Nachiket Icici Bank

Opportunities and challenges for Indian banks July 5, 2006 FICCI Banking Conclave

Opportunity spectrum for Indian banks 

Consumer finance



Robust industrial investment outlook



Increasing internationalisation of India



Rural banking

India’s economic momentum driving banking sector growth 2

Consumer finance growth drivers Changing structure of the economy

Access to finance

Consumer finance growth

Demographic patterns

3

Upward migration of income

Changing structure of the economy FY1991

FY2006

Services

43%

61%

Industry

25%

19%

Agriculture

32%

20%



4

Rapid growth of services sector  Leveraging high quality education and vast talent pool  Sublimating India’s knowledge capital to create economic value

Upward migration of incomes… (households in million)

FY1996

FY2002

Middle income

33

50

FY2010 Estimat e 98

High income

1

3

10



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

Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 5 per household p.a.

…across rural and urban India (households in million)

FY1996 Urban Rural Middle income High income 

6

FY2002

FY2005E

Urba n

Rural

Urba n

Rural

17

16

27

23

35

28

0.7

0.3

1.8

0.7

3.6

1.2

43% of households in middle and high income groups from rural India in 2005  Their number has grown by 79% from 1996-2005 Figures for 2005 are estimated Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 per household p.a.

Demographic advantage BRICS (Age group )

>60

35-59

India

Chin Russi (percentage of a population) a

7

10

23

23

30

15-34

35

0-14

35

25

8

36

35

26

16

Brazi l

26

37

29

58% of the population is in the working age group of 15-59 years

7

Increased access to finance 

Rapid growth in availability of credit  Spread

from large cities to second and third tier urban centres



Credit providers focusing on customer convenience  Delivery

at customer’s doorstep or at point-of-sale of the asset financed



Increasing affordability  Decline

in interest rates and rising incomes have allowed younger to take loans for acquiring assets  Drop

8

in average age of home buyers

Drivers for corporate banking 2000 onwards Early 1990s

Capitalising on domestic demand

Mid to late 1990s Restructuring to achieve worldclass efficiency

Articulation of international competitiveness

Key transformational trends • Increased deployment of technology • De - leveraging & organic capital generation • Constantly improving quality standards

Corporate investment plans of over US$ 50 bn 9

Opportunities in corporate banking Renewed investment cycle

Markets and transaction banking  Forex

 Domestic

capital expenditure in infrastructure and manufacturing

expansion – organic and inorganic

– increasing integration with global markets

 Growing

use of derivatives for risk management

 Global

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 Demand

for efficient transaction banking

Opportunities in global banking 

Vast Indian diaspora spanning the globe  Inward

remittances of about US$ 22 bn  Seeks strong India linkage and ethnic familiarity  Demands world class service  Potential for credit and liability products and transaction services  For

personal as well as business requirements



Expansion of Indian industry to global markets  Growing

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export orientation – 25% growth in FY2006  Setting up international marketing and distribution networks  Acquiring/ creating production capacities

Rural banking: A new growth opportunity Opportunities for growth Though

agriculture constitutes only 20% of India’s GDP, rural economy (agri + non-agri) constitutes about 50% of GDP1

Rural

population of about 780 million2 with limited access to financial services

 Population  Informal

per bank branch: 22,793

credit in India amounts to US$ 82bn3

A

high proportion of agricultural lending is from informal sources3

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1. Source: CERG (Consumer & Economic Research Group) 2. Source: Tata Statistical Outline 3. Source: Mckinsey Global Institute May 2006

However, banking in rural India is challenging… 

Special needs  Doorstep

banking  Flexibility in timings  Low value and high volume of transactions  Limited background information and proof of income  Require simple processes with minimum documentation 

Conventional banking not suited to meet these demands  High

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costs of delivery through traditional channels  High transaction costs  Dependence on documentation and financial

…and requires a comprehensive approach 

Multiple products  Low-income

customers require full range of services: credit, transaction banking, investment and risk mitigation



Multiple channels  Branches

at selected locations  Franchisees, internet kiosks, MFI partners 

Deep penetration of the market  Using

a combination of channels to completely cover selected areas



Rapid-scale up  To

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reduce average operating costs

Example: ICICI Bank’s channel strategy

District cluster branch Crop cluster branch ATM Franchisee Kiosk (every circle represents 8 kiosks) MFI Branch Post Office Channel 15

Challenges faced by Indian banks 

Lack of product expertise  Traditionally

focused on limited range of

products  Primarily

 Need

for acquiring skills in

 Retail,



for corporate clients

structured finance

Lack of distribution expertise  Reliance

on branch channel and human intervention  Relatively high unit cost of delivery given small transaction sizes 

Limited use of technology  Across

both customer-facing and internal functions

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

Inefficient capital allocation

To tap opportunities, banks must first build a robust platform  

Acquire product knowledge and comprehensive product suite Build distribution expertise  Look

beyond branch coverage  Focus on efficiency and cost-to-serve 

Improve risk management and capital allocation  Manage

new products and associated risks  Operate in increasingly complex environment   17

Deploy technology effectively to ensure return on investment Develop a flexible model that allows for

In summary  

India: strong growth prospects Banking has vast growth opportunities  Driven

by consumer finance, demographics, industrial resurgence, increasing internationalisation and deeper penetration of financial services



This requires a transformation of the traditional banking model  New

channel architecture  Building partner relationships for outreach  Full suite of products and services 

A successful mass banking model  Is

essential to meet the larger objective of supporting economic growth  Builds a new engine for stakeholder value creation 18

Thank you

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