Bhattacharya

Indian Banking: Shaping an Economic Powerhouse

Shri TS Bhattacharya Managing Director State Bank of India

Indian Banking Sector: Overview 

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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

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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

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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

100.00

100.00

100.00

100.00

100.00

ASCB Total Banks

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 2006

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 deposits 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  

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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 (40.05%)

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 branches Adoption of Technology to lead to business transformation and cost advantage in the long term.

Human Resources 

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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

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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 subsidiaries

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

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Competition to intensify

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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%.

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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

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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

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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 industries Retail Boom - The size of organised retail will grow three times in next 4-5 years

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On the way to become an International Manufacturing Hub 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  

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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

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Indian economy is poised to move into a higher growth trajectory. 11th Plan Projection 8% GDP (12% manufacturing) Rapid growth of services sector

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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

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NCAER data for top 24 cities in India shows migration to higher income levels growing at over 40% per annum

Going Ahead

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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.

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Competition, consolidation and convergence will transform banking. Technology will be the key and drive the change. Banks strengthening capital base, risk management & skills