comment can be classified into the following three categories:  Public sector banks or PSBs (SBI & its associates. The Act also vested licensing powers and the authority to conduct inspections with the RBI. of Banks in India for FY 05-06 29 20 30 8 SBI & Associates Nationalised Banks Category of Banks Private Banks Foreign Banks Source: IBA 38 .

39 . Canara Bank and PNB Bank have each more than Rs. Among private sector banks.48412 cr. among Foreign banks – Citibank.45437 cr. Rs.73506 cr and UTI Bank of size Rs.37473 cr and Rs. in FY 05-06.49731 cr.251389 cr followed by HDFC Bank of size Rs. HSBC and Standard Chartered bank are leaders with asset base of Rs.100000 cr. public sector banks have highest base compared to private and foreign banks.691872 cr while other banks such as BOB. In terms of asset size. Resp. BOI. ICICI Bank is the leader with asset base of Rs.Indian Banking System 201 0 Asset Size of Banks for FY 05-06 ('000 crores) 1327 565 198 201 SBI & Associates Na tionalised Banks Category of Banks Private Banks Foreign Banks Source : IBA In terms of asset size. SBI & Associated have asset base of Rs.

in real terms.a process that seems to have begun in the mid-1990s 40 . Bank credit to the private sector. First. and substantial bank restructuring. while the share of the household sector has increased sharply in several countries. As a result. especially in Asia and Latin America. excess liquidity in banking systems reflecting easier global and domestic monetary conditions. Second. was rising at a rate between 10 and 40 per cent in a number of countries by 2005 (BIS. 2006).Indian Banking System 201 0 Credit Growth The bank lending has expanded in a number of emerging market economies. Several factors have contributed to the significant rise in bank lending in emerging economies such as strong growth. in recent years. credit to the business sector . banks investments in Government securities increased sharply until 2004-05. The recent surge in bank lending has been associated with important changes on the asset side of banks balance sheet.historically the most important component of banks assets – has been weak. commercial banks continue to hold a very large part of their domestic assets in the form of Government securities .

Indian Banking System 201 0 MICRO FACTORS 41 .

October 2006). Indian Banking Industry has seen sustained strength in credit growth. rising efficiency of credit markets. Loan growth sustained for very long Source: RBI 42 .Indian Banking System 201 0 MICRO FACTORS AFFECTING INDIAN BANKING INDUSTRY  Loan Demand: Over the past three years. which is not just a function of economic buoyancy but also the broad-basing of loan demand. and competitive pressures augmenting the overall supply of credit. Monetary Policy Review.” (Reserve Bank of India. structural shifts in supply elasticity’s. This has recently been articulated by the central bank too: “A contextual analysis of the co-movement between macroeconomic performance and bank credit in the current phase of the business cycle suggests that factors other than demand may also be at work: financial deepening from a low base.

growth in industrial credit was almost wholly driven by infrastructure. That explains the apparent lack of correlation between rates that have been rising and loan demand. However. it is unlikely that the government will be able to influence the course of interest rates single-handedly. That PSU banks raised prime lending rates twice in. The reality is that banks. There is a perceptibly wider participation from other segments during FY05 and FY06. and banks have reduced exposure to them considerably during the last 3-4 years. went into a less profitable and hence a financial restructuring mode. Along with the diversification of the pie that keeps the tempo of demand intact. under compulsion.  Rising funding costs with soft lending rates irrational: Plenty of historical evidence of return of pricing power to banks: Concerns are often expressed about banks’ ability to increase lending rates in the face of competition and government pressure. There was no retail credit then. which led the mortgage price war. and hence banks’ rates going by 200-300bps is not so meaningful. If a substantial portion of loan growth gets driven by the banking system taking away market shares from informal sectors – this is clearly happening to farm credit. have increased mortgage rate by 200-300bps from the bottom. which accounted for a lion’s share of bank credit. SMEs and the rural folk have accessed credit from other sources at exorbitant interest rates. Competition from overseas borrowings is a serious factor only with AAA companies.Indian Banking System 201 0 The slowdown of the mid-1990s hit the banks very hard because corporate. banks did not focus on Small and Medium Enterprises and farm lending was done grudgingly. In the five years prior to FY05. SMEs and to a limited extent non-mortgage retail – interest rate considerations influencing demand will be relatively low. 43 . and is yet to see significant resistance. Government stand is understandably against higher interest rates. after a long time industry has also started demanding higher levels of credit.

