Banking Sector –

1) Overview Of banks

2) Major Players and market share

FDI Limits –

Private Banks

(1) This 74% limit will include investment under the Portfolio Investment Scheme (PIS) by

FIIs/FPIs, NRIs and shares acquired prior to September 16, 2003 by erstwhile OCBs, and

Continue to include IPOs, Private placements, GDR/ADRs and acquisition of shares from

Existing shareholders.

(2) The aggregate foreign investment in a private bank from all sources will be allowed up to a

Maximum of 74 per cent of the paid up capital of the Bank. At all times, at least 26 per cent

Of the paid up capital will have to be held by residents, except in regard to a wholly-owned

Subsidiary of a foreign bank.

(3) The stipulations as above will be applicable to all investments in existing private sector

Banks also.

(4) Other conditions in respect of permissible limits under portfolio investment schemes through

Stock exchanges for FIIs/FPIs and NRIs, setting-up of a subsidiary by foreign banks and

Limits in respect of voting rights are at Annexure-9.

PSU Banks -
Major Investments –

Major FII Investors -

Foreign institutional investors (FIIs) have trimmed their holdings in 12 private banks in
the September quarter amid concerns over a build-up of stress in mid-sized companies
and small and medium enterprises (SMEs).

For private banks, the share of NPA’s in advances to MSME’s has increased to 2.91 % in 2018-19
from 2.69% in the previous F.Y 2017-2018. Meanwhile, FIIs seems to have raised their bets in some
state-owned banks. In PNB, the FII stake has increased by 13bps to 3.45%. Similarly, it has increased
by 27 bps to 4.5% in canara bank. Within the BSE-500 universe, FIIs have increased their stakes in
eight public-sector banks.

Contribution to GDP

The banking sector is nothing less than the backbone of any economy. This
pertains to the Indian economy as well, where the banking sector is
displaying the potential for becoming the 5th largest banking industry
globally by 2020. With a continued boost in banking performance bolstered
by numerous technological advancements, the Indian banking sector is
likely to assume the 3rd largest position in the world by 2025.

Not just globally, the Indian banking sector has proved its true worth back
home as well. This can be inferred from the valuable contribution of our
banks, both nationalised and private, for boosting up the national economy.
Currently, the banking industry holds pride in contributing nearly 7.7% to
the national GDP. Besides that, our banks are the prime employment
generators for almost 1.5 million people in the country. Banks help in Capital
Formation, Promote Industrial Bloom and Generate Employment. To set up any
business or industry, a significant amount of capital is required, and the banks have
a considerable role to play here. After collecting deposits from the depositors, the
banks use these savings as investments and make use of it to provide loans and
advances to the budding businesses in dire need of funds. This way, the banking
industry becomes a direct stakeholder of creating employment in the country, which
eventually contributes to GDP growth.
 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Parameters Units
FY18 FY19 FY19 FY19 FY19 FY20 FY20 FY20 FY20 FY21
Private Banks                      
Outstanding Credit                      
(Rs.
Axis Bank 4,397 4,411 4,561 4,751 4,948 4,973 5,216 5,501 5,714 5,613
Bn)
(Rs.
HDFC Bank 6,583 7,086 7,508 7,810 8,194 8,297 8,970 9,360 9,937 10,033
Bn)
(Rs.
ICICI Bank 5,124 5,163 5,445 5,643 5,866 5,924 6,134 6,357 6,453 6,312
Bn)
(Rs.
IDBI Bank 1,717 1,598 1,578 1,525 1,468 1,367 1,327 1,297 1,298 1,259
Bn)
(Rs.
IndusInd Bank 1,450 1,507 1,631 1,732 1,864 1,935 1,971 2,074 2,068 1,981
Bn)
(Rs.
Yes Bank 2,035 2,147 2,396 2,439 2,415 2,363 2,245 1,861 1,714 1,645
Bn)
Outstanding Deposits                      
(Rs.
Axis Bank 4,536 4,471 4,797 5,141 5,485 5,407 5,840 5,917 6,401 6,282
Bn)
(Rs.
HDFC Bank 7,888 8,058 8,334 8,525 9,231 9,546 10,216 10,674 11,475 11,894
Bn)
(Rs.
ICICI Bank 5,610 5,469 5,587 6,068 6,529 6,607 6,963 7,163 7,710 8,016
Bn)
(Rs.
IDBI Bank 2,479 2,399 2,362 2,300 2,274 2,308 2,318 2,182 2,224 2,194
Bn)
(Rs.
IndusInd Bank 1,516 1,589 1,682 1,757 1,949 2,006 2,072 2,167 2,020 2,113
Bn)
(Rs.
Yes Bank 2,007 2,134 2,228 2,228 2,276 2,259 2,095 1,658 1,054 1,174
Bn)
Gross NPA's                      
6. 6. 6. 5. 5. 5. 5. 5. 4. 4.
Axis Bank Ltd (%)
8 5 0 8 3 3 0 0 9 7
1. 1. 1. 1. 1. 1. 1. 1. 1. 1.
HDFC Bank (%)
3 3 3 4 4 4 4 4 3 4
8. 8. 8. 7. 6. 6. 6. 6. 6. 5.
ICICI Bank (%)
8 8 5 8 7 5 4 0 0 5
28. 30. 31. 29. 27. 29. 29. 28. 27. 26.
IDBI Bank (%)
0 8 8 7 5 1 4 7 5 8
1. 1. 1. 1. 2. 2. 2. 2. 2. 2.
IndusInd Bank (%)
2 2 1 1 1 2 2 2 5 5
1. 1. 1. 2. 3. 5. 7. 18. 16. 17.
Yes Bank (%)
3 3 6 1 2 0 4 9 8 3
                       
