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1. Industry definition
The Banking industry comprises of segments that provide financial assistance and advisory services to its customers by means of varied functions such as commercial banking, wholesale banking, personal banking, internet banking, mobile banking, credit unions, investment banking and the like. With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. Banks are among the main participants of the financial system in India. Banking offers several facilities & Opportunities. Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. The commercial banking structure in India consists of: Scheduled Commercial Banks & Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain customer base.
2. over 80% of the funds flowing through the financial sector. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. PSBs are still dominating the commercial banking system. For. by far. accounting for as it does. Many banks are . Industry Segments y Public Sector Banks: Almost 80% of the business is still controlled by Public Sector Banks (PSBs). The RBI has also been granting licenses to industrial houses. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. these entities sustaining long-term customer relationship management (CRM) has become a challenge with almost everyone in the market with similar products. Financial sector would be opened up for greater international competition under WTO. y Private Sector Banks: The RBI has given licenses to new private sector banks as part of the liberalization process. greater challenges lie ahead. improve customer relationship management (CRM) and employee productivity. While the banking system has done fairly well in adjusting to the new market dynamics. the most dominant segment of the financial sector. in order to achieve an efficient banking system.The evolution of IT services outsourcing in the Indian banks has presently moved on to the level of Facilities Management (FM). The banking system is. Banks now looking at business process management (BPM) to increase returns on investment. Shares of the leading PSBs are already listed on the stock exchanges. the onus is on the Government to encourage the PSBs to be run on professional lines. Hence.
The presence of foreign banks in India has benefited the financial system by enhancing competition. 3. Now. Also with the presence of foreign banks. At a time when access to foreign currency funds was a constraint for the Indian companies. resulting in higher efficiency. Market Overview The banking industry too has evolved rapidly over the last few years in India due to the availability of cheaper technology and falling communication costs. . There has also been transfer of technology and specialized skills which has had some "demonstration effect" as Indian banks too have upgraded their skills.successfully running in the retail and consumer segments but are yet to deliver services to industrial finance. improved their scale of operations and diversified into other activities. small business and agricultural finance. the presence of foreign banks in India enabled large Indian companies to access foreign currency resources from the overseas branches of these banks. it is the challenge for the supervisors to maximize the advantages and minimize the disadvantages of the foreign banks' local presence.well beyond the commitments made to the World Trade Organization. y Foreign banks: Foreign banks have been operating in India for decades with a few of them having operations in India for over a century. new compliance requirements. competition from non-financial players. and changing customer expectations has added complexity and challenges to banking systems and processes. retail trade. The number of foreign bank branches in India has increased significantly in recent years since RBI issued a number of licenses . De-regulation. as borrowers in the money market and their operation in the foreign exchange market has resulted in the creation and deepening of the inter-bank money market.
and Russia) and has the third largest GDP in the entire continent of Asia. The high GDP growth in India is creating lots of job opportunities in urban and semi-urban India and it will go further into rural India ² increasing the potential for rural . Setting up branch involves higher cost and operating expenses. Market potential India is the fifth largest economy in the world (ranking above France. Qualitative growth The growth of banking in the coming years is likely to be more qualitative than quantitative. 90. That will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. the world's most populous democracy has. the penetration of deposit accounts languishes at a deplorable 18 per cent. It is also the second largest among emerging nations. and lower return on investment. the pace of deposit growth may slow down. despite the practically unlimited possibilities in India for overseas businesses.7 per cent between 1994-95 and 2002-03. Yet. the pace of growth in both advances and investments is forecast to weaken. face an uphill task in reaching out to the customers in remote locations such as villages. Given the 742-million rural population. however. The total assets of all scheduled commercial banks by end-March 2010 was estimated at Rs 40. there is likely to be large additions to capital base and reserves. There is a lower level of literacy and access to Internet. On the asset side. until fairly recently. Banks assets are expected to grow at an annual composite rate of growth of 13.Banks. the United Kingdom. On the liability side.000 crore.4 per cent during the rest of the decade against 16. As the reliance on borrowed funds increases. India is also one of the few markets in the world which offers high prospects for growth and earning potential in practically all areas of business. Italy. failed to get the kind of enthusiastic attention generated by other emerging economies such as China.