PNB. yields on investments have been continuously falling over the last few years.20%. banks will be cautious about the actual implementation of the lending rate increases and may do it in a graduated fashion so as not to invite outright resistance or overt attention from the government. This is because as the last interest-rate cycle showed. incremental opportunity as more cash from chests moves into bank deposits first before potentially going to other avenues. Banks’ increased risk appetite good for loan yields: The banks’ lending risk appetite has increased significantly over the last five years – banks veering more towards lending at increasing spreads rather than investing in risk-free bonds. Also. household financial savings have moved out of equities and long-term products to bank deposits in percentage terms. the fight for deposits has intensified and it is possible that in Q4FY07 banks could be increasing their exposure to high-cost wholesale deposits. SBI and a few others have nevertheless already made a beginning by increasing their prime lending rates after the cash reserve ratio hike by the RBI. and the RBI could be increasing CRR or SLR requirements to further tighten the liquidity. banks have managed to move the deposit growth rate from 15-16% to 19. which is good for overall asset yields. on a larger base. and followed by lending rates. The Q4FY07 is expected to be a period of margin pressure.Indian Banking System 201 0 Inflexibility of deposit growth a myth: With 100-200bps increase in the card rates of deposits. However. Accordingly. In the last five years. taken at higher than card rates. Investment spreads may increase in future: As long-duration bonds at high interest rates have been coming up for maturity and getting repriced at lower interest rates. deposit costs increase first. 44 . banks are willing to take higher risks. Q4 is also usually a period of tight liquidity. The point to note here is that component of cash (currency) has marginally risen – that’s the real. HDFC Bank.

Commercial real estate: According to figures disclosed by the RBI itself. Residential mortgages: It is very unlikely in near term that there can be a large-scale increase in delinquencies on loans taken for the first house (typically self-occupied).Indian Banking System 201 0  Non – Performing Loans (NPLs): concerns overstated: Loan growth-NPL The asset price deflation (read real estate prices) may hurting banks’ asset quality has been blown out of proportion. typically for investment/speculation. LTV ratios had gone up to more risky levels at the peak of the mortgage boom. 45 . risk weights from 100% to 150% and instructing banks not to lend unless the developer has “all the permissions. real estate loans constituted 2. Even then. Even if the assumption that 10% of the outstanding mortgages are for the second house and all of that goes bad. Problems can arise more frequently for loans taken for the second house. it will mean 1% of the banking system’s loans go bad. a 25% fall is theoretically not possible.0% of gross non-food credit of banks as of end-June 2006. with an average loan-to-value of 75%. it does not matter to the borrower whether the price of the house he is staying in is rising or falling. There is a possibility that some individuals have been hiding from banks the fact that they already have one more loan. by increasing standard assets provisioning on these loans to 100bps from 25bps. Banks have been reluctant to disclose the exact volume of second houses financed. Even if it has been growing at high percentage rates is not material as the base was very low. Most banks claim that it is in the range of 2-5% of incremental mortgage lending. unless there is a household income problem. In any case. but this is becoming increasingly difficult with a credit bureau now in full swing.

Indian Banking System 201 0 One stark example of this is the largest bank SBI itself.000. according to National Council for Applied Economic Research. the most prominent individual borrowers for banks. with little coming from others. farm credit and trade. SBI’s loan portfolio now quite diversified Source: Company data. The corporate pricing power story is less known because of the media harping on high competition and margin compression. 000-1. In the mid 1990s. SBI’s portfolio was distributed between large corporate. it is a fact that manufactured product inflation has been rising. Even the RBI has recently commented on the 46 .000 pa. but so have incomes: The apparent disconnect between interest rates rising now for two years and lending not losing steam can be explained by i) rising incomes in case of individuals. and ii) improved corporate profitability through better pricing power. Cost of borrowing has risen. While there are several studies illustrating the household income growth in India. The Sep’06 portfolio looks dramatically different. an explosive growth is underway in the percentage of households earning Rs91. While these issues cannot be summarily dismissed. thereby imparting increased thrust to retail lending.

