BANKING SECTOR INDIA AND

ITS SWOT ANALYSIS

ASSIGNMENT I

Submitted To:- Submitted By:-

Prof. Aravind.S Prateek Rastogi 1121028
MBA Finance Dept. Dhruv Chopra 1121030
CUIM Harsh Cariapa 1121031
 EXECUTIVE SUMMARY

Today‟s Banking Sector is developing with tremendous pace over the past decade. World has
just faced the global financial turmoil but not much affecting Indian Banks as they continue to
provide growth opportunities, a feat unlikely to be matched by other developed markets around
the world.

In a survey conducted by FICCI1 on Indian Banking Industry2 to assess the competitive

advantage offered by the banking sector, as well as the policies and structures required to further
stimulate the pace of growth. The predicament of the banks in the developed countries owing to
excessive leverage and tax regulatory system has time and again been compared with somewhat
unscathed Indian Banking Sector.

The optimism about Indian economic growth portends well for Indian banks. There are,
however, challenges in retaining profitability and growth in the next decade. The industry has to
live up to high expectations from several quarters. This report highlights trends that will shape
Indian banking over next decade. It identifies critical and complex challenges thrown at the
industry for which solution has to be found with urgency.

This Report talks about Current, future challenges and also does a Swot Analysis to find as what
can be done to overcome weakness‟s and safeguard Indian Banking Industry from Threats

1
FICCI stands for Federation of Indian Chambers of Commerce and Industry.
2
Survey done by FICCI on INDIAN BANKING SYSTEM: THE CURRENT STATE & ROAD AHEAD
ANNUAL SURVEY
 CURRENT SCENARIO

Banking strategies are presently undergoing various transformations, as the overall scenario
has changed over the last couple of years. Till the recent past, most of the banks had adopted
fierce cost cutting measures to sustain their competitiveness. This strategy however has become
obsolete in the new light of immense growth opportunities for banking industry. Most bankers
are now confident about their high performance in terms of organic growth and in realising high
returns. Nowadays, the growth strategies of banks revolve around customer satisfaction.
Improved customer relationship management can only lead to fulfillment of long-term, as well
as, short-term objectives of the bankers. This requires, efficient and accurate customer database
management and development of well-trained sales force to develop and sustain long-term
profitable customer relationship.

The banking system in India is significantly different from that of the other Asian
nations, because of the country‟s unique geographic, social, and economic characteristics.
Though the sector opened up quite late in India compared to other developed nations, like the US
and the UK, the profitability of Indian banking sector is at par with that of the developed
countries and at times even better on some parameters. For instance, return on equity and assets
of the Indian banks are on par with Asian banks, and higher when compared to that of the US
and the UK.

Banks in India are mainly classified into Scheduled Banks and Non-Scheduled Banks. Scheduled
Banks are the ones, which are included in the second schedule of the RBI Act 1934 and they
comply with the minimum statutory requirements. Non-Scheduled Banks are joint stock banks,
which are not included in the second Schedule of the RBI Act 134, on account of the failure to
comply with the minimum requirements for being scheduled
Index Performance
If we see the current performance of Banking Index then we find that overall the performance of
Banking Industry is very good thanks to strategies taken up by RBI but still there is a slum in the
Index but that is seen all over the world. Bankex 3 has grown at a compounded annual rate of
about 31%

Growth In Banks
In 2009-10 the banking sector growth is seen majorly between 15-20% and as of now today the
Industry is growing above 20% and the future is more likely above 20% as the Financial
inclusion takes its place in the Industry.

