Changes In Banking Industry Environment

ENVIRONMENTAL CHANGES TAKING PLACE IN THE INDIAN BANKING SECTOR

Regulatory Changes over the years • Banking Regulator - the Reserve Bank of India (RBI) • Capital markets regulator- Securities Exchange Board of India (SEBI) • Insurance regulator - Insurance Regulatory Authority of India (IRDA) • Major reforms in 1991, then in late 1990s, then WTO reforms 2005

Major Reform Initiatives • Interest rate deregulation • Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, exposure limits, investment fluctuation reserve, etc. • Lowering of reserve requirements (SLR and CRR) • Government equity in banks reduced • Banks allowed to access the capital market for raising additional capital. • New private sector banks set up and foreign banks permitted to expand their operations in India. • Banks allowed to set up Offshore Banking Units in Special Economic Zones. • New areas opened up for bank financing: insurance, credit cards, infrastructure financing, leasing, gold banking, investment banking, factoring, etc.

• New instruments introduced for greater flexibility and better risk management. • New institutions set up including the National Securities Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd., Credit Information Bureau India Ltd. • Limits for investment in overseas markets by banks, mutual funds and corporates liberalized. • Universal Banking introduced. • Payments and settlement system strengthened • Risk Based Supervision of banks - Risk Management Committees formed • Increase flow of credit to priority sectors • The limit for foreign direct investment in private banks has been increased from 49% to 74%. • Development financial institutions can turn themselves into banks

Key business drivers

Rapid Easier advances access to in knowledge technolo gy

Globalization

Economic Changes over the years •

Globalization – Increasing irrelevance of national borders • Capital markets are growing in scale, mobility and integration – Acting as ‘engines’ of globalization – Events in a remote part of the globe can have a disproportionate impact on other nations – Unpredictable scale and pace of change

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Pressure on operations – Greater disintermediation • Declining margins in traditional business lines • Asset side - Top corporates have access to cheaper funds from national / global capital markets • Liability side - Availability of investment options like mutual funds – Customer driven • Customer is more informed and sophisticated enabling him to differentiate between offerings easily • Need to innovate continuously as product cycles are shrinking

Economic Changes over the years (contd.) • Risk management norms – New Basel II norms require strict risk management – Capital adequacy ratio getting higher

• Stress on service quality and delivery – Switchover costs are low – Price sensitivity being subordinated to service sensitivity

• Emergence of more and more universal banks • Vertical integration by banks by offering insurance etc • Merger of many public sector banks to give rise to banks more global in operations

Technology Changes over the years • Rapid advances in technology – Death of distance, time and location – Reduction in entry barriers – Proliferation of technology-based distribution channels • Access to knowledge – Increasing importance of ‘Knowledge Capital’ – Leveraging knowledge as a key resource – Ability to access talent worldwide through technology – Knowledge is an asset which does not deplete – As the number of people who access a pool of knowledge increases, the pool expands

Technology Changes over the years • Increased use of IT – CBS/internet banking/ATMs/RTGS/SFMS/etc the organization is moving towards a paper- less office • Greater use of technology – New entrants leverage technology to overcome barriers of time and distance • Products are becoming virtual commodities • Banks focusing on cost reduction and quality. (e.g. SBI cost/income 64% to 50%) • Quality and six sigma are becoming important • Banks have adopted core-banking solutions in a fully networked environment. Back office functions being taken away from branches to a centralized place (Outsourcing).

Social Changes over the years • The emerging middle class: Development of India’s economy boosting overall consumer purchasing power. The percentage of middle- to high-income Indian households rising. • Diffused Customer loyalty: Customer bound to react to the value added offerings. There are multiple choices. low switching costs • Misaligned mindset: Resistance to change from employees, Fear of uncertainty . Acceptance of technology is slow. • Competency Gap: Placing the right skill at the right place will determine success.

Focus on the customer

Implement multi-product, multi-channel distribution

Diversification

Increase revenue streams

Reduced dependence on interest income

Focusing on non-fund based revenue streams

Focus on processes

Improve operating efficiencies

Consolidation

Gain benefits of economies of scale & scope