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Indian Banking

Shaping an
Economic Powerhouse

Shri TS Bhattacharya
Managing Director
State Bank of India
Indian Banking Sector: Overview

 222 commercial banks in India (of which 133 RRBs)
 Operating with 68,681 branches (March 06)
 Nearly 70% of branches are in rural/semi-urban areas
 Bulk of commercial bank finance is for short-term
working capital needs of industry, trade, agriculture &
personal segment. Foray into project finance also.
 Banks are supporting growth in the economy by
financing productive sectors
 CD Ratio increased to 72.5% against benchmark 60%.
Incremental CD Ratio of over 100% reflecting the
strong underlying credit momentum.
Vibrant Indian Banking Sector

 Size of the banking sector has gone up over six
times from Rs.5,984 bn in 1995 to over RS.36,105
bn in 2006

 Due to growing competition, market share of
various groups of banks has changed, though
public sector banks still dominate the market.
All Scheduled Commercial Banks

Branches Staff Deposits Advances Net Profit
% Share in the Total
Public Sector Banks 88.41 87.23 75.24 73.25 73.62
Private Sector Banks 11.33 10.76 19.42 20.24 16.95
Foreign Banks 0.26 2.01 5.44 6.51 9.43
ASCB Total Banks 100.00 100.00 100.00 100.00 100.00
Changing Market Share of Banks (%)
Public Sector OSCB Foreign Banks

Deposits 1995 85.51 6.95 7.54

Deposits 2006 75.24 19.42 5.34

Advances 1995 85.66 6.81 7.53

Advances 73.25 20.24 6.51
Banking Sector after reforms
13 years of economic and financial sector reforms have
strengthened the banking sector:
 Widespread branch network, varied client base
 Recapitalisation has bolstered bank balance sheets
 Public confidence in PSBs
 Risk averseness: limited exposure to risky sectors
 Investment in retail branches in an earlier era has given
PSBs competitive advantage of access to stable, low cost
But the large staff strength, age profile, Government
regulations (on loss making branches, CVC) and slow
pace of change in PSBs could be a hindrance to dynamic
growth in today’s fast paced world.
New Initiatives by PSBs
 Technology savvy: SBG daily 11 lakh ATM transactions
amounting to Rs 140 crore per day
 Specialised branches
 New products targeted at specific groups
 Change in structure, systems and procedures involving
quick turnaround time to meet world standards
 Marketing orientation
 Change in ambience
 Recruitment of specialists
 Tie-ups, sharing networks, and strategic alliances
Product Innovation

 Banks moving away from plain vanilla lending to
commerce and industry.
 More options for customers: cash management, channel
financing, foreign currency loans.
 New innovative products being introduced and fee
based income increased to meet the challenges ahead.
 Bancassurance and other products, outsourcing of
some products, technology-based payment systems.
 Product innovations and process re-engineering to meet
customer requirements, reduce cost, improve efficiency.
International Competitiveness
According to Moody’s Investor Services:
 Indian lenders have highest ROE in Asia (20.38%),
followed by Indonesia (20.19%), New Zealand
(18.83%), Japan (-6.42%)
 Average gross bad loans as share of total loans: India
(8.18%), Phillipines (15.05%), Thailand (13.08%),
China(11.80%) and Malaysia (9.73%). Improvement in
asset quality.
 Cost to Income ratio in India is 44.56% with banks of
only three countries with better ratio:
Singapore(44.15%), Taiwan (42.61%) and Hong Kong
Technology in Banking
 IT spend by banking and financial services industry in
USA is 7% of the revenue as against around 1% by
Indian Banks.
 Shared ATM network to reduce costs, increase reach.
 SBI: Branch networking (CBS), ATM network,
Internet banking and other facilities introduced in
shortest time frame (Hewlett Packard)
 Cheque truncation system to change the speed of
banking transactions
 RTGS system running since 2004 and covers 15,000
 Adoption of Technology to lead to business
transformation and cost advantage in the long term.
Human Resources
 In order to meet the global standards and to remain
competitive, banks are recruiting more specialists in
various fields such as Treasury Management, Credit,
Risk Management, IT related services, HRM.
 Fast track merit and performance based promotion
from within would have to be institutionalized to inject
dynamism and youthfulness in the workforce.
 SBG treasury is as sophisticated and modern as that of
Barclays and Natwest
Risk Management
 Under Basle II capital allocation will be based
on risk of assets
 Integrated approach to risk management:
credit, market and operational risk
 Risk adjusted return on capital will be used to
drive pricing, performance measurement &
portfolio management
Scenario Beyond 2009
 Foreign Banks allowed to set up fully owned