Fig:-1 Survey done by FICCI shows the growth of Indian Banks and the expected growth
3
Bankex is (Index tracking the performance of leading banking sector stocks)
Public Private and foreign Banks
Now if we see the growth in terms of Public, Private, Foreign banks then Public Banks in India
take all the credit for the robust growth of Industry. As we see the Public banks maintain a
CAGR above 20% and then Private Banks also try to keep CAGR near 18% and Foreign Banks
still aiming at 15 % CAGR

4
http://stockshastra.moneyworks4me.com/learn/indian-banking-industry-future-prospects-and-sector-
overview/
Let us see the CAR NPA and ROA of Indian Banks

Currently foreign Bank‟s maintained best ROA and then comes Private Banks. Net NPA is
again increasing in Public Sector Banks and less in Private Banks. CAR in public sector banks is
very less as compared other Banks.

Hence public sector banks needs to focus more on NPA, CAR and ROA5. Foreign banks see
India as emerging market hence their share will increase and the private players should grow in
near future.

5
NPA stands for Non Performing Assets
CAR stands for Capital Adequacy
Ratio ROA stands for Return On Assets
 SWOT ANALYSIS

STRENGTH

 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

 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

 India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake)after merger of New Bank of India in
Punjab National Bank in 1993, 29 private banks (these do not have government
stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They
have a combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA6 Limited, a rating agency, the public sector banks hold over 75 percent
of total assets of the banking industry, with the private and foreign banks holding 18.2%
and 6.5% respectively

 . 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.

6
ICRA is a credit rating company abbreviated as International Credit Rating Agency
 WEAKNESS

 PSBs need to fundamentally strengthen institutional skill levels especially in

sales and marketing, service operations, risk management and the overall
organizational performance ethic & strengthen human capital.
Old private sector banks also have the need to fundamentally strengthen skill levels.

 Structural weaknesses such as a fragmented industry structure, restrictions on

capital availability and deployment, lack of institutional support infrastructure, restrictive
labor laws, weak corporate governance and ineffective regulations beyond SCBs 7, unless
industry utilities and service bureaus.

 Refusal to dilute stake in PSU8 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.

 Impediments in sectoral reforms: Opposition from Left and resultant cautious

approach from the North Block in terms of approving merger of PSU banks may
hamper their growth prospects in the medium term.

Opportunities

While many Indian industries have demonstrated low–cost innovations that have caught the
world‟s fancy, Indian banks have yet to make a substantive impact. The regulator who has
zealously protected the banks‟ turf for years may be forced to relent in light of the demands for
faster development. Weak wholesale debt markets that have kept banks at centre stage of
corporate borrowing may finally deepen, leading to pressure on growth and / or margins. Non
Banking Finance Companies (NBFCs), who, barring a few exceptions, almost became extinct in
the last decade may make a comeback.

7
SCB means Scheduled Commercial Banks
8
PSU means Public Sector Banks
Changing customer preferences and rapid technology evolution could pose challenges to banks
in many ways. On top of it, the public sector will face a severe handicap in mobilizing itself
unless it addresses its HR on priority.

1. Wealth management will be big business with 10X growth:

Going forward, wealth is expected to get further concentrated in the hands of a few. The top
band of income distribution is expected to grow most rapidly over the next decade. By 2020, the
top 5 percent households, predominantly residing in the metros and Tier I cities, will account for
30 percent of the total disposable income. Wealth management services will be demanded by the
nouveau rich and will be an integral part of the product portfolio for both, private as well as
public sector banks.

2. “The Next Billion” will be the largest segment:

The income group right below the middle class in the annual house holds income range of Rs
90,000 to Rs 200,000 per annum will be the largest group of customers. These customers will be
profitably served only with low cost business models having low break even ticket size of
business. The next decade would witness banks experimenting with different low cost business

9
Chart is from BCG Report on Indian Banking Industry
models, smaller cost effective branches and new use of technology to serve this segment
profitably.

3. The number of branches to grow 2X; ATMs to grow 5X:

India has a very low penetration of branches and ATMs as compared to some of the other
developed and developing nations. It is evident that the bank branches and ATMs are by far the
most popular channels, despite a decade of promotion of alternate channels. The experience in
developed economies also corroborates that branches and ATMs continue to be the critical
channels, although certain transactions have shifted to alternate channels. As such, there is a
requirement of at least 40,000–50,000 additional branches and 160,000–190,000 additional
ATMs in the coming decade. This will be 3 times more than the branches and ATMs launched in
the last decade.