PSU Banks                      

Outstanding Credit                      
(Rs.
Bank of Baroda 4,274 4,145 4,335 4,487 *6,514 *6,484 *6,526 *6,545 *6,901 *6,867
Bn)
(Rs.
Bank of India 3,414 3,278 3,403 3,311 3,410 3,330 3,348 3,367 3,689 3,706
Bn)
(Rs.
Canara Bank 3,817 3,863 4,095 4,172 4,277 4,328 4,293 4,226 4,322 6,172
Bn)
(Rs.
Punjab National Bank 4,337 4,153 4,310 4,344 4,582 4,218 4,279 4,255 4,718 6,562
Bn)
(Rs.
State Bank of India 19,349 18,758 19,573 20,478 21,859 21,348 21,462 21,999 23,253 22,983
Bn)
(Rs.
Union Bank of India 2,888 2,931 2,930 2,919 2,969 2,938 2,979 3,076 3,150 5,817
Bn)
Outstanding Deposits                      
(Rs.
Bank of Baroda 5,913 5,815 6,070 6,106 *9,152 *9,229 *9,220 8,962 9,460 9,345
Bn)
(Rs.
Bank of India 5,209 5,146 5,121 5,151 5,209 5,122 5,180 5,221 5,555 5,952
Bn)
(Rs.
Canara Bank 5,248 5,333 5,519 5,755 5,990 6,107 6,094 6,252 6,254 9,096
Bn)
(Rs.
Punjab National Bank 6,422 6,303 6,497 6,504 6,760 6,725 6,958 7,085 2,224 10,749
Bn)
(Rs.
State Bank of India 27,063 27,478 28,074 28,305 29,114 29,488 30,334 31,112 7,038 34,194
Bn)
 (Rs.
Union Bank of India 4,085 4,059 3,991 4,023 4,159 4,300 4,429 4,451 32,416 8,925
Bn)
Gross NPA's                      
12. 12. 11. 11. 9. 10. 10. 10. 9. 9.
Bank of Baroda (%)
3 5 8 0 6 3 3 4 4 4
16. 16. 16. 16. 15. 16. 16. 16. 14. 13.
Bank of India (%)
6 7 4 3 8 5 3 3 8 9
11. 11. 10. 10. 8. 8. 8. 8. 8. 8.
Canara Bank (%)
8 1 6 3 8 8 7 4 2 8
18. 18. 17. 16. 15. 16. 16. 16. 14. 14.
Punjab National Bank (%)
4 3 2 3 5 5 8 3 2 1
10. 10. 10. 8. 7. 7. 7. 6. 6. 5.
State Bank of India (%)
9 7 0 7 5 5 2 9 2 4
15. 16. 15. 15. 15. 15. 15. 14. 14. 15.
Union Bank of India (%)
7 0 7 7 0 2 2 9 2 0
Note: *Consolidated data for the bank after merger                  
Source: Company reports & CRISIL Research        