in a drive to carry on with tremendous expansion in terms of customer base. WAP and 3G mobile telephony applications to facilitate online access to customers. Indian banks need to encompass the extension of all the services that are required and dictated by customers. As the mindset of the Indian customer undergoes a change. Areas of Improvement: Few challenges associated with technology adoption by banks are:  Indian banks still don’t have the robust systems required for efficient functioning of online banking. At the same time. In future.  Banks need to explore newer channels such as SMS.  Banks. 47 .Indian Banking System 201 0 increased ability of manufacturers to pass on cost increases.  Technology: The trend in banking is changing from computerization of branches to laying a common platform by having a core banking solution in all the branches. these levels of increases in interest costs have been easily absorbed by companies. online banking will see a surge in the usage from current 1% to at least 10% in the next couple of years. Indian banks are looking at internet banking which promises to grow into an alternate self-service channel. And with a considerably de-leveraged corporate India compared with the early/mid 1990s. RBI has provided guidelines relating to security and other issues and hopefully. needs to have employees who are well informed about products and services and are comfortable with technology which requires extensive training. The emergence of peer-to-peer money transmission mechanisms (such as Western Union Money Transfer) poses a challenge to current role of bankers and emphasizes the role of robust payment systems like RTGS in maintaining and promoting financial stability. banks will need to focus on value-differentiating services by keeping in-Houser their competitive advantages while partnering with others who complement its services.

The banks need to realize that they need to maintain different delivery for different generations. VALUATION TOOLS 48 . Banks still need to maintain brick-and-mortar locations that people feel comfortable with.Indian Banking System 201 0 Potential Pitfalls: Banks should not get overwhelmed by the concept of automation and online banking.

Over 2. 49 . mobile banking. The two entities subsequently merged to become the largest commercial bank in the private sector. call centers and ATMs. ICICI Bank started with all the latest technologies to hit the Indian banking industry in the second half of the nineties. All its branches are fully computerized with the state-ofthe-art technology and systems. ICICI Bank current account customers will have the facility to invest their account surpluses in the liquid fund schemes of Prudential ICICI Asset Management Company and GIC Mutual Fund. of UK for its mutual find business. namely internet banking. networked through VSAT technology. The bank is connected to the SWIFT International network. an Indian development financial institution. A new generation bank. Prudential ICICI Asset Management Company Limited and Prudential ICICI Trust Limited. The duo has been fairly aggressive through their companies. Over 70% of customer induced transactions take place through these electronic channels. Initially. Lloyds TSB in UK and DBS in Singapore.  Developments ICICI Bank launched `Mutual Fund Sweep Account` . Investitsionno-Kreditny Bank (IKB). It continued to expand its electronic channels.an automatic sweeping facility which allows current account holders to park their short-term surpluses into liquid mutual funds and earn higher returns..000 Internet kiosks and 70 agri-desks have been established in locations with large agricultural markets.  ICICI has entered into strategic alliance with Prudential plc. The bank has also built several strategic alliances with banks like Wells Fargo in USA. and migrate customer transaction volumes to these channels.910 ATMs. which will help boost its corporate business and deposit franchise overseas.Indian Banking System 201 0 ICICI Bank: Business ICICI Bank was promoted in 1994 by ICICI Ltd. It has acquired a small Russian banking entity. In 2005. it expanded its network to 562 branches and 1. The bank is also keen to offer its services to the Indian agricultural sector.

