Topic -> Indian banking industry overview

Subject ->strategic management (midterm assignment)

Submitted to -> Dr. R K Kovid





Submitted by
Sourabh Kaul
PGDM17/11/B31
SECTION :B






Indian banking industry in 2013
Post financial crisis of 2008 when major investment bank in USA like Lehman brothers and the worlds
insurance giant AIG went bankrupt and latter had to be rescued by US Govt, the BCBS took an important
decision of moving ahead of Basel 2 norms and for time been they implemented Baesl2.5 till they chalked
down the Basel3 norms . Basel 3 norms are to be implemented by year 2018 .last year RBI declared that
how BASEL 3 norms are going to put pressure on banks as Indian banks would be needed to raise INR
2.6 trillion of additional capital by 2018. Standard & Poor's believes the top-tier Indian banks are
relatively well-placed to manage the transition toward Basel III and the demands of a high-growth
banking system.
"The biggest challenge for the Indian banking sector is the state of Indian public finances,"" said Standard
& Poor's credit analyst Deepali Seth. ""The government's large fiscal deficit will limit its ability to inject
capital into government-owned banks, which currently have less capital adequacy than the private and
foreign banks operating in India."
Some smaller banks may face difficulties on the path to achieving Basel III; the extent will vary from
bank to bank. For some weakly capitalized banks, the capital requirement could go up to two to three
times their current market capitalization, Ms. Seth said.
"As banks simultaneously tap the capital market, some may struggle to raise the necessary capital. A few
of the smaller banks could become potential takeover targets, which could result in consolidation in
India's currently fragmented banking sector," she added.
History of Indian banking industry
Colonial era
During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a
private joint stock association, then partnership. Its proprietors were the owners of the earlier
Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace these
two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore that it had
opened in the previous year. Also in 1840 the Bank revealed that it had been the subject of a fraud by
the bank's accountant. Union Bank was incorporated in 1845 but failed in 1848, having been insolvent
for some time and having used new money from depositors to pay its dividends.
The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in
India; it was not the first though. That honour belongs to the Bank of Upper India, which was established
in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being
transferred to the Alliance Bank of Shimla.
Foreign banks too started to appear, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de
Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and
Pondicherry, then a French possession, followed. HSBC established itself in Bengal in 1869. Calcutta was
the most active trading port in India, mainly due to the trade of the British Empire, and so became a
banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which
has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of
stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other
infrastructure had improved. Indians had established small banks, most of which served particular
ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and a
number of Indian joint stock banks. All these banks operated in different segments of the economy. The
exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint
stock banks were generally undercapitalized and lacked the experience and maturity to compete with
the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid
wooden bulkheads into separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found banks of
and for the Indian community. A number of banks established then have survived to the present such as
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and
Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district.
Four nationalized banks started in this district and also a leading private sector bank. Hence undivided
Dakshina Kannada district is known as "Cradle of Indian Banking".
During the First World War (19141918) through the end of the Second World War (19391945), and
two years thereafter until the independence of India were challenging for Indian banking. The years of
the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian
economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed
between 1913 and 1918.
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralysing
banking activities for months. India's independence marked the end of a regime of the Laissez-faire for
the Indian banking. The Government of India initiated measures to play an active role in the economic
life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a
mixed economy. This resulted into greater involvement of the state in different segments of the
economy including banking and finance. The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April 1935, but was
nationalized on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948.
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to
regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing bank could be
opened without a license from the RBI, and no two banks could have common directors.
Nationalization in the 1960s
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State
Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian
banking industry had become an important tool to facilitate the development of the Indian economy. At
the same time, it had emerged as a large employer, and a debate had ensued about the nationalization
of the banking industry. Indira Gandhi, the then Prime Minister of India, expressed the intention of the
Government of India in the annual conference of the All India Congress Meeting in a paper entitled
"Stray thoughts on Bank Nationalization. The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking
Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalized the 14 largest
commercial banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of
