TASK 11

BANKING INDUSTRY ANALYSIS BASED ON CURRENT SITUATION

The global COVID-19 pandemic has emerged as the “black swan event which is going to require
extraordinary measures from governments across the globe to help resume economic stability.
the impending outbreak of the virus is likely to severely impact the recovery process.
The pandemic is impacting the financial services sector in multiple ways — from business
continuity issues and operational considerations to the overall financial outlook. As financial
services companies are mobilizing and taking steps to minimize these impacts, they will likely
face short- & long-term implications on both profitabilities as well as balance sheet items.
A continued spread of the pandemic and its aftermath will significantly slow down business,
hence financial institutions must take additional measures to ensure business continuity to
continue to remain relevant to their customers. Banks and financial institutions must prepare for
scenarios that might occur post the lockdown period as well. This would be essential in
developing a flexible contingency plan that best equips the banks for crisis management and
provides supportive solutions to its customers.
Banks in the country are likely to witness a spike in their non-performing assets ratio by 1.9 per
cent and credit cost ratios by 130 basis point in 2020, following the economic slowdown on
account of COVID-19 crisis.
NPA ratio in India is likely to fare similarly to China's (1.9 per cent 2 per cent) but the credit
costs ratios could be worse, increasing by about 130 basis points

Financing conditions may likewise sour as investors become more risk averse. This would hit
bank credit.While banks are not as exposed as the corporate sector during the initial stage of the
pandemic, the strain on lenders could ultimately be profound. Banks face a second-order hit
compared with the corporate and household sectors. The report said the economic storm created
by COVID-19 will test the ratings resilience of the region's 20 banking sectors.
RBI in its seventh bi-monthly monetary policy announced on March 27, reduced the repo rate by
75 basis points to 4.40 per cent. It announced to provide Rs 3.74 lakh crore liquidity to banks
through reduction in cash reserve ratio, by conducting targeted long term repos operations
(TLTRO) and by increasing the limit for marginal standing facility (MSF) to 3 per cent.

RBI also allowed a repayment moratorium for three months on all term loans outstanding as on
March 1, 2020, to borrowers  of all commercial banks, including regional rural banks, small
finance banks and local area banks, co-operative banks, and NBFCs, including housing finance
companies and micro-finance institutions.
PORTERS FIVE FORCES MODEL ON BANKING INDUSTRY

Threat of New Entrants:

 With so many new banks entering the market each year the threat of new entrants should
be extremely high.  However, due to mergers and bank failures the average number of
total banks decreases by roughly 253 a year2.  A core reason for this is, what is arguably,
the biggest barrier of entry for the banking industry,
 industry deals with other people's money and financial information new banks find it
difficult to start up. Due to the nature of the industry people are more willing to place
their trust in big name, well known, major banks who they consider to be trustworthy.
 The banking industry has undergone a consolidation in which major banks seek to serve
all of a customers financial needs under their roof. This consolidation furthers the role of
trust as a barrier to entry for new banks looking to compete with major banks, as
consumer are more likely to allow one bank to hold all their accounts and service their
financial needs.
 Ultimately the barriers to entry are relatively low for the banking industry.  While it is
nearly impossible for new banks to enter the industry offering the trust and full range of
services as a major bank, it is fairly easy to open up a smaller bank operating on the
regional level.
POWER OF SUPPLIERS:
 Capital is the primary resource on any bank and there are four major suppliers (various
other suppliers [like fees] contribute to a lesser degree) of capital in the industry. 
1.Customer deposits.
2. mortgages and loans.
3. mortgage-baked securities.
4. loans from other financial institutions. 