Banks and other lenders rely on financial statements of companies when deciding whether to grant or extend credit. Therefore. some banks can end up spending the money on clean-ups of sites contaminated through their clients' activities. Under current reporting requirements. India presents a vast potential for overseas investment and is actively encouraging the entrance of foreign players into the market.entrepreneurships and rural growth with higher per-capita income and savings opportunities. No companies. Investment in Indian market India. . for long ignore this country which is expected to become one of the top three emerging economies. shortages of power and infrastructural deficiencies. Prudent lenders are following the environmental trends and changes in regulatory framework to assess the possible implications of these changes on their clients' overall financial position. potential environmental liabilities can easily remain undiscovered unless a lender develops its own procedure to assess the environmental risks. among the European investors. of any size. 4. Borrower's ability to meet financial obligations The borrower's obligation to clean up contaminated sites might impair his or her ability to repay a loan. bureaucratic hassles. Key Drivers of sustainability in the banking industry Lender's liability Lender's liability is associated with the financial risks banks face when granting or extending loans. is believed to be a good investment despite political uncertainty. The contamination might also reduce the value of the guarantee. aspiring to be a global player can.
Influenced by these trends. several international banks have recently adopted innovative. effective risk managers will prosper and risk-averse are likely to perish. . Risk and reward The ability to gauge the risks and take appropriate position will be the key to successful banking in the emerging scenario.Growing environmental concerns The last few decades have been marked by numerous changes in the regulatory framework relating to environmental protection. They have developed new products such as ethical funds or loans specifically designed for environmental businesses to capture new market opportunities associated with sustainability. some banks have begun looking closely into their own environmental and social performance. However. the risk awareness levels of line functionaries also will have to increase. Recent scientific discoveries of environmental and health risks associated with pollution have contributed to an increase in public demand for environmental quality. the report asserts. Risk-takers will survive. proactive strategies to capture the opportunities associated with sustainability. Business opportunities The traditional approach of the banking sector to sustainability is often regarded as reactive and defensive. These growing concerns have contributed to a major shift in public perception of corporate roles in society. As audit and supervision shifts to a risk-based approach rather than transaction oriented.
In the past mergers were initiated by regulators to protect the interest of depositors of weak banks. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards. Alongside. banks in India wanting to increase their international presence could naturally be expected to follow these corporate entities and other trade flows out of India. the opinion that the financial sector would be opened up for greater international competition under WTO. will also impact on globalization of Indian banking. under WTO. insurance etc. says the report. the flow need not be one way. and management skills which would increase the competitive spirit in the system leading to greater efficiency. such as Singapore. In recent years. Mergers between public sector banks or public sector banks and private banks could be the next logical development. technology. As globalization opens up opportunities for Indian corporate entities to expand their business overseas. there have been a number of market-led mergers between private banks. However. the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. This process is expected to gain momentum in the coming years. would see a number of global banks taking large stakes and control over banking entities in the country. Some of the Indian banks may also emerge as global players. They are expected to bring with them capital. Government policy to allow greater FDI in banking and the move to amend Banking regulations Act to remove the existing 10% cap on voting rights of shareholders is pointer to these developments.5. Issues and Implications On the growing influence of globalization on the Indian banking industry. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under the various Free Trade Agreements that India is entering into with other countries. . Opening up of the financial sector from 2005.
These changes include strengthening prudential norms. y In terms of quality of assets and capital adequacy. . SWOT Analysis Strengths y Indian banks have compared favorably on growth. Indian banks are considered to have clean.6. asset quality and profitability with other regional banks over the last few years. y The vast networking & growing number of branches & ATMs. enhancing the payments system and integrating regulations between commercial and co-operative banks. y 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. service operations. y The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of all the major private banks of India. Indian banking system has reached even to the remote corners of the country. Weakness y PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing. y Policy makers have made some notable changes in policy and regulation to help strengthen the sector. strong and transparent balance sheets relative to other banks in comparable economies in its region. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 percent growth in the market index for the same period. y Old private sector banks also have the need to fundamentally strengthen skill levels. risk management and the overall organizational performance ethic & strengthen human capital. y Bank lending has been a significant driver of GDP growth and employment.