bank deposits in the country. Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament
passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for
the nationalization was to give the government more control of credit delivery. With the second dose of
nationalization, the Government of India controlled around 91% of the banking business of India. Later
on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the
only merger between nationalized banks and resulted in the reduction of the number of nationalized
banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy.
Liberalization in the 1990s
In the early 1990s, the then government embarked on a policy of liberalization, licensing a small number
of private banks. These came to be known as New Generation tech-savvy banks, and included Global
Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental
Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along
with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen
rapid growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms for
Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could
exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4
64 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a
modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom
in India. People not just demanded more from their banks but also received more.
Forward banks face huge challenges. Future agenda of the banking sector in present regulatory frame
work is going to be in following ways
Consolidation
The public sector needs to consolidate into large and more efficient banks utilizing the economies of
scale wherever it is viable. This is necessary to face global competition from larger foreign banks.
Govt ownership
At present, the share of Govt in the PSB cant go below 51%.if these banks face constraint in tier-1 or
equity capital, Govt may have to reduce its share to provide more capital.
Risk management
The credit risk management is still a cause of a concern. The challenge may become bigger as the credit
supply to the services sector is increasing because risk assessment of credit to services sector requires a
different methodology than that of manufacturing sector .the management of exchange risk is also
needed.
Customer service
Although with the induction of technology in various forms like ATMS & e banking, the customers have
been benefited, there is still potential of improvement in terms of face to face interaction when
customers come to banks for different purposes.
To conclude, the Indian banks and financial system should be integrated with rest of the world in the
face of globalization .the organizational effectiveness, corporate planning and governance and financial
inclusion are some other key aspects that the banks should be concerned about
Year to year growth of Indian banking
Growth of Indian banking since liberalization regime from 1991 has been impressive. The addition of
private sector banks in the market has increased the financial inclusion in the country. The reporting
branches increased from 91558(sep11) to 100189(sep12). The credit with the banks also increased from
INR 42,452.74 billion (sep11) to INR 48,882.08 billion (sep12) which was credit growth of 15.14 %. Bank
deposit also increased from INR 57,045.80 billion (sep11) to INR 64,794.63 billion (sep12) which was an
increase of 13.58. The credit-deposit ratio improved from 74.42(sep11) to 75.44(sep12).
Comparison of ICICI bank and IDBI bank
ICICI BANK
Many private sector banks have performed exceptionally well and of such banks is ICICI ban. It has
performed quite well in a market which is dominated by PSB which have large government holding.
Despite being the second largest bank in the country after SBI in terms of asset size and third largest in
market capitalization. ICICI Bank lost its share of the banking sector's advances from 10.2% in FY07 to 8%
in FY12. At the end of March 2012, the bank had assets of over Rs 4.8 trillion and a franchise of over
9,000 ATMs and 2,750 branches spread across the country. Retail assets constituted 34% of advances in
FY12 as against 65% in FY07. The bank is focusing on loan origination in the large corporate, SME and
agrie segments and on non-fund based products and services. Besides the bank itself being the market
leader across retail loan portfolios, its subsidiaries ICICI Life Insurance, ICICI General Insurance and ICICI
AMC are leaders in their respective businesses
ICICI is the second largest bank in terms of total assets and market share. Total assets of ICICI are Rs.
4062.34 Billion and recorded a maximum profit after tax of Rs. 51.51 billion and located in 19 countries.
One of the major strength of ICICI bank according to financial analysts is its strong and transparent
balance sheet. ICICI bank has first mover advantage in many of the banking and financial services. ICICI
bank is the first bank in India to introduce complete mobile banking solutions and jewelry card. The bank
has PAN India presence of around 2,567 branches and 8003 ATMs. ICICI bank is the first bank in India to
attach life style benefits to banking services for exclusive purchases and tie-ups with best brands in the
industry such as Nakshatra, Asmi, and Ddamas etc. ICICI bank has the longest working hours and
additional services offering at ATMs which attracts customers. Marketing and advertising strategies of
ICICI have good reach compared to other banks in India
Customer support of ICICI section is not performing well in terms of resolving complaints. There are lot
of consumer complaints filed against ICICI. The ICICI bank has the most stringent policies in terms of
recovering the debts and loans, and credit payments. They employ third party agency to handle
recovery management. There are also complaints of customer assault and abuse while recovering and
the credit payment reminders are sent even before the deadlines which annoys the customers. The
bank service charges are comparatively higher. The employees of ICICI are bank in maximum stress
because of the aggressive policies of the management to win ahead in the race. This may result in less
productivity in future years.
Banking sector is expected to grow at a rate of 17% in the next three years. The concept of saving in
