You are on page 1of 30

Commercial Banking

LBS PGDM-GEN
Section A


Lecture 1



1

Part I

Books/Other material for
study/reference

2
Books
Management of Banking and Financial Services,
Pearson Education - 2
nd
Edition 2010
Authors: Padmalatha Suresh & Justin Paul
Management of Banking, Cengage Learning - 6
th

Edition 2006, Indian Reprint 2009
Authors: S Scott MacDonald & Timothy W Koch
3
Other Important Material
Available on respective Websites
RBIs Annual Report on Trend and Progress of Banking in
India for the Year ended 30
th
June 2013: the report
covers commercial banks, co-op banks as well as NBFCs
RBI website: Master circulars on various subjects issued
in July 2013 / 2014 issued/ to be issiued by RBI
Latest Annual Reports of major Banks, and a few large
NBFCs
Coverage in newspapers and magazines relating to
current issues facing the industry
4
RBIs Annual Report on Trend and Progress of Banking in India
Ch 1: Indian banking sector
Ch 2: Global Banking Developments
Ch 3: Policy Environment
Ch 4: Operations and performance of
commercial banks
Ch 5: Co-op banking
Ch 6: NBFCs

5

Lecture I Part II

Some observations on the Indian
Banking Industry

6
Banking Industry in India: 1999-2009
During the above decade,
The number of banks declined from 297 in 2000 to 171 in 2008, mainly
due to closure/merger of weak rural banks
Number of branches rose from 65,412 in 2000 to 76,050 in 2008.
However, the break up shows greater focus of the banks in this regard on
metro and urban areas, as under:
Rural branches went down from 32,734 to 31,076
Urban branches went up from 10,052 to 14,392
Metro branches went up from 8,219 to 12,908
All Banks aggregated Loan book rose from Rs 4 trillion to Rs 29.41
trillion in 2009, with percentage of bank loans to GDP, going up from 19%
to around 52% as of now, and the credit deposit ratio going up from
53.3% in 2000 to 70.34%
7
Major Banks in India: Performance during 1999-2009
Among the private sector banks, assets of Axis Bank grew from Rs
66.69 billion to Rs 1.48 trillion, HDFC Bank from Rs 116.56 billion
to Rs 1.83 trillion & ICICI Bank from Rs 120.73 billion to Rs 3.8
trillion. During the decade their net annual profits went up
respectively from Rs 51 crore to Rs 1,815 crore, from Rs 120 crore
to Rs 2,215 crore, and from Rs 105 crore to Rs 3,758 crore
During the decade, the assets of SBI, PNB and BOB went up
respectively from Rs 2.61 trillion to Rs 9.65 trillion, from Rs 0.54
trillion to Rs 2.74 trillion, and from Rs 0.58 trillion to Rs 2.27
trillion. Their profits went up respectively from Rs 2,056 crore to
Rs 9,121 crore, from Rs 408 crore to Rs 3,091 crore, and from Rs
503 crore to Rs 2,227 crore
The reduction in NPAs by the public sector banks over the decade
was truly remarkable. In 2000, 4 of them (named below) had
double digit net NPAs which were down a decade later to less
than 1% in case of Indian Bank, Allahabad Bank and SBB&J, and
Dena Bank also at just 1.09%
The relative movements in case of NPAs of new generation
private sector banks are not comparable, since having come up in
the mid 90s, they were not carrying any baggage
8
A little historical perspective about
New Generation Private Sector Banks
The guidelines for licensing of new banks in the private sector were issued by
the Reserve Bank of India on January 22, 1993. Out of various applications
received, RBI had granted licences to 10 banks. After a review of the experience
gained on the functioning of the new banks in the private sector, in consultation
with the Government, it was decided to revise the licensing guidelines in
January 2001.
A few of the private sector banks set up during the past two decades got/were
merged
Global Trust Bank was merged with Oriental Bank of Commerce
Centurion Bank first took over Bank of Punjab and then merged with HDFC Bank
After almost a decade a couple of additional licenses were given to Yes Bank
and Kotak Mahindra Bank
In August 2011, the Reserve Bank of India released fresh Draft Guidelines for
Licensing of New Banks in the Private Sector. Finally the guidelines were issued
and applications invited in 2013
During 2014, licenses have been issued to Bandhan Financial and IDFC
9
CURRENT ISSUES AND FUTURE
CHALLENGES IN INDIA