 By utilizing these four major suppliers, the bank can be sure that they have the necessary
resources required to service their customers' borrowing needs while maintaining enough
capital to meet withdrawal expectations.
 The power of the suppliers is largely based on the market, their power is often considered
to fluctuate between medium to high.
POWER OF BUYERS
 The individual doesn't pose much of a threat to the banking industry, but one major factor
affecting the power of buyers is relatively high switching costs. If a person has one bank
that services their banking needs, mortgage, savings, checking, etc, it can be a huge
hassle for that person to switch to another bank.
 The internet has greatly increased the power of the consumer in the banking industry. 
The internet has greatly increased the ease and reduced the cost for consumers to
compare the prices of opening/holding accounts as well as the rates offered at various
banks.
AVAILABILITY OF SUBSTITUTES
 Some of the banking industry's largest threats of substitution are not from rival banks but
from non-financial competitors.
 The industry does not suffer any real threat of substitutes as far as deposits or
withdrawals, however insurances, mutual funds, and fixed income securities are some of
the many banking services that are also offered by non-banking companies.
 There is also the threat of payment method substitutes and loans are relatively high for
the industry.  For example, big name electronics, jewelers, car dealers, and more tend to
offer preferred financing on "big ticket" items.  Often times these non-banking companies
offer a lower interest rates on payments then the consumer would otherwise get from a
traditional bank loan.
COMPETITIVE RIVALRY
 The banking industry is considered highly competitive.
 The financial services industry has been around for hundreds of years, and just about
everyone who needs banking services already has them. Because of this, banks must
attempt to lure clients away from competitor banks.
 They do this by offering lower financing, higher rates, investment services, and greater
conveniences than their rivals. The banking competition is often a race to determine
which bank can offer both the best and fastest services, but has caused banks to
experience a lower ROA (Return on Assets).
 Given the nature of the industry it is more likely to see further consolidation in the
banking industry. Major banks tend to prefer to acquire or merge with other banks than to
spend money marketing and advertising.
PESTLE ANALYSIS OF BANKING INDUSTRY
Political factors –
 Government interference in the economy, restrictions on the trade, restrictions on the
operations, rules and new laws by the existing government and modification or
abandonment of laws followed which are made by the previous government creates
impact on the working of banks .Government has declared loan waiver of short term
agriculture during elections attract the farmers this has affected the profit of banks and
few banks are being run by the politicians appointed by the government to set up the
framework which is more advantageous for their benefits.
These are the factors related to political
 Foreign direction of investments
 Wavier of agriculture loans
Economic factors –
RBI declares monthly policy and modified regulations to be followed by the banks when there
are critical situations where banks faces difficult situations to cope up with the RBI and to
protect banks from losses makes policy which are suitable and union budget do affect the
banking sector to boost the economy and savings of the banks are encouraged as it regulates the
flow of money which in turn attracts the deposits and there will be an increase in lending of
money to the agriculture sector and industry sector by relaxing the foreign direct investments
will help in booming of the economy.
These are the factors related to economy
 Monetary policy
 GDP
 Inflation, interest
Social factors –
Banks are given objective to boost the economy and help the weaker section in providing finance
to the required sectors in the economy, banks dealing with the private companies should provide
personalized banking to the clients as the customers of those banks do not prefer in wasting their
time, they should be provided with special provisions as it will attract more clients and makes
banking process easy and convenient.
These are the factors related to social
 Development of banking sector from the beginning till now
 Advantages with the easy operations
Technological factors –
There is an increase in the efficiency of operations in the financial sector with the use of
technology, it improved the effective transactions, safe, secure and easy settlement process. RBI
and government predominantly focused on the modernization and strengthened the computerized
cheque clearing, expansion of electronic cleaning services and electronic finds transfer. There is
development of new clearing houses, Real time gross settlements, centralized funds management
systems, negotiated dealing system and structured financial messaging system. There is also