banks and investing in financial products is increasing in rural areas as more than 62% percentage of
Indias population is still in rural areas. As per 2010 data in TOI, the total number b-schools in India are
more than 1500. This can ensure regular supply of trained human power in financial products and
banking services .Within next four years ICICI bank is planning to open 1500 new branches Small and
non performing banks can be acquired by ICICI because of its financial strength ICICI bank is expected to
have 20% credit growth in the coming years. ICICI bank has the minimum amount of non-performing
assets
RBI allowed foreign banks to invest up to 74% in Indian banking. Government sector banks are in urge of
modernizing the capacities to ensure the customers switching to new age banks are minimized. HDFC is
the major competitor for ICICI, and other upcoming banks like AXIS, HSBC impose a major threat. In rural
areas the micro financing groups hold a major share. Though customer acquisition is high on one side,
the unsatisfied customers are increasing and make them to switch to other banks.
IDBI BANK
IDBI Bank Limited is an Indian financial service company headquartered Mumbai, India. RBI categorized
IDBI as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide
credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest
development bank in the world in terms of reach with 1715 ATMs, 1111 branches including one
overseas branch at DIFC, Dubai and 766 centers including two overseas centers at Singapore & Beijing.
Some of the institutions built by IDBI are the Securities and Exchange Board of India (SEBI), National
Stock Exchange of India (NSE), the National Securities Depository Limited (NSDL), the Stock Holding
Corporation of India Limited (SHCIL), the Credit Analysis & Research Ltd, the Exim Bank (India), the Small
Industries Development Bank of India (SIDBI), the Entrepreneurship Development Institute of India, and
IDBI Bank, which is owned by the Indian Government. IDBI Bank is on a par with nationalized banks and
the SBI Group as far as government ownership is concerned. It is one among the 26 commercial banks
owned by the Government of India. The Bank has an aggregate balance sheet size of Rs.2908.37 billion
as on 31 March 2012
In 2006, IDBI Bank acquired United Western Bank in a rescue.Annasaheb Chirmule, who worked for the
cause of Swadeshi movement, founded Satara Swadeshi Commercial Bank in 1907, and some three
decades later founded United Western Bank. The bank was incorporated in 1936, and commenced
operations the next year, with its head office in Satara, in Maharashtra State. It became a Scheduled
Bank in 1951. In 1956 it merged with Union Bank of Kolhapur, and in 1961 with Satara Swadeshi
Commercial Bank. At the time of the merger with IDBI, United Western had some 230 branches spread
over 47 districts in 9 states, controlled by five Zonal Offices at Mumbai, Pune, Kolhapur, Jalgaon and
Nagpur.
To meet emerging challenges and to keep up with reforms in financial sector, IDBI has taken steps to
reshape its role from a development finance institution to a commercial institution. With the Industrial
Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the status of a limited
company viz. "Industrial Development Bank of India Limited" (IDBIL). Subsequently, the Reserve Bank of
India (RBI) issued the requisite notification on 30 September 2004 incorporating IDBI as a 'scheduled
bank' under the RBI Act, 1934. Consequently, IDBI, formally entered the portals of banking business as
IDBIL from 1 October 2004. The commercial banking arm, IDBI BANK, was merged into.
The banks major strength is it involves latest cutting edge technologies to support its core banking
operations. The bank has network of 943 branches and 1529 ATMs. The total turnover of the bank is 3,
37,584 crores in the last FY 2010-11, and earned a net profit of Rs.1650 cr. The bank has grown at a rate
of 60% compared to previous year. IDBI has the first mover advantage in opening G-sec portal. This is a
platform for the retail investors to invest in government securities. IDBI is one of the largest commercial
banks in India which focuses on industrial infrastructure and development. IDBIs product portfolio
includes 14 broad classifications, and there are some sub categories in each. The bank has customized
solution faculties for its industrial clients. The location of its headquarters in Mumbai fosters the growth
of the bank. IDBIs subsidiaries are into capital market services, IT services, asset management and life
insurance.
IDBI has less penetration into the rural market. IDBI has very less number of branches and ATM network
compared to other major players. It concentrates mainly on commercial banking services whereas the
individual banking services is where the main revenue lies. The customer help desk is not performing
efficiently and there are many unresolved issues of customers. The bank has lots of consumer
complaints with respect to servicing charges. The bank lacks in promotional activities.
Scope for bagging government schemes is high as IDBI belongs to public sector. Global opportunities for
IDBI are the rise as the management is keenly focusing on global expansion in next few years. They have
a good number of financial expertise to face the emerging industrial and economic growth in India. It is
the only bank in public sector which has enabled social media plug-in in its website. This has increased
the brand awareness and better reach to its customers. The bank has good opportunities in semi-urban
and Tire II cities areas as the industrial growth is taking very rapidly.
IDBI faces tough competition in terms of new market development due to competition from both
government and private banks. FDI in Indian banking has been opened up to 74% by the RBI. In private
banking HDFC, ICICI and in public sector SBI, Punjab National Bank, Andhra bank and Allahabad bank are
the major competitors. The bank has to focus on improving the customer satisfaction in order to sustain
the loyal customers. Recent scams and fraudulent activities of bank have gained mistrust from its
customers and investors