y With increased interest in India. restrictive labor laws. actively adopting acquisitions as a means to grow and reaching the next level of . This will expose the weaker banks. weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs). competition from foreign banks will only intensify. consumer finance and wealth management on the retail side. unless industry utilities and service bureaus. lack of institutional support infrastructure. credit and operations. and in fee-based income and investment banking on the wholesale banking side. y Given the demographic shifts resulting from changes in age profile and household income. y Structural weaknesses such as a fragmented industry structure. These require new skills in sales & marketing.y The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. y 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. y 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. Opportunity y The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards. restrictions on capital availability and deployment. consumers will increasingly demand enhanced institutional capabilities and service levels from banks. y Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided.
compared to 20% foreign equity holding allowed in PSU banks. y In an attempt to relieve banks of their capital crunch. left with little headroom for raising equity. Threats y Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. FII and NRI investment limits in these securities have been fixed at 49%. developing and retaining more leadership capacity y Foreign banks committed to making a play in India will need to adopt alternative approaches to win the ³race for the customer´ and build a value-creating customer franchise in advance of regulations potentially. If the new instruments find takers. y Rise in inflation figures which would lead to increase in interest rates. y With the growth in the Indian economy expected to be strong for quite some time especially in its services sector-the demand for banking services. Attracting. Significantly. Maintaining a fundamentally long-term value-creation mindset. mortgages and investment services are expected to be strong. y The Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. they should stay in the game for potential acquisition opportunities as and when they appear in the near term.performance in their service platforms. . y Increase in the number of foreign players would pose a threat to the PSB as well as the private players. it would help PSU banks. y Reach in rural India for the private sector and foreign banks. especially retail banking. the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. At the same time.
Social and Technological analysis.7. PEST Analysis PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. stricter prudential regulations with respect to capital and liquidity. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry. PEST stands for Political. Political Factors Government and RBI policies affect the banking sector. This gives India an . Economic. y Focus on regulations of government Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework.
Government affects the performance of banking sector most by legislature and framing policy government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers.0 percent to 49.0 percent and have been included within the ambit of FDI investment. o To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. o To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting.advantage in terms of credibility over other countries. y Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year. y Budget impact The Union Budget 2008-09 has focused on farm credit. The Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of . y Other provisions o The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner. y FDI Limit The move to increase Foreign Direct Investment FDI limits to 49% from 20% during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners. Ceiling for FII investment in companies was also increased from 24.
land. On the flipside. banking has existed in one form or the other from time to time. opening of banking centre in un-banked blocks are some of the positive moves for the sector. banks would not be affected much. then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector. If in the Budget savings are encouraged. The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. With Government bearing this burden. then more FDI are brought in India through banking channels y Growing economy / GDP Indian economy has registered a growth of more that 9% for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. It is great news that today the service sector is contributing more than half of the Indian GDP. through rise in yields on government securities. Moreover the emphasize on hiking promoter shareholding in Public sector banks. booming the economy. therefore. SEZs and NRI investment have been framed to give a push to the economy and hence the GDP. Policies of FDI. y Low interest rates . In India. Earlier it was agriculture which mainly contributed to the Indian GDP. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular. If the FDI limits are relaxed. Banking Industry is directly related to the growth of the economy. Economic Factors Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. expanding network with ATM's. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities.
shahukars. Socio-cultural factors like taboos. customs.63 per cent to 3. These factor are changing continuously people¶s life style. preferences. In the recent past. their behavior. y Agriculture credit Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. buying and consumption habit of people. the sector has recorded a growth of about 5% per annum with substantial increase in plan allocations and capital formation in the sector. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry.92 per cent. consumption pattern etc. shroffs. beliefs and values affect the business. y Traditional Mahajan Pratha Before the birth of the banks. tastes. people of India were used to borrow money local moneylenders. is changing and also creating opportunities and threat for banking industry. Socio Cultural Factors Socio culture factors also affect the business. y Inflation rates Inflation represents a rise in general level of prices of goods and services over a period of time. Farmers need money so. They were used to charge higher interest and also mortgage land and house. Government of India & Reserve Bank of India took many fiscal as well as monetary actions. their language. each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12. Resultantly. It leads to an erosion in the purchasing power of money. traditions. which is based on several monetary policies. Banking industry is also operates under this social environment and it is also affect by this factor.Reserve Bank of India controls the Interest rate. they had to go to shahukar and borrow money from them. But after emergence of banks attitude of . To fight against the slowdown of the Economy. They show in which people behave in country.