We expect FY21 GDP contraction to deepen by 150bps to our bear case 7.5% after the
June quarter surprised with a drop of 23.9% in real GDP and -22.8% y-o-y in real GVA
terms, making this the sharpest fall in independent India’s economic history. The nationwide
lockdown that began on March 25 and was lifted in parts starting June 1 was bound to pull
down growth as economic activities came to a standstill. GVA data showed that growth in
agriculture was underwhelming at 3.4% y-o-y (vs 5.9% seen in March quarter). While
industry saw a contraction of 33.8% y-o-y, services fell by 24.3% y-o-y led by construction (-
50%) and trade (-47%). An unexpected contraction in government expenditure driven public
administration and defence services component was the key gap between our estimate and
the actual number.

Forex reserves

Forex reserves are external assets in the form of gold, SDRs (special drawing rights of the IMF) and
foreign currency assets (capital inflows to the capital markets, FDI and external commercial
borrowings) accumulated by India and controlled by the Reserve Bank of India. The International
Monetary Fund says official foreign exchange reserves are held in support of a range of objectives
like supporting and maintaining confidence in the policies for monetary and exchange rate
management including the capacity to intervene in support of the national or union currency. It will
also limit external vulnerability by maintaining foreign currency liquidity to absorb shocks during
times of crisis or when access to borrowing is curtailed.
The major reason for the rise in forex reserves is the rise in investment in foreign portfolio
investors in Indian stocks and foreign direct investments (FDIs). Foreign investors had
acquired stakes in several Indian companies in the last two months. According to the data
released by RBI, while the FDI inflow stood at $4 billion in March, it amounted to $2.1
billion in April. After pulling out Rs 60,000 crore each from debt and equity segments in
March, Foreign Portfolio Investments (FPIs), who expect a turnaround in the economy later
this financial year, have now returned to the Indian markets and bought stocks worth over
$2.75 billion in the first week of June. Forex inflows are set to rise further and cross the $500
billion as Reliance Industries subsidiary, Jio Platforms, has witnessed a series of foreign
investments totalling Rs 97,000 crore.
On the other hand, the fall in crude oil prices has brought down the oil import bill, saving
precious foreign exchange. Similarly, overseas remittances and foreign travels have fallen
steeply – down 61 per cent in April from $12.87 billion. The months of May and June are
expected to show further decline in dollar outflows.
The sharp jump in reserves seen over the last nine-months started with the finance
minister, Nirmala Sitharaman’s announcement to cut corporate tax rates on September 20.
Since then the forex reserves have grown by $73 billion.
The rising forex reserves give a lot of comfort to the government and the Reserve Bank of India in
managing India’s external and internal financial issues at a time when the economic growth is set to
contract by 1.5 per cent in 2020-21. It’s a big cushion in the event of any crisis on the economic front
and enough to cover the import bill of the country for a year. The rising reserves have also helped
the rupee to strengthen against the dollar. The foreign exchange reserves to GDP ratio is around 15
per cent. Reserves will provide a level of confidence to markets that a country can meet its external
obligations, demonstrate the backing of domestic currency by external assets, assist the government
in meeting its foreign exchange needs and external debt obligations and maintain a reserve for
national disasters or emergencies. In his monetary policy statement on May 22, RBI Governor
Shaktikanta Das said, “India’s foreign exchange reserves have increased by US$ 9.2 billion in 2020-21
so far (up to May 15) to US$ 487.0 billion – equivalent to 12 months of imports.”