Current Valuations

ICICI BANK IDBI BANK ICICI
BANK/IDBI
BANK

P/E (TTM) x 14.7 5.0 297.6%
P/BV x 2.0 0.5 416.7%
Dividend Yield % 1.6 5.0 31.0%

Financials
EQUITY SHARE DATA

ICICI
BANK
IDBI
BANK
ICICI
BANK/


Mar-12 Mar-12 IDBI
BANK


High Rs 1,128 154 732.5%

Low Rs 652 77 846.8%

Income per share (Unadj.) Rs 329.6 183.0 180.2%


Earnings per share
(Unadj.)
Rs 66.3 15.7 423.3%


Cash flow per share
(Unadj.)
Rs 334.4 30.5 1,094.6%


Dividends per share
(Unadj.)
Rs 16.50 3.50 471.4%


Avg Dividend yield % 1.9 3.0 61.2%


Book value per share
(Unadj.)
Rs 531.6 151.7 350.5%


Shares outstanding (eoy) m 1,152.59 1,278.38 90.2%


Bonus/Rights/Conversions

ESOS ESOP,PA -

Avg Price / Income ratio x 2.7 0.6 427.7%

Avg P/E ratio x 13.4 7.4 182.0%


Avg P/CF ratio x 11.3 4.3 263.5%


Avg Price/Bookvalue ratio x 1.7 0.8 219.9%


Dividend payout % 24.9 22.3 111.4%

Avg Mkt Cap
Rs
m
1,025,805 147,653 694.7%

No. of employees `000 58.3 15.4 377.6%

Total wages & salary
Rs
m
51,049 13,625 374.7%

Avg. income/employee
Rs
Th
6,519.8 15,153.3 43.0%

Avg. wages/employee
Rs
Th
876.0 882.7 99.2%

Avg. net profit/employee
Rs
Th
1,311.5 1,297.4 101.1%


INCOME DATA
Interest income
Rs
m
379,949 233,891 162.4%


Other income
Rs
m
286,634 22,031 1,301.0%

Interest expense
Rs
m
250,132 188,181 132.9%

Net interest income
Rs
m
129,817 45,710 284.0%


Operating expense
Rs
m
295,520 27,112 1,090.0%

Gross profit
Rs
m
-165,703 18,598 -891.0%


Gross profit margin % -43.6 8.0 -548.5%


Provisions/contingencies
Rs
m
14,063 14,293 98.4%

Profit before tax
Rs
m
106,866 26,336 405.8%

Extraordinary Inc (Exp)
Rs
m
0 0 -

Minority Interest
Rs
m
-2,947 -106 2,780.2%

Prior Period Items
Rs
m
0 0 -

Tax
Rs
m
27,490 6,204 443.1%

Profit after tax
Rs
m
76,429 20,026 381.6%


Net profit margin % 20.1 8.6 234.9%



BALANCE SHEET DATA
Advances Rs m 2,921,254 1,811,584 161.3%

Deposits Rs m 2,819,505 2,102,442 134.1%


Credit/Deposit
ratio
x 103.6 86.2 120.2%


Yield on advances % 8.4 9.9 85.0%

Cost of deposits % 5.4 6.7 81.2%

Net Interest
Margin
% 2.3 1.6 139.8%


Net fixed assets Rs m 54,320 30,428 178.5%

Share capital Rs m 11,528 12,784 90.2%

Free reserves Rs m 438,127 129,625 338.0%

Net worth Rs m 612,765 193,912 316.0%

Borrowings Rs m 1,612,966 534,776 301.6%

Investments Rs m 2,398,641 828,293 289.6%

Total assets Rs m 6,041,914 2,906,967 207.8%


Debt/equity ratio x 7.2 13.6 53.2%

Return on assets % 1.3 0.7 183.6%


Return on equity % 12.5 10.3 120.8%


Capital adequacy
ratio
% 19.6 14.6 134.2%


Net NPAs % 0.7 1.6 45.6%



CASH FLOW
From Operations Rs m 208,834 -32,449 -643.6%


From Investments Rs m -212,629 -1,770 12,012.9%


From Financial
Activity
Rs m 17,421 5,565 313.0%


Net Cashflow Rs m 13,626 -28,654 -47.6%



Share Holding

Indian Promoters % 0.0 70.5 -

Foreign
collaborators
% 0.0 0.0 -

Indian inst/Mut
Fund
% 26.6 14.7 181.2%

FIIs % 35.9 3.2 1,122.5%

ADR/GDR % 26.9 0.0 -

Free float % 10.6 11.6 91.4%

Shareholders 709,083 440,729 160.9%

Pledged
promoter(s)
holding
% 0.0 0.0 -

NM: Not Meaningful
Source: Company Annual Reports, Regulatory Filings,
Equitymaster