branches in United States. life and nonlife insurance. Thailand. 2009 and profit after tax Rs. IBL`s comfortable profitability and capital adequacy.883 ATMs in India and presence in 18 countries. Our UK subsidiary has established branches in 50 Belgium and Germany.19 billion (US$ 648. while the debit card business is relatively new. Malaysia and Indonesia. The merger of two wholly-owned subsidiaries of ICICI. The bank is adding credit and debit cards at the rate of 1.Indian Banking System 201 0  The bank is in the process of the reverse merger of ICICI with ICICI Bank.50. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries and affiliates in the areas of investment banking. Bangladesh. ICICI Personal Financial Services Limited and ICICI Capital Services Limited. Bahrain. with ICICI Bank is also underway. Singapore. Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates. The rating agency said in its report that the rating takes into consideration IBL`s strategic importance to its parent ICICI.28 billion (US$ 77 billion) at December 31. The Bank has a network of 1. China.000 per month.000. to the Rs 500 crore certificates of deposit (CD) programme of ICICI Bank Ltd (IBL). 3. 2009.  ICICI Bank has tied up with MasterCard International to launch ICICI Bank MasterCard credit cards. Hong Kong. ICICI Bank is the largest card issuer in the market. Russia and Canada. venture capital and asset management. 50. The bank had launched the credit card business 2 years back.562. Sri Lanka. while for debit cards it is 4. good control on asset quality.  ICRA has assigned an A1+ rating.8 million) for the nine months ended December 31.00. indicating highest safety in the short-term.000.646 branches and about 4. The Bank currently has subsidiaries in the United Kingdom. ICICI Bank is India's second-largest bank with total assets of Rs. 30. . South Africa. At present ICICI Bank’s credit card base stands at around 5.

The shares are listed on the Stock Exchange.Indian Banking System 201 0 ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).4 per cent from 0. The proportion of NPA`s to total advances increased to 0. trade services.1% of the bank's equity and about 19.3.1 billion). The bank has a distribution network of 535 (in 228 cities) and 1. HDFC Bank: HDFC Bank Ltd was set up in 1994 by India’s leading housing finance company Housing Development Finance Corporation (HDFC).323 ATMs and a customer base of 9.000 shareholders.3% of the equity is held by Foreign Institutional Investors (FIIs) and the bank has about 190. Retail loan products are auto loans.4% of the equity is held by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue). 51 .450 crore (Rs. It was the first Indian bank which launched an international debit card. The bank offers a wide range of services which can be classified into three categories namely. The bank’s focus on semi-urban and under banked markets continued with more than half of its retail loans being given in non-metro markets. it provides working capital finance. personal loans and loans for twowheelers. Treasury function includes foreign exchange & derivatives.4. The paid-up capital is Rs. transactional services and cash management. Under wholesale banking. 2006 stood at 11. The bank’s total capital adequacy ratio (CAR) as on March 31. rural supply chain initiatives and commodity finance covering the entire agriculture financing cycle. treasury.311. Roughly 31.6 million as of March 2006. This marginal increase is because of the changing mix of loans as HDFC Bank has a high share of auto loans. It also provides depository participant services for retail customers.3 per cent last year. With products including the Kisan Gold Card. money market securities and equities.9 crore (Rs.41% The authorized capital of HDFC Bank is Rs. The HDFC Group holds 22. the bank’s agriculture lending increased by over 60% during the year. wholesale banking and retail banking services.5 billion).

For these customers. The Bank's business is supported by scalable and robust systems which ensure that our clients always get the finest services we offer. Technology: HDFC Bank operates in a highly automated environment in terms of information technology and communication systems. the Bank has succeeded in leveraging its market position. the Bank provides a wide range of commercial and transactional banking services. including working capital finance. Multi-branch access is also provided to retail customers through the branch network and Automated Teller Machines (ATMs). Business: HDFC Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key business segments:  Wholesale Banking Services: The Bank's target market ranges from large. which enables the bank to offer speedy funds transfer facilities to its customers. expertise and technology to create a competitive advantage and build market share. All the bank's branches have online connectivity. transactional services. to build the infrastructure for a world class bank. trade services.Indian Banking System 201 0 Mumbai and the National Stock Exchange. The bank's American Depository Shares are listed on the New York Stock Exchange (NYSE) under the symbol "HDB". In each of its businesses. blue-chip manufacturing companies in the Indian corporate to small & mid-sized corporates and agri-based businesses. cash 52 . The Bank has prioritised its engagement in technology and the internet as one of its key goals and has already made significant progress in web-enabling its core businesses. The Bank has made substantial efforts and investments in acquiring the best technology available internationally.