Regulatory changes
Finance Minister Nirmala Sitharaman on Wednesday said amendments to the banking regulation law seeking to
extend the supervision of RBI to cooperative banks are aimed at improving their governance and protecting
depositors' money.
Moving the Banking Regulation (Amendment) Bill, 2020 in the Lok Sabha, Sitharaman said the government was
compelled to come out with an ordinance during the lockdown period as the condition of the cooperative banks
was "grave".
Gross non-performing assets (NPAs) of cooperative banks increased from 7.27 per cent in March 2019, to over
10 per cent by March 2020, she said, adding as many as 277 urban cooperative banks have reported losses in
2018-19 fiscal.
She further said over 100 urban cooperative banks were unable to meet the minimum regulatory capital
requirement and 47 had negative networth at the end March 2019.
In June, the Union Cabinet had approved an ordinance to bring cooperative banks under the supervision of the
Reserve Bank of India (RBI). It also extended the provisions applicable on commercial banks to cooperative
banks.
"Due to the pandemic, the stress in cooperative banks increased and the gross NPA ratio increased from 7.27
per cent in March 2019 to over 10 per cent in March 2020. Therefore it was felt that to protect depositors' interest
we should have the ordinance brought in," she said.
Section 45 of the Banking Regulation Act is being amended to enable making of a scheme of reconstruction or
amalgamation of a banking company for protecting the interest of the public, depositors and the banking system
and for securing its proper management, even without making an order of moratorium, so as to avoid disruption
of the financial system.
Besides, amendments in sections 3 and 56 extend the provisions applicable to scheduled commercial banks to
cooperative banks and brings them within the RBI regulation.
The amendments do not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose
primary object and principal business is long-term finance for agricultural development, and which do not use the
words "bank", "banker" or "banking".

Fiscal measures

Market sentiment has been impacted by concerns relating to the inflation outlook and
the fiscal situation. Higher borrowings only adds to the bad news. However, in the
quest to ensure orderly market conditions RBI announced a series of measures,
following up on their special OMO announcement:
RBI will conduct additional special open market operation involving the simultaneous
purchase and sale of government securities for an aggregate amount of Rs 200 bn in
two tranches of `100 bn on September 10 and 17. RBI remains committed to conduct
further such operations as warranted by market conditions.
RBI announced term repo operations of Rs 1 trn at floating rates in the middle of
September to assuage pressures on the market on account of advance tax outflows.
In order to reduce the cost of funds, banks that had availed of funds under long-term
repo operations (LTROs) may exercise an option of reversing these transactions
before maturity. Thus, the banks may reduce their interest liability by returning funds
taken at the repo rate prevailing at that time (5.15%) and availing funds at the current
repo rate of 4%.
Banks will be allowed to hold fresh acquisitions of SLR securities acquired from
September 1 under HTM up to an overall limit of 22% of NDTL up to March 31, 2021.
This opens up space worth 2.5% of NDTL (~Rs 3.7 trn/ $49.5 bn) to accommodate
higher browning.
We have long argued that an increase in HTM limits will incentivise banks to buy G-
secs with their money market surplus by defusing MTM risks. As the blended cost of
funds is about 5%, should a bank prefer to buy, say, a 10y with a coupon of 5.77%
rather than parking its surplus at 3.35% RBI reverse repo? In our view, not really, as
it would lose Rs 7.2 if the 10y yield were to rise by 100bps.
RBI also remarked that it stands ready to conduct market operations as required
through a variety of instruments so as to ensure orderly market functioning
Our liquidity model suggests that RBI would need to OMO buy $64 bn to clear the G-
sec market in FY21. We expect RBI to buy FX ($45 bn in FY21, $34.2 bn FYTD) in
the forward market to create headroom for future OMO. While our liquidity model
calculates the FY21 durability liquidity requirement at $35 bn, there is already a
much larger surplus in money market and M3 growth is in excess supply.
RBI to cut rates: We expect the new RBI MPC to cut rates by an “out-of-the-box”
15bps on October 1, 50bps in December, and a total of another 75bps in FY21 as it
gets greater visibility of inflation coming off (see graphic). We expect inflation to peak
off to 6.6% in August and 2.5-3% in H2FY21 from 6.9% in July base effects, good
rains and low demand. With the “busy” industrial season commencing in October,
time is running out for the RBI MPC to cut rates.
Also, an RBI OMO calendar should be supportive for sentiment. In fact, RBI can
consider bidding at primary auctions as the FRBM Act allows, if growth in any
quarter is 3% below the average of the previous four quarters.