development in financial sector with the help of ATM, debt cards, credit cards, Equated monthly
instalment, Electronic funds transfer, Electronic clearing services.
Legal factors –
Banking industry has rules and laws of privacy, consumer laws and trade structure RBI states
that government states their perspectives with the central bank and there is no intervene and RBI
is 100% more autonomous.
These are the factors related to legal
 Regulation Acts
 Interventions of RBI
ENVIRONMENTAL FACTORS-
Sustainability and environment friendliness has become important for the banking sector too just
like other businesses. Energy management and other environmental concerns are being addressed
by banks globally. Banks like HDFC are investing in energy management. Many have already
taken important steps towards paperless transactions.
In order to control its environmental footprint, HDFC has also introduced solar ATMs. These
use rechargeable Lithium Ion batteries which use solar energy for their functioning, thereby
reducing the consumption of conventional energy”. Banks also publish their yearly
environmental reports highlighting their critical achievements over the year in this area.
SWOT ANALYSIS OF BANKING INDUSTRY
STRENGTH
 Indian banks have compared favourably on growth, asset quality and profitability with
other emerging economies banks over the last few years.
 Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms, enhancing
the payments system and integrating regulations between commercial and co-operative
banks.
 Bank lending has been a significant driver of GDP growth and employment.
 Extensive reach: the vast networking & growing number of branches & ATMs. Indian
banking system has reached even to the remote corners of the country.
 In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region.
 Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector
banks and 20 per cent of government owned banks.
WEAKNESS
PSUs need to fundamentally strengthen institutional skill levels especially in sales and
marketing, service operations, risk management and the overall organisational performance ethic
& strengthen human capital.
 Old private sector banks also have the need to fundamentally strengthen skill levels.
 The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.
 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 regulationsbeyond Scheduled Commercial Banks
(SCBs), unless industry utilities and service bureaus.
 Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU
banks below 51% thus choking the headroom available to these banks for raining equity capital.
OPPORTUNITY
 The market is seeing discontinuous growth driven by new products and services that include
opportunities in credit cards, consumer finance and wealth management on the retail side, and in
fee-based income and investment banking on the wholesale banking side. These require new
skills in sales & marketing, credit and operations.
 With increased interest in India, competition from foreign banks will only intensify.
 Given the demographic shifts resulting from changes in age profile and household income,
consumers will increasingly demand enhanced institutional capabilities and service levels from
banks.
 New private banks could reach the next level of their growth in the Indian banking sector by
continuing to innovate and develop differentiated business models to profitably serve segments
like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means
to grow and reaching the next level of performance in their service platforms. Attracting,
developing and retaining more leadership capacity
 Foreign banks committed to making a play in India will need to adopt alternative approaches
to win the “race for the customer” and build a value-creating customer franchise in advance of
regulations potentially opening up post 2009. At the same time, they should stay in the game for
potential acquisition opportunities as and when they appear in the near term. Maintaining a
fundamentally long-term value-creation mindset.
 Reach in rural India for the private sector and foreign banks.
THREATS
 Threat of stability of the system: failure of some weak banks has often threatened the stability
of the system.
 Rise in inflation figures which would lead to increase in interest rates.
 Increase in the number of foreign players would pose a threat to the PSB as well as the private
players.
COVID 19 RESPONSE OF RBI AND ITS EFFECT ON BANKING
INDUSTRY –
 The COVID-19 pandemic has wreaked havoc on the global financial environment,
leading to a situation of unprecedented loss and isolation.
 The onerous and intractable situation both at the macro and micro levels does call for
responses, both from the Centre and the central bank to mitigate the proliferating
financial implications of the shutdown in economic activity.
 The RBI and the monetary policy committee (MPC), highlighting the severe
implications on account of a mixture of demand and supply shock, came up with a
comprehensive plan with force multipliers which included a combination of policy rate
cut, liquidity infusion measures and easing financial stress announcements.

