Doing Business in India The Big Picture

A Banker’s Perspective
US – India Business Summit November 29, 2006 Dr. Anil K Khandelwal Chairman & Managing Director Bank of Baroda
April 21, 2008 US – India Business Summit, 2006 1

Indian Economy – A Snapshot
 One of the fastest growing in the world  Consumption growth fuelling economic growth – consumption expenditure forming 78% of GDP  Services sector contributing over 60% to GDP  Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses  Where forces of competition are at work  Innovation driving enterprises  Economic reforms well on course – entering second phase       
April 21, 2008 US – India Business Summit, 2006 2

Indian Economy – A Snapshot
 “Inclusive growth” occupying central place  High untapped potential in rural / agri - economy  Indian companies on acquiring spree and going global  Indian companies pursuing global best practices and producing world-class managers

April 21, 2008

US – India Business Summit, 2006

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Improved Ranking on Business Front
World Bank – IFC Report on Doing Business in India for 2007 has given a higher rank to India compared to last year because :
- India has cut the time to start a business from 71 to 25 days - Reduced the Corporate Income Tax rate from 36.59% to 33.66% - Supreme Court’s decision has made enforcing collateral simpler – easing access to credit - Reforms to Stock Exchange Regulations have toughened investor protection

April 21, 2008

US – India Business Summit, 2006

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The Indian Financial Sector
 Robust financial system  Well established institutions  Strong supervisory system  Progressive integration of financial markets - banking, insurance, mutual funds, securities, commodities  High competition marked by innovation  High technology absorption  Rediscovery of the Indian customer  21st century customer driving innovations in banking  Banking plus financial services becoming the new offerings

April 21, 2008

US – India Business Summit, 2006

5

The Indian Financial Sector
 Alternate e-delivery channels becoming popular with Indian customers  Financial sector bracing to meet life cycle and life style needs of the great Indian middle class  “Cradle to Grave” becoming the new spectrum of life cycle needs  Banking graduating beyond traditional boundaries of vanilla banking  Indian customer demanding TOTAL FINANCIAL SOLUTIONS  Banking sector bracing itself to offer customized and structured products

April 21, 2008

US – India Business Summit, 2006

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The Indian Financial Sector
 Banking sector entering newer areas like wealth management, private banking, doorstep banking, electronic banking, credit cards, investment advisory services, etc.  Indian banks in a war game to acquire and retain customers  Indian middle class being reached out and wooed by banks  Indian middle class and financial sector beginning to dream together and weave a new bond of relationship  Financial products like mutual funds, life policies, non-life policies competing with traditional banking products  Banking sector fully geared for helping Indian middle class realize its dream  Banking sector in good health – with low non-performing assets and prudential accounting standards in place  Indian banking entering the phase of consolidation (2nd Phase of Reform) – on way to acquire global size
April 21, 2008 US – India Business Summit, 2006 7

Robust & Resilient Banking Sector
 A free & open banking sector where most businesses are now covered at the market-determined rates  Full banking license system  Highly Stable Sector despite a series of Exogenous Shocks like the Asian Crisis, Sanctions due to Nuclear Explosions, Record High Oil Prices and Large Corrections in Stock Markets  Significant improvement in the Asset Quality: Net NPAs (%) have decreased from 8.1% at end-March 1997 to 2.0% at end-March 2006 despite tightening of prudential norms  Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% at end-March 1997 to 12.8% at end-March 2006  Operating Expenses of SCBs have declined from 2.1% of Total Assets in 1992 to 1.8% in 2005 indicative of improved efficiency  Intermediation costs of SCBs have declined from 2.9% in 1995-96 to 2.1% in 2005-06
April 21, 2008 US – India Business Summit, 2006 8

Indian Banks – in good health…
 Strong Regulatory & Supervisory system  RBI has strengthened prudential norms with respect to income recognition, disclosures and capital adequacy  India complies with BIS 26 norms of best practices of supervisory criteria, country risk & convertibility  Indian banks are well on road towards BASEL II compliance  Credit Deposit Ratio is increasing – PSB : 66.2%, Pvt. Banks : 76.3%  Bank credit is growing by about 30%  Indian banks compare favourably with its Asian peers in asset quality  Indian banking sector grew by 6 times in the last decade – from Rs. 5,984 bn in 1995 to Rs. 36,105 bn.  KYC norms and Anti Money Laundering regulations in force  Indian banks are serving the “Two Faces” of India – the Underprivileged, the Progressive & the Opulent – with equal aplomb
April 21, 2008 US – India Business Summit, 2006 9

Indian Banks – in good health…
 About 70000 strong branch network – More than 60% presence in Rural areas
• PSBs • Pr.Bks : 72% : 19% • Fgn. Bks.: 7% • Others include UCBs, RRBs, LABs & NBFCs • Spread • CAR • ROA : 3.2% : 12.0% : 1.0%+

 Consistent growth in profitability – Spread is getting healthier – from 3.1% in 2004-05 to 3.2% in 2005-06  NPL Ratios compare favourably with global trends