 Foreign banks to be treated on par with Indian banks
after 2009 to the extent appropriate

 Competition to intensify

 To achieve critical mass and long term profitability
consolidation will be the trend
Response of Banks
Banks are expanding credit to support growth
 High Credit Growth: The YoY deposit growth for
ASCBs at 23% (as on 23rd June 06) was lower than
credit growth at 30%.
 Agricultural Credit: banks exceeded the target of Rs.
87,200 cr fixed for 2005-06 and disbursed Rs 1,07,900 cr
(125% of the target).
 Govt directed banks to double agl credit in 3 yrs but
in 1 ½ yrs SBI agri credit up by 67% and 9.41 lakh
new farmers covered.
 Sectors driving credit growth: Agriculture, SME,
Infrastructure, exports, industry.
Response of Banks
 Large scope in retail: Share of organised retail: USA 85%,
Thailand 40%, Brazil 36%, China 20%, India 5%.
 Large scope for financing services sector
Ind Agl Ser
Bank Credit / GDP (%) 65.0 11.0 14.0
Share in GDP (%) 21.8 22.1 56.1

 Rural India financing opportunities for banks. Strategies to
tap rural customers: A recent survey shows that 53% of
FMCG sales & 59% of consumer durables are in rural areas.
Of the 2 mn BSNL mobile connections, 50% went to small
towns and villages.
Blueprint for Banks
A strong and resilient banking sector is necessary to support a
vibrant economy and sustain growth. Banks will strive for :
 Customer Service : single window, code for banks
 Multiple channels for delivery
 Focus on Fee-based Income/Non Banking financial services
as well
 Insurance, Credit cards
 Derivatives
 Financial Inclusion
 Micro Finance and SHGs
 Agricultural credit to be increased
 Contract Farming Arrangements
 Infrastructure Projects
India an Economic Powerhouse
 Service Sector leads growth
Global leadership in BPO/KPO and IT enabled
Retail Boom - The size of organised retail will grow
three times in next 4-5 years

 On the way to become an International Manufacturing
Transformation in auto, auto-components, pharma,
other industries
Good Q1 Results, 170 firms so far give sales growth
35%, net profit growth 54%
Indian Investments and acquisitions abroad
India an Economic Powerhouse
 Decreased dependence on monsoon
 Continuing Reforms
Focus on SEZs for accelerating growth
Manufacturing Investment Regions to be set up
100% FDI in plantation, horticulture, etc.
Tapping rural markets
Bank outsourcing norms to be introduced by RBI
 Growth Constraints
Improvements required in infrastructure
Global oil prices are a concern
Need capital to support growth (FDI)
Banks :Partners in Growth
 Credit to productive sectors.
 Investment in bonds, commercial paper.
 Payments, Collection, Remittances.
 Foreign exchange services.
 Specially tailored products for target groups
 Advisory support.
 Technology support: SBI’s Project Uptech
 Reschedule repayments for borrowers with
genuine problems.
 Limit for FDI in private banks increased from
49% to 74%.
Banks: Partners in Growth
 Banks now enjoy greater managerial autonomy for sound
banks in terms of area of business, opening and swapping of
branches, recruitment.
 Banks have also been allowed to set up Offshore Banking
Units in Special Economic Zones.
 Credit delivery mechanism has been reinforced to increase
the flow of credit to priority sectors through focus on micro
credit and Self Help Groups.
 Policy package to step up credit to SMEs.
 Securitisation of assets: The Indian securitisation market
has come a long way since the first deal in1992 (autoloan
securitisation by Citibank).
Going Ahead
 Indian economy is poised to move into a higher growth
trajectory. 11th Plan Projection 8% GDP (12%
 Rapid growth of services sector
 Leveraging high quality education and vast
talent pool
 Tapping India’s knowledge capital to create
economic value
 Rising affluence and growth of the consuming class
 NCAER data for top 24 cities in India shows
migration to higher income levels growing at
over 40% per annum
Going Ahead
 Consumer finance, robust industrial investment
outlook, increasing internationalisation of India and
rural banking will drive growth in the economy.
 Upward migration of incomes, demographic patterns
and access to finance will act as change agents.
 The banking sector is gearing itself to support growth.
 Competition, consolidation and convergence will transform
 Technology will be the key and drive the change.
 Banks strengthening capital base, risk management & skills