MoF to follow up with demand supportive measures: These could include 1. lending rate
subsidies for SMEs/real estate; 2. oil tax cuts; 3. lower-income tax cuts offset by a potential
Covid-19 cess on higher-income; as well as 4. recapitalising PSBs through non-fiscal levers
like recapitalisation bonds, or, use of RBI revaluation reserves; and 5. issuing PSU bonds to
fund infrastructure.
Pestle Analysis

Porters five force model

Banking is mainly a client oriented business. A high-quality of services to the client is crucial for the
growth and stability of any bank. A wider distribution and access of financial services helps both
consumers and producers to raise their welfare and productivity. Such access is especially powerful
for the poor as it provides them opportunities to build savings, make investments, avail credit, and
more important, insure themselves against income shocks and emergencies. To survive in an
increasingly competitive environment, bank need to come up with various facilities like Internet
banking, mobile banking etc. With the onset of mobile banking, the industry finds itself at the
threshold of the next major technological leap.

Buyer Power - High bargaining power of customer’s on account of banks renders uniform services to
the clients. Now a day’s almost all banks would like to provide requisite information very easily by
way to Internet, Mobile banking to the clients

Supplier Power- Low bargaining power of supplier’s on account of RBI regulatory benchmarks. Banks
have to meet numerous regulatory standards created by RBI

Competitive Rivalry- High competition of account of number of prominent public, private, foreign
along with cooperative banks

Availability of Substitutes - High menace from substitutes like NBFC’s, Mutual funds, Government
securities and T-bills

Threat of new entrants - Low threat of new entrants on account of banking regulations. Before
setting up of a new bank, it is essential to take the consent of RBI.

Impact of covid & road ahead

70% of banking sector debt

affected by Covid-19 impact
The Indian economy wasn’t in great shape even before the Covid-19
outbreak, which has only made matters worse. The report by the Reserve
Bank of India’s (RBI) expert committee on a resolution framework,
headed by former ICICI Bank chief K V Kamath, brings this out clearly. The
report notes that the pandemic “has affected the best of companies” and
businesses that were otherwise viable before the outbreak. Experts
believe that banks may be more risk-averse to restructuring loans this
time around, having already suffered big losses in previous restructuring
efforts. Nineteen sectors, which were not under stress before the
pandemic but have been hit it, account for Rs 15.5 lakh crore of debt.
Retail and wholesale trade are the worst affected with outstanding debt
of Rs 5.4 lakh crore. The pandemic has also affected 11 sectors which
were already under stress. These sectors have a debt of Rs 22.2 lakh
crore. Non-banking financial companies (NBFCs) have the highest , Rs
7.98 lakh crore, among these sectors. Agriculture and allied products
make up the biggest silver lining in India’s debt landscape. This sector has
debt of Rs 9.8 lakh crore. It was stress-free before the pandemic and
continues to be so.

Huge write-offs in previous restructuring might make banks more risk-averse.

The Nomura report expects risk-aversion among banks to rise given their bad experience in
previous restructuring cycles. “We think banks will be a lot more prudent towards restructuring in
this cycle vs past restructuring cycles where ultimate slippages/write offs were as high as 70-
75% in the corporate segment”, the report said. That’s bad news for industry.