Lecture I
Part III
10
Banking Industry in India the road ahead
M & As
With mergers and amalgamations we might see emergence of 3/4 banks,
which are half or one third the size of SBI, depending on the initiatives of the
government. The issue however continues to be politically sensitive
FINANCIAL INCLUSION CHALLENGE
Only 40% of the Indian population has bank accounts, 13% debit cards and
2% credit cards. Spread of banking at a faster pace in the rural areas,
through branches, banking correspondents and mobile telephony, at a fast
pace is likely.
Banks are being compelled to reach out to rural India, but they are
increasingly appreciating the business opportunity in financial inclusion, as
urban consumers suffer from loan fatigue and corporations find other ways
of raising money
NPAs
The slowdown in the economy and other factors have led to a big rise in
NPAs. The gross NPAs and net NPAs have risen and so have the restructured
Assets increasing the quantum of potentail NPAs
11
NEW GLOBAL CHALLENGES
The global financial crisis of 2007 has thrown up new
challenges for the financial system
The key contributory factors for the crisis were:
Lower interest rates inducing higher risk taking, and leading
to an asset price bubble
Changing structure of the financial sector and rapid pace of
innovation over the last two decades, and the failure of risk
management to match up to the new demands
Failure to adequately regulate highly leveraged financial
institutions
The very foundation that a sound financial system
requires TRUST, crumbled during the crisis
Consequently, Banks that had liquidity hoarded it, and
the banks who did not have it, faced doomsday

12
FINANCIAL REGULATION
There are two vital objectives of financial
regulation
Mitigation of systemic risk
Consumer protection
Financial regulation typically uses tools such as
Prudential regulation
Specialized tools such as deposit insurance
Regulation of payment and settlement systems
Regulation of business entities

13
FINANCIAL STABILITY THE OVERARCHING AGENDA OF
FINANCIAL REGULATION FOR THE FUTURE
Financial stability has to be an explicit
objective of regulation
International co-operation key to resolving
systemic crises in the new world
Indias financial sector reasonably insulated
from crisis of 2007
Financial stability has now been made
explicit objective of RBI monetary policy
14
The New Focus on Financial
Stability across the World
For a fairly long time the main focus of the
regulators used to be on Inflation and Growth
One major outcome of the G 20 deliberations
post the crisis was the establishment of a new
Financial Stability Board that includes all
large countries of the world, to be operated by
the IMF, with a strengthened mandate
15
Challenges before regulators in the world
Who takes the responsibility of ensuring financial
stability?
Where does risk management amount to
conservativeness?
What are the reforms required to create an efficient
and effective regulatory architecture to ensure
financial stability?
How do we resolve the constant tension between
fiscal and monetary policies? Think about the need
to keep rates low because of large government
borrowing programmes.
16
COMMERCIAL BANKING SYSTEM IN
INDIA - AS OF 2009
Public sector banks [27]
Private sector banks [22]
Foreign banks [32]
Regional rural banks [84]
[Figures in brackets show number of
institutions]
17
Alternative Organisations for
Financial Conglomerates
Universal Bank Model All financial operations are
conducted within a single corporate entity
Operating Subsidiary Model Operations are
conducted as subsidiaries of a financial institution
Holding Company Model Financial operations are
carried out by distinct entities such as banks,
mutual funds, insurance companies, NBFC, HFC, etc.
(Current model used in India is the Operating
Subsidiary Model)
18
CO-OPERATIVE CREDIT INSTITUTIONS
URBAN CO-OPERATIVE BANKS [1721]
Scheduled UCB [53]
Non scheduled UCB [1668]
RURAL CO-OPERATIVE CREDIT INSTITUTIONS [96061]
Short term [95344]
State co-operative banks
District central co-operative banks
Primary agriculture credit societies
Long term [717]
SCARDB State Co-op and Rural Development Bank
PCARDB Primary Co-op and Agriculure Rural
Development Bank
19
Committee on Financial Sector
Assessment (CFSA)
According to CFSA, dual regulatory control of RBI and
NABARD, is the single most important regulatory and
supervisory weakness in the co-operative banking
sector
Further, directors are appointed on political affiliation
CFSAs report points out that the sector is plagued by:
1. Low resource base
2. Inadequate business diversification and recoveries
3. High level of accumulated losses
4. Weak MIS and poor controls
20
EVOLUTION OF INDIAN BANKING
The period can be divided in 4 phases, as under:
Pre 1947: no entry norms, several banks failed as they were
either too small to stand global pressures or mismanaged
1947-1967: Banking Companies Act (now called Banking
Regulation Act) enacted, SBI expanded in rural areas, nexus
between big industrial houses and banks resulted in no credit
being extended to agricultural or SSI sector
1967-1991/92: tightening of social controls, directed lending
introduced, asset quality suffered, banks low on profitability
From 1991-92 onward: financial sector reforms, prudential
norms in accordance with international best practices,
improved profitability, greater risk aversion also leading to low
credit, particularly to agricultural sector
21
NON BANKING FINANCE COMPANIES: 2009
Deposit taking NBFC-D [336]
Non deposit taking NBFC- ND [12402] - There are a
few very important companies classified in this category
under the sub-category, NBFC-ND-SI, which are
systemically important, have asset size of over Rs 100
crores and are the fastest growing category in the NBFCs
space
Residuary NBFC RNBFC [2]