4. Mobile banking to see huge growth and will redefine transaction banking paradigm:

The uptake of internet and call centers is low in all segments other than foreign banks.
Comparing with usage pattern in US, the significant potential in online and phone channels is
apparent.

However, India may evolve differently. The penetration of internet and broad band access in
India has been low so far. However, with the advent of mobile banking, the access to banking
facilities could completely get revolutionized over the next decade.

10

10
Chart is from BCG Report on Indian Banking Industry
5. Customer Relationship Management (CRM) and data warehousing will drive the next wave
of technology in banks:

The average number of banking products per customer in India is significantly lesser than the
global benchmarks. There is a significant potential for cross selling amongst all categories of
banks in India. Given that cross selling is highly cost–effective as compared to all other means
of customer acquisition, banks will adopt CRM strategies aggressively in pursuit of cost–
effective business models.

6. New models to serve the Small and Medium Enterprises (SME):

A survey was conducted by FICCI to gauge the level of satisfaction among large, medium and
small business customers with regard to banking services showed that the large customers are
more satisfied across all dimensions as compared to the medium and small sized ones. The
smallest businesses are most dissatisfied. Due to higher risk and lower ticket size, the SME
typically get less attention. Banks are yet to create innovative models to serve SMEs with
sufficient and timely credit at the right price. In general, the level of dissatisfaction is higher on
pricing and product range. A further analysis highlights that the dissatisfaction on pricing is
higher for the private sector banks while dissatisfaction on product range is higher for the public
sector ones. As the yields in large corporate banking falls with further deepening of wholesale
debt markets, the banking industry in India will find cost–effective ways to serve the SME
customers where yields are quite high.

Challenges

1. Soaring NPA (Non Performing Asset) Ratios:

In the last few years, investors have been flocking to emerging economies like India due to their
high growth trajectory and the uncertain growth in the developed economies. However, as
countries like India fail to tame inflation, FII11s have been rushing to „safe haven‟ assets like
the

11
FII are Foreign Institutional investors
US Treasury bills, US dollars and gold. While the FDI12 flows have not yet slowed down, FII
flows have been moderated. The overall business climate, therefore, has not been conducive for
growth, putting pressure on the credit off-take from banks. All these factors, along with rising
levels of non-performing assets (NPAs), have impacted the performance of Indian banks
adversely, though they appear to be healthier than their global counterparts.

13

2. Shift from a Product Centric to Customer Centric Model:

Banks are facing challenges as customers have become more demanding and their loyalties are
diffused with low-switching costs. In India, recent RBI initiatives like savings-account
portability, zero-balance account with minimum facilities, withdrawal of penalty for foreclosure
of home loans and savings rate deregulation will have an adverse impact on banks‟ operations
and their ability to retain customers. There are five key aspects of changing customer behavior,
which will make banks think about engaging more with the customer.

12
FDI means Foreign Direct Investment
13
Chart is from World Bank
14

3. Integration complexity:

To consolidate the disparate technology platforms and operations of multiple product lines is a
highly complex process fraught with execution risk. It may be difficult to reconcile diverse and
often conflicting business and technology requirements of various product groups. As product
features and functions are designed with consumer experience in mind, individual business units
lose absolute control over the product development process in a multi-product, customer-centric
world.

4. Conflicting priorities:

Product-line investments, revenue and cost allocation models do not support multi-product or
entity-level projects that might improve operational efficiency and organizational profits
(e.g., shared underwriting and marketing processes for credit cards, auto loans and home
loans).
Instead, incentives tend to fund and implement projects within silos. Thus, it drives the
market share and profitability of each silo rather than the organization as a whole.