• Gross NPA : 3.34% • Net NPA : 2.00%

TRS Apr 01 – Apr 05
• PSU Banks : 61.2% : 40.0% : 33.9%
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 Consistently out-performing stock indices –

• India Banking : 51.3% • New Private

Total Return to Shareholders continues to be • Old Private attractive
April 21, 2008 US – India Business Summit, 2006

Banks – Major Financiers of Growth
 India has one of the strongest financial sector with low systemic risk  Upturn in economic activity is mirrored in the sustained growth in “Demand for Bank Credit”  Bank credit has increased sharply from 30% of GDP at end-March 2000 to 48% at end-March 2006  Non-food credit by SCBs increased by an average of 26.1% between 2002-2006 versus its long-term average of 17.8% from 1970 to 2006  Deployment of credit is quite broad-based with increasing flows going to infrastructure , SMEs, agriculture and retail sector (especially residential mortgages) during the past three years
April 21, 2008 US – India Business Summit, 2006 11

Indian Banks in the Best of the League of Asian Peers
According to Moody’s Investor Services Analysis :  Indian lenders have highest Return on Equity (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%), Philippines (15.05%), Thailand (13.08%), China (11.80%) and Malaysia (9.73%)  Cost to Income Ratio in India at 44.56% is in line with the best regulated Asian countries like Singapore (44.15%), Taiwan (42.61%) and Hong Kong (40.05%)
April 21, 2008 US – India Business Summit, 2006 12

Financial Sector Reforms – Going Ahead
Requirements
 Banking Regulations • • • •  Credit & Recovery  Payment Systems • • • • • •  Communications & Infrastructure • • •
April 21, 2008

Fulfillments
Deregulated Interest rate Greater freedom to banks Significant steps towards Full capital Account Convertibility SARFAESI Act 2002 Debt Recovery Tribunal (DRT) Real Time Gross Settlements(RTGS) Electronic Clearing System (ECS) Electronic Fund Transfer (EFT) Cheque Truncation - in the pipeline Internet Banking, E-Banking, On-line Tax Payment / Utility Payments, ATM, Mobile Banking
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US – India Business Summit, 2006

Significant Steps for Improvement…
Area
 Capital Norms -

Status
Min. Capital @ 9% as against 8% by BIS Indian Banks are ahead in Basel II readiness – implementation road-map targets March 2009 Min. Capital requirement for entry set @ Rs. 3 bn. for all banks in private sector Credit Information Bureau of India Ltd List of defaulters on RBI website No financial crisis – escaped contagion effect of South East Asian meltdown Strong Regulatory Practice & Prudence in place for “Managing Affluence” Regulatory provisions to bring NBFCs & UCBs under uniform prudential norms

-

 Credit Information  Financial Track record  Other Regulatory Initiatives

April 21, 2008

US – India Business Summit, 2006

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Indian Banks are on a high growth track… 1. Overall banking sector is growing by – 18% 2. Retail Sector (CAGR – 5 years) - Housing Loan : 50.% - Consumer Durables : 16% - Credit Card : 45% - Two Wheeler Loan : 31% - Car Loans : 26% - Other Personal Loans : 38%
More than 25% of the Bank Loan Assets are in Retail sector ensuring high returns - likely to cross Rs. 5700 bn by 2010
April 21, 2008 US – India Business Summit, 2006 15

Indian Banks are on a high growth track…
Online Banking in India . . .
Growth of e-Commerce Transactions
2002-03 2003-04 2004-05 2005-06 2006-07 2500 2000 1500 Rs. CR 1000 570 500 0 130 255

• Estimated 4.6* million Indian Internet users are Banking Online today • Indians paying bills online is expected to

1180

2300

increase from the current 0.3 million in 2005-06 to 1.8 million by 2007-2008. • E-commerce transactions will cross the Rs 2000 crore mark (2006-2007) which translates into an increase of over 300% from financial year 2004-05.

April 21, 2008

US – India Business Summit, 2006

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Doing Business in India …

 Is there any Untapped Potential in Indian Financial Market ?  What is the ‘Big Picture’ ?

April 21, 2008

US – India Business Summit, 2006

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The Big Picture…
Consumption boom in India
Consumer Loans / GDP(%)
60 50 40 30 20 10 0 13 8
India Thailand Malaysia Taiwan Korea

Mortgages / GDP(%)
58 40 35 30 India Thailand Malaysia Taiwan Korea 37

36 26

25 20 15 10 5 0 4
India Thailand Malaysia Taiwan Korea

17 13 9

India Thailand Malaysia Taiwan Korea

Credit Cards / GDP (%)
140 120 100 80 60 40 20 0 0.4
India

Other Retail Loans / GDP (%)
45 40

121.9 India Thailand Malaysia Taiwan Korea

41
India Thailand Malaysia Taiwan Korea

82.4

35 30 25 20 15 10 5 0

16 4
India

17

2.8
Thailand

9.8
Malaysia Taiwan Korea

8
Thailand Malaysia Taiw an Korea

In April 21, 2008

each of the US – India Business Summit, 2006 area, huge untapped potential left

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The Big Picture…
Mutual Funds – Global Perspective
Mutual Funds as a % of GDP
100 90 80 70 60 50 40 30 20 10 0 Brazil UK Korea USA Australia 6 India 5 30 23 21 87 72