Total (12740)


22
Some other Classifications: Finance Companies
There are 43 Housing finance companies.
These are regulated by NHB
NBFCs are also classified on the basis of Asset
Type as Asset Finance Companies, Loan
Companies and Investment Companies
Mortgage Guarantee Company (Reserve Bank)
Guidelines, 2008' notified on 15th February
2008 now allows mortgage guarantee
company to commence the business of
providing mortgage guarantee in India

23

Lecture I
Part IV
Group Presentations
Guidelines to follow
AND
List of Topics for Group
projects/presentations
24
Topics: Indian Banks, NBFCs and Insurance Companies
Each group will analyze in depth one bank /
NBFC. Before presenting a view on the
company, you should present a detailed
analysis of the business that the company is
in
If the promoters are interested in a
significant manner in other activities, you will
need to very briefly talk about the other
important entities in/activities of the group
and discuss the overall strategy of the group/
promoters
25
Section A: To Study and report on
Group 01: Axis Bank
Group 02: Central Bank of India
Group 03: Dhanalakshmi Bank
Group 04: State Bank of Bikaner & Jaipur
Group 05: Punjab National Bank
Group 06: Yes Bank
Group 07: LIC Housing Finance
Group 08: IDFC
26
Minimum aspects that will you focus on
1. Analysis of the business that the company is in
2. Historical Background of the company/promoters/group
3. Performance over a period of 10 years; Ratio Analysis
4. Competition/Major players/Relative position of the company in
the sector/segment
5. Strategy
6. Financial Strength/Capital Adequacy/Position vis--vis
regulatory norms
7. NPAs: Gross/Net/Recoveries/Restructured assets, if relevant
8. Technology
9. Current development(s)/challenge(s); Future prospects
10. Share Price/Valuation

27
Next class: A brief presentation
Make a oral 5 minutes presentation (1 person
only from each group) in the next class to talk
about what exactly you will cover in your
group presentations later. No PPTs required
for this purpose
28
Guidelines for final presentations
Two group (s) will present in each session. This will be an
exhaustive presentation of 30 minutes duration
All group members to present jointly. There will be an individual
evaluation of each members presentation
Commencement of presentations begin in the 8
th
class
Soft copy of all group PPTs to reach me in advance, by 5.30 pm
one day before the 8
th
class. Delay will attract a penalty
The order of presentations will be advised by the 6
th
class so that
all group members remain present
Each of the group members must contribute to make the exercise
worthwhile for the group as well as the other students and all
students must take interest in what the other groups present
Happy Learning!
30