The traditional banking model, structured around internal product groups (silos), is organization-
centric. It prevents banks from understanding the products and services their customers have
purchased across the enterprise. In this difficult economic environment, product silos are
struggling to stay profitable. In our view, banks should adopt a new, customer centric model
14
Chart is from PwC Report “Searching for new frontiers of growth”
integrated around customer needs. To adopt a more efficient customer-centric model, the key is
to develop an open and successful relationship with the customer, deliver an effective value
proposition throughout the customer lifecycle and back it up with good customer service. Trust
levels are very important in a banking relationship as the customer wants sound advice and
good services.

5. Improving Penetration:

Today, banks have products but not the distribution network. This gap can be reduced with the
help of mobile networks. Currently, money transfers, payments and banking can take place over
devices. The World Bank estimates that banking penetration among middle-and high income
groups is 45% and less than 5% among the low-income segment in emerging markets. With
unique identification number coming in full force in the next couple of years, mobile can be an
effective way to transfer funds in the rural areas. Mobile remittance provides a big opportunity
where mobile network operators forge partnerships with banks or RSPs to efficiently handle cash
management and disbursement. Banks exploit the distribution reach of mobile networks to
market services among underpenetrated customer segments while mobile network operators
benefit from the banks domain expertise.

However, the value chain for this is little complex with incorporating wholesale arrangements
between mobile operators and financial service providers on the one side and the retail
distribution network that serves customers, on the other. However, an effective regulatory
structure can help and it will ensure a range of solutions efficiently, securely and at minimal cost,
resulting in services being substantially more widespread, inclusive and sustainable.
 Conclusion:

In many ways the coming decade will be crucial for India. It is estimated that if India grows at
8 per cent per annum, India‟s per capita GDP will increase from the current level of $1,600 to
$8,000-10,000 by 2025. Then India will transit from being a low income country to a middle
income country. The Indian banking system must assist India in this process of transition. It is
important that the banking system must develop to meet the needs of a growing and diversifying
economy. The competitive environment is essential to make the banking system cost efficient.
Adequate availability of services to customers both as depositors and borrowers must remain
the driving force.

Obviously, regulation is important to steer the banking sector acts as the barometer for the
economy at large. For an emerging economy, where credit dispersion is often a challenge in the
SME sector and intermediation between savers and investors requires a strong institutional set
up, commercial banks acts as the bulwark for this. We therefore need strong banks which are
well capitalized, with innovative business models purveying products and services to a diverse
set of customers. In an increasingly digitized world, banks need to adopt business strategies built
on a scalable IT platform which allows deeper reach beyond tier II cities and manage cost
structures well. As part of a larger ecosystem where banks have to identify the most relevant
stakeholders (including Telco‟s, banking correspondents, independent financial advisors and
any supply chains) an appreciation of their interconnectivity, can help connect the dots. It
remains to be seen which banks are able to see through all of this and identify new frontiers of
growth and contribute more substantially to the economy.
 REFERENCES

 Survey done by FICCI on INDIAN BANKING SYSTEM: THE CURRENT STATE

& ROAD AHEAD ANNUAL SURVEY
 http://stockshastra.moneyworks4me.com/learn/indian-banking-industry-future-prospects-
and-sector-overview/
 RBI website rbi.org.in for data
 World Bank Report
 PwC Report “Searching for new frontiers of growth”
 http://www.gsmi-ijgb.com/Documents/V5%20N1%20IJGB%20P01%20- M
%20Dhanabhakyam%20%E2%80%93India-s%20Economic%20Performance-
%20Globalization.pdf International Journal of Global Business, 5 (1), 1-16, June 2012
“India‟s Economic Performance- Globalisation As Its Key Drive” authored
Dr.M.Dhanabhakyam, Sakthipriya.M.R.G
 Report “The Indian Banking System – Challenges Ahead” by Dr. C. Rangarajan
Chairman Economic Advisory Council to the Prime Minister , Nov 2011
 Report “Banking Industry: Challenges And Opportunities” by Dr. K.A. Goyal & Vijay
Joshi Indian
 “Indian Banking 2020” September 2010 bcg.com