Global Investment Fund Asset Pool
1600 1400 1200

13711396

US$bn

Japan

1000 800 600 400 200 0
1 11 44 77 177 274 344 399 635 468 493 512

Low Penetration – Indian industry still in early stages
April 21, 2008 US – India Business Summit, 2006

19 Source : CLSA Asia Pacific Markets

Luxembourg

Philippines New Zealand India

Ireland

Korea

Hong Kong

Singapore

Australia

UK

Taiwan

Japan

Italy

France

The Big Picture…
Insurance Penetration – Global Landscape
Life premium/ GDP (%)
10 9 8 7 6 5 4 3 2 1 0 8.9 8.32 7.27 7.08 4.14

Insurance density (US$ premiums per capita)
3.6 3.51 2.53 1.78

0.82 Indonesia

Country UK Japan France US

Life 3287 2954 2474 1753 1366 1211 188 18 13 10

Non Life 1311 790 1093 2122 1203 495 95 4.5 16 10

Australia

Malasiya

France

Korea

India

Japan

South

China

UK

US

Non Life premium/ GDP (%)
6 5 4 3 2 1 Malasiya Australia France Japan South Korea 0 US UK 3.55 3.13 3.09 2.98 2.22 1.82 0.92 0.7 Indonesia 0.61 India 5.01

Australia South Korea Malasiya India China Indonesia

Low Penetration – A large potential still untapped
April 21, 2008 US – India Business Summit, 2006
Source : Swiss Re Report 2005

China

20

The Big Picture…
Growth of Card Spending in India . . .
Growth of Credit and Debit Cards in India

 Increasing trend of Plastic Spend
8 7 6 5
NUMBER OF CARDS IN Cr

 High Technology Banking Products  Need for value added services on card products
7.3 4.9 2.8

4 3 2 1 0 2004 2005

Growth of ATMs in India
30000 25000
2006

20000 15000 10000 5000 0
2000 2001 2002 2003 2004 2005 2006 No of ATMs

 Larger Number of Access Points for Customers  Convenience to customer is the key  Shared network is the future
April 21, 2008

US – India Business Summit, 2006

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Wealth Management & Private Banking – New Growth Opportunities…  India - one of 10 fastest-growing population of HNWIs globally  There are at least 23 Indian citizens amongst the richest people on the planet  Non Resident Indians can invest in all Indian Asset Classes  No. of HNWIs in India – 100,000 (19.3% growth in 2005)  Salary increases in India – 13.9% is the highest in the world  Increasing Investment avenues – Art, Realty Funds, Commodities  Penetration level of wealth management services in India - 10% in comparison to European markets (60-90%)  The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE.  Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.
April 21, 2008 US – India Business Summit, 2006 22

The Big Picture…
India is fast emerging as the “Back Office” of the World & the “Global Knowledge Hub”
 100 Global Companies outsource from India  Top Global Banks are present in India  Largest talent pool  World class educational / professional institutions  Increasing Trade activities  Cost of operations – low

April 21, 2008

US – India Business Summit, 2006

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The Story Continues…
 Savings Rate @ 29% is low – Offers high potential from an increasingly affluent community  Less than 40% of Indian household has a bank account  Bulging Middle Class – likely to exceed 300 mn  Only 2% of the Indian population have insurance cover  Less than 1% of the population is actively participating in the Stock market  Number of high net worth households (> Rs. 500,000) is likely to grow from 200,000 to 400,000 by 2010  Consumer Finance stands at about 2% to 3% of GDP as compared to 25% in European market  Real Estate Market is projected to touch USD 50 bn by 2008  SME Sector is catching up fast creating huge prospect of growth
April 21, 2008 US – India Business Summit, 2006 24

Challenges Ahead….
 Capital Requirements – to compete with Foreign banks in the post 2009 phase  Financial Inclusion – to remove imbalances in economic growth  Banking Sector Consolidation – for improving competitiveness – need for a clear road-map for “Managed Consolidation”  HR Challenges – Changing working conditions, re-skilling, compensation etc.  Coping with the massive technology adoption programme – change management – from employees’ as well as customers’ perspectives
April 21, 2008 US – India Business Summit, 2006 25

Challenges Ahead….
 High intermediation costs  Low Productivity  Better Corporate Governance – higher level of accountability  Improvement in productivity and efficiency in line with advanced markets  Transformation from Plain Vanilla banking’ to “multi-specialist” banking

April 21, 2008

US – India Business Summit, 2006

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Thank You
April 21, 2008 US – India Business Summit, 2006 27