 The RBI’s MPC voted unanimously to a sizeable reduction in policy repo rate but with
a 4-2 voting pattern agreed upon 75 basis points cut in the policy repo rate. This rate
cut means that the repo rate is now at 4.4% and is at its lowest level since its
introduction in 2000 and also 35 basis points lower than the lowest level seen during
the aftermath of the 2008 global financial crisis. In addition, to discourage the banks
from parking their surplus liquidity with the RBI, the MPC reduced the reverse repo
rate (the rate at which the banks park their excess liquidity with the RBI) to its lowest
level since April, 2010. 

 What these two measures have done is widened the monetary policy rate corridor (the
difference between the reverse repo rate and the marginal standing facility rate) from
50 basis points to 65 basis points. This widening has  happened for the first time since
April 2017. 

 However, the issue with RBI’s liquidity operations is that the banks have been parking
close to Rs 3 lakh crore in the reverse repo channel. In order to discourage this
arrangement and make it less attractive, the RBI lowered the reverse repo rate by 90
basis points to 4%. 
 Not only on one hand did the RBI made this channel unattractive, but also on the other
hand it mandated the banks that the liquidity which is availed from the RBI as a part of
its targeted long term repo operations has to be deployed in investment grade corporate
bonds, commercial papers and non-convertible debentures. Although both these moves
are welcome and would benefit especially NBFCs and HFCs who are actively involved
in raising money from the bond and CP market, the point which will have to be
monitored is that amidst this lockdown, whether there will be on-lending of these
funds by financial institutions to various industries. 

 In addition, the RBI slashed the cash reserve ratio for all banks by 100 basis points to
3% for a period of one year, its lowest level since 1962. Cash reserve ratio (CRR) is a
 proportion of the net demand and time liabilities. In simple terms, it refers to
“deposits” which the banks have to park with the RBI without earning interest. Even
during the 2008 financial crisis, the RBI had undertaken a similar measure when it had
reduced the CRR ratio from 9% in August, 2008 to 5% in January 2009. 

 Also, the banks will have to maintain a minimum daily CRR balance of 80%, lower
than the current level of 90%.The RBI has computed that its multi-pronged approach
of liquidity infusion since February 2020, accounts for a sizeable quantum of 3.2% of
India’s GDP. 

 All financial institutions are accumulated with refinance facility of Rs 50,000 crore at the
repo rate and relaxation is provided on the asset classes undergoing moratorium. These
actions and precautions were taken by the RBI in order to regulate the cash flow in the
economy and help banks from entering into losses going extinct which results in lack of
funds for the industries and there will be disturbances in the money flow to avoid these
situations RBI has given provisions for the banks to motivate and support them during the
pandemic situation.

FUTURE POTENTIAL OF INDIAN BANKING INDUSTRY

 Banking has witnessed a significant change in recent times. Owing to the increasing
consumer expectancies, regulations, economic changes and constant competition, modern
banking has embraced technology. Digital platforms, mobile, internet banking, and
payments bank have revolutionized the sector in a substantial way. “The Digital India
Moment” has also given the much-needed impetus to the digitization efforts in the
banking sector.
 At present, financial services are only a small part of their business globally. But given
their size and reach, their entry into financial services has potential to bring about the
rapid transformation of the financial sector landscape. The entry of these firms have
many potential benefits, and they can easily provide basic financial services to the masses
at cheap cost
 But the advent of fintechs and BigTechs are a challenge to banks, as well as banking
regulators. While banks have to imbibe these new technology and business practices to
remain competitive, banking regulators, on the other hand, Das said, “have to focus on
achieving a balance between promoting innovation and applying a measured/proportional
supervisory and regulatory framework.”
 All these mean that the future of banking will not be a continuation of the past.

 We would see a very different banking sector, in terms of structure and business model,
in the coming years, There would be different categories of banks. The first segment
 could be large Indian banks with domestic and international presence, for which merger
of public sector banks are already taking place. The second segment could be mid-sized
niche banks, and the third segment could be smaller private sector banks, small finance
banks, regional rural banks, and co-operative banks. The fourth could be of digital
players, which may act as service providers directly to customers or through banks by
acting as their agents or associates.

 In any case, the conventional banking system would make way for next-generation
banking, with a focus on digitisation and modernisation, where the need for brick-and-
mortar branches would be reviewed continuously.

 Artificial intelligence will be an integral part of smart banking. Banks can expand their
consumer base by learning what clicks with their users. Cognitive technology with AI can
offer features like cognitive engagement, cognitive automation, cognitive perceptions,
and cognitive strategy formation. Through AI, a support system can be developed that
targets the user’s personal preferences, reduces human intervention, catches data patterns
and devises strategies based on market subtilities. China and India could have a combined
share of around 35% of global banking assets by 2050. The US, Japan and Western
Europe are all projected to see large falls in their share of global banking assets in the
coming decades

 Banks now have shifted their focus away from large infrastructure and industrial loans
towards retail loans, but this diversification strategy has its own limitations.
 As the Indian banking sector is propelled forward to a higher orbit, banks would have to
strive hard to remain relevant in the changed economic environment by reworking their
business strategies, designing products with the customer in mind and focusing on
improving the efficiency of their services,