television. This affects the banking sector. Banks would open their branches after looking into the population demographics of the area. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they have relationships from the time of their fore fathers. They are demanding high class products. They have become more advanced. they demand for these products and borrow from banks. Joint families are breaking up.people was changed. mobile. mobile. bike. People want everything car.e. Traditional mahajan pratha still exist in India specially in rural areas. Even middle class people also want to have well furnished home. Now teenagers also have mobile and vehicle. which affect the private sector banks. A family need home consumer durables like freeze. So. So. Illiterate people hesitate to transact with banks. this is reason it still exist. this impacts negatively on banks. Banking infrastructure is also week in some interior areas of India. vehicle and this has opened opportunities for banking sector to tap this change. y Change In Life Style Life style of India is changing rapidly. so. As they don¶t have money they go for installment and banks satisfy nuclear family needs. Income distributions also affect the operations and overall business of private sector banks. y Population Increase in population is one of the important factors. Percentage of deposit in any branches of banks depends upon the population demographic of that area. y Literacy Rate Literacy rate in India is very low compared to developed countries. etc. But there is positive side of this as well i. Recently there is boost in housing finance and vehicle loans. y Shift Towards Nuclear Family The younger generation wants to remain separate from their parents after they get married. etc. tv. illiterate people trust more on . Everything is available so it has become easy to purchase anything if you do not have lump sum. car. But banking sector is positively affected by this trend.
These are also called as electronic purse. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services. Credit card facility has encouraged an era of cashless society. The use of ATM and Internet banking has allowed anytime.banks to deposit their money. All these technological changes have forced the bankers to adopt customer-based approach instead of product-based approach Technology . The messages are then recognized by the bank to provide you with the required information. The banks have now started issuing smartcards or debit cards to be used for making payments. they look bank as their sole and safe alternative. Some of the banks have also started home banking. anywhere banking facilities. currency accounting machines makes the job easier and selfservice counters are now encouraged. Technological Factors y Technology in banks Technology plays a very important role in bank¶s internal control mechanisms as well as services offered by them. For example SMS functions through simple text messages sent from your mobile. Opportunities in stocks or mutual funds. they do not have market information. y It services & mobile banking Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. y ATM The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. So. Today MasterCard and Visa card are the two most popular cards used world over. Automatic voice recorders now answer simple queries.
On the other hand. mutual funds or fixed income securities. more services. The suppliers of capital might not pose a big threat. remember that the possibility of a mega bank entering into the market poses a real threat. but there are services. and exposure to foreign capital markets . y Availability of Substitutes. Banks are fearful of being squeezed out of the payments business. Porter¶s Five Force Analysis y Threat of New Entrants. y Power of Buyers. As you can probably imagine. chances are there is a non-banking financial services company that can . when analyzing a regional bank. Another trend that poses a threat is companies offering other financial services. etc. but one major factor affecting the power of buyers is relatively high switching costs. such as internet bill payment. because it is a good source of fee-based revenue. banks try to lower the price of switching.by offering better exchange rates. In an attempt to lure in customers. but whether it is insurance. investment firms. Banks offer a suite of services over and above taking deposits and lending money. The individual doesn't pose much of a threat to the banking industry. If a person has a mortgage. it can be extremely tough for that person to switch to another bank. but the threat of suppliers luring away human capital does.work extremely hard to get high-margin corporate clients. car loan. checking account and mutual funds with one particular bank. If a talented individual is working in a smaller regional bank. Financial institutions . The average person can't come along and start up a bank. credit card. Also.8. there is the chance that person will be enticed away by bigger banks. on which entrepreneurs can capitalize. large corporate clients have banks wrapped around their little fingers. y Power of Suppliers. there are plenty of substitutes in the banking industry. but many people would still rather stick with their current bank.
y Competitive Rivalry. They do this by offering lower financing. The banking sector is in a race to see who can offer both the best and fastest services. The financial services industry has been around for hundreds of years and just about everyone who needs banking services already has them. we're likely to see more consolidation in the banking industry. Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people. Because of this. but this also causes banks to experience a lower ROA. They then have an incentive to take on high-risk projects.offer similar services. The banking industry is highly competitive. preferred rates and investment services. banks are seeing competition rise from unconventional companies. . On the lending side of the business. banks must attempt to lure clients away from competitor banks. In the long run.
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