the Bank has made significant inroads into the banking consortia of a number of leading Indian corporates including multinationals. providing customers the facility to hold their investments in electronic form. The HDFC Bank Preferred program for high net worth individuals. The Bank also has a wide array of retail loan products including Auto Loans. mutual funds. NetBanking and Mobile Banking. etc. stock exchange members and banks. information and advice on various investment avenues. Phone Banking.  Retail Banking Services: The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services. Personal Loans and Loans for Two-wheelers. The Bank launched its credit card business in late 2001. as well as through alternative delivery channels like ATMs. companies from the domestic business houses and prime public sector companies. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the Mastercard Maestro debit card as well. the HDFC Bank Plus and the Investment Advisory Services programs have been designed keeping in mind needs of customers who seek distinct financial solutions. By March 2009. giving the customer a one-stop window for all his/her banking requirements. The products are backed by world-class service and delivered to customers through the growing branch network. The bank is also a leading provider of structured solutions. which combine cash management services with vendor and distributor finance for facilitating superior supply chain management for its corporate customers. the bank had a total card base (debit and credit cards) of over 13 million. Based on its superior product delivery / service levels and strong customer orientation. Loans against marketable securities. It is recognised as a leading provider of cash management and transactional banking solutions to corporate customers. It is also a leading provider of Depository Participant (DP) services for retail customers.Indian Banking System 201 0 management. The Bank is also one of the leading 53 .

These and fine pricing on various treasury products are provided through the bank's Treasury team. Local Currency Money Market & Debt Securities. Mr. has been a professional banker for over 25 years.000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. Management: Mr. industry and commercial banking. advice and product structures. The Managing Director. Bill Payments. the bank is required to hold 25% of its deposits in government securities. the bank has three main product areas . 54 . Senior banking professionals with substantial experience in India and abroad head various businesses and functions and report to the Managing Director. Given the professional expertise of the management team and the overall focus on recruiting and retaining the best talent in the industry.Indian Banking System 201 0 players in the “merchant acquiring” business with over 70. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Capoor was a Deputy Governor of the Reserve Bank of India. To comply with statutory reserve requirements.  Treasury Within this business. Loans. Aditya Puri. corporates need more sophisticated risk management information. Mr. Jagdish Capoor took over as the bank's Chairman in July 2001. etc. the bank believes that its people are a significant competitive strength. administration. With the liberalisation of the financial markets in India. and Equities. Prior to this. Senior executives representing HDFC are also on the Board.Foreign Exchange and Derivatives. and before joining HDFC Bank in 1994 was heading Citibank's operations in Malaysia. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits. The Bank's Board of Directors is composed of eminent individuals with a wealth of experience in public policy.

Established in 1806 as Bank of Bengal. It is also.Following its arch-rival ICICI Bank. international and NRI products and services. According to the Forbes 2000 listing it tops all Indian companies. the SBI has extensive coverage. It is the only Indian bank to feature in the top 100 world banks in the Fortune Global 500 rating and various other rankings. State Bank of India has electronically networked most of its metropolitan. most notably during Chandra Shekhar's tenure as Prime Minister of India. it is a regional banking behemoth. It has laid emphasis on reducing the huge manpower through Golden handshake schemes and computerizing its operations. it remains the oldest commercial bank in the Indian Subcontinent and also the most successful one providing various domestic. The bank was nationalized in 1955 with the Reserve Bank of India having a 60% stake. through its vast network in India and overseas. State Bank of India has often acted as guarantor to the Indian Government. Group companies  SBI Capital Markets Ltd  SBI Mutual Fund (A Trust) 55 . The bank has the largest ATM network in the country having more than 5600 in number [1]. With more than 9400 branches and a further 4000+ associate bank branches. In recent years.Indian Banking System 201 0 SBI : State Bank of India (SBI) is the largest bank in India. urban and semi-urban branches under Core Banking System(CBS). The State Bank of India has had steady growth over its history. the bank has started Core banking process by which more than 4400+ branched have been completed so far. though it was marred by the Harshad Mehta scam in 1992. measured by the number of branch offices and employees. With an asset base of $126 billion and its reach. the largest bank in the world. the bank has sought to expand its overseas operations by buying foreign banks.

56 . Internet banking and internal email.600.Bancassurance (Life Insurance)  SBI Funds Management Pvt Ltd According to PM Network. such as the IP telephone network. over 10.000 branches have been covered.The new infrastructure serves as the bank's backbone. The new infrastructure has enabled the bank to further grow its ATM network with plans to add another 3. As of December 2006. The first and the second phases of the project have already been completed and the third phase is still in progress.000 domestic and 70 foreign offices and branches. Ltd . carrying all applications.Indian Banking System 201 0  SBI Factors and Commercial Services Ltd  SBI DFHI Ltd  SBI Cards and Payment Services Pvt Ltd  SBI Life Insurance Co.000 by the end of 2008 raising the total number to 8. ATM network. State Bank of India launched a project in 2002 to network more than 14.

Indian Banking System 201 0 MAJOR FINDINGS 57 .

2 per cent).3 per cent at end-March 2005.6 per cent) and old private sector banks (12.2 per cent). As a result. public sector banks have highest base compared to private and foreign banks. Credit to the priority sector increased by 33. Retail loans.7 per cent in 2005-06 as against 40. which witnessed a growth of over 40. EURO and Yen and Capital Market – the year is booming for market with FII and mutual fund are pumping money increasing BSE Sensex returns over 50%. Bank group-wise. There are 87 Scheduled Commercial Banks operating in India including 8 Bank of SBI & Associates. while that of new private sector banks increasing to 15. Credit to small scale industries also accelerated. SBI & Associated have asset base of Rs. Indian Banking System is spread through 66000 branches with an asset base of about $270 billion. the relative significance of PSBs declined significantly with their share in total assets of SCBs declining to 72. Inflation – which has slow down due to falling crude prices. public sector banks (13. In terms of asset size. The agriculture and housing sectors were the major beneficiaries.1 per cent from 12. Gross Fiscal Deficit Interest Rate – the UPA government is confident to achieve the budgeted targets. 29 Private Banks and 30 Foreign Banks. new private sector banks grew at the highest rate during 2005-06 (43. In June 2006. FDI Confidence Index – where India stands II in the world.3 per cent at end-March 2006 from 75.2 per cent).5 per cent. Rising Oil prices & Exchange Rate – Indian government and oil companies are relax as oil prices have fallen beside Indian Rupee has strengthen against USD.691872 cr.Indian Banking System 201 0 MAJOR FINDINGS Major Macro – Economic Factors include Gross Domestic Product – which has grown by over 8% in 2005-06. 20 Nationalized Banks. followed by foreign banks (31. which together accounted for more than two-third of incremental priority sector lending in 2005-06.0 per 58 .3 per cent in the previous year.

However. credit spread increase to 3.0 per cent in March 2004 to 25. 1719.75% due to rising interest cost  Non – Performing Loans (NPLs) . HDFC Bank and UTI Bank are also in high growth phase. 59 .  Rising funding costs with soft lending rates – Deposits has seen a growth of 22% of which household savings contribute to 43%. Retail loans as a percentage of gross advances increased from 22. WAP and 3G mobile telephony applications to facilitate online access to customers.Indian banks still don’t have the robust systems required for efficient functioning of online banking and Banks need to explore newer channels such as SMS.Indian Banking System 201 0 cent in 2004-05 and again in 2005-06.The Total bank loans stood at Rs 15. of which 58% growth has seen in service sector and 100% in real estate sector).231.5 per cent in March 2006. of which housing loans are Rs. Bank of India and Punjab National Bank. Bank of Baroda Bank. have been the prime driver of the credit growth in recent years. The laggards are SBI Bank.2bn. the Industry’s share of total credit has dropped to 40%  Technology .5%.7bn. Micro-Economic Factors affecting Banking Industry: Some of Micro-Economic factors identified in the report are:  Loan Demand in which the Indian Banking Industry has seen sustained strength in credit growth (a 30% increase in Oct 2006.3% and Yield on government bonds reduced to 7. ICICI Bank is the leading market player with change in loans market share in FY02-06 of over 5% and change in deposits market share in FY 02-06 is nearby 2.

Indian Banking System 201 0 conclusion 60 .

61 . earning and Profit and Loss account. the share can be recommended to conservative investors. All shares are undervalued and expected to give positive risk adjusted returns to investors. which including estimating growth rate by regression on historical sales to forecast next year sales. Then EPS is calculated which is multiplied to Historical P/E to forecast intrinsic value of share. The methodology followed is Target Pricing. SBI and HDFC Bank.Indian Banking System 201 0 CONCLUSION The project involves valuation of major Indian Banks including ICICI Bank. Since the intrinsic value is more than current market price for all the companies.

Indian Banking System 201 0 62 .

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