MANAGERIAL ECONOMICS PROJECT ON DEMAND & SUPPLY ANALYSIS OF SBI

Submitted To:
Dr. I.R.S. Sarma
(Faculty of Economics)

Submitted By:
Siddhartha Gorai (09BSHYD0818), St.:67,

Date: September 9, 2009.

Section: J

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ACKNOWLEDGEMENT
This formal acknowledgement will hardly be sufficient in expressing our deep sense of gratitude towards our Project Guide Dr. I. R. Sarma, (Faculty of Economics) for his stimulating guidance and profuse assistance that we have received through out the course of our Project work. We are highly in debt to him for providing kind help & advice through all the phases of the project work. We cherish our association with him and for his encouragement, approachability and freedom of thoughts. This continuous encouragement and valuable guidance have been the motivating force in the accomplishment of our task.

Siddhartha Gorai (09BSHYD0818).

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ABOUT STATE BANK OF INDIA:

Website: http://www.statebankofindia.com The evolution of State Bank of India can be traced back to the first decade of the 19th century. It began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the British India, established under the sponsorship of the Government of Bengal. Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras (established on 1 July 1843) followed the Bank of Bengal. These three banks dominated the modern banking scenario in India, until when they were amalgamated to form the Imperial Bank of India, on 27 January 1921. An important turning point in the history of State Bank of India is the launch of the first Five Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy in general and the rural sector of the country, in particular. Until the Plan, the commercial banks of the country, including the Imperial Bank of India, confined their services to the urban sector. Moreover, they were not equipped to respond to the growing needs of the economic revival taking shape in the rural areas of the country. Therefore, in order to serve the economy as a whole and rural sector in particular, the All India Rural Credit Survey Committee recommended the formation of a state-partnered and statesponsored bank. The All India Rural Credit Survey Committee proposed the take over of the Imperial Bank of India, and integrating with it, the former state-owned or stateassociate banks. Subsequently, an Act was passed in the Parliament of India in May 1955. As a result, the State Bank of India (SBI) was established on 1 July
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1955. This resulted in making the State Bank of India more powerful, because as much as a quarter of the resources of the Indian banking system were controlled directly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in 1959. The Act enabled the State Bank of India to make the eight former State-associated banks as its subsidiaries.

The State Bank of India emerged as a pacesetter, with its operations carried out by the 480 offices comprising branches, sub offices and three Local Head Offices, inherited from the Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to creditworthy parties, the State Bank of India catered to the needs of the customers, by banking purposefully. The bank served the heterogeneous financial needs of the planned economic development.

Branches The corporate center of SBI is located in Mumbai. In order to cater to different functions, there are several other establishments in and outside Mumbai, apart from the corporate center. The bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major cities throughout India. It is recorded that SBI has about 10000 branches, well networked to cater to its customers throughout India.

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Subsidiaries: The State Bank Group includes a network of eight banking subsidiaries and several non-banking subsidiaries. Through the establishments, it offers various services including merchant banking services, fund management, factoring services, primary dealership in government securities,

Credit Cards and Insurance.

The Eight Banking Subsidiaries are:

State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of India (SBI) State Bank of Indore (SBIR) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Saurashtra (SBS) State Bank of Travancore (SBT)

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Services SBI provides easy access to money to its customers through more than 8500 ATMs in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which includes the ATMs of State Bank of India as well as the Associate Banks State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and International Bank Ltd by using the State Bank ATMcum-Debit (CashPlus) card. Products and Services Provided by State Bank Of India:

Personal Banking

SBI Term Deposits SBI Loan For Pensioners SBI Recurring Deposits Loan Against Mortgage Of Property SBI Housing Loan Against Shares & Debentures SBI Car Loan Rent Plus Scheme SBI Educational Loan

Other Services

Agriculture/Rural Banking NRI Services ATM Services DEMAT Services Corporate Banking Internet Banking Mobile Banking International Banking Safe Deposit Locker
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RBIEFT E-Pay E-Rail SBI Vishwa Yatra Foreign Travel Card Broking Services Gift Cheques.

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Regulation of Banking Industry: The Banking Industry in India is regulated mainly by two Acts. 1. Reserve Bank Of India Act, 1934. 2. Banking Regulation Act, 1949. The government controls the businesses of commercial banks through Reserve Bank Of India (RBI) which is the Central Bank.

Following are the main rates which regulates the banking industry: CRR (Cash Reserve Ratio): Scheduled Commercial Banks are required to maintain with RBI an average cash balance, the amount of which shall not be less than three percent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. SLR (Statutory Liquidity Ratio): All Scheduled Commercial Banks, in addition to CRR are required to maintain under the RBI Act, 1934 a) in cash, or b) in gold valued at a price not exceeding the current market price, or c) in unencumbered approved securities valued at a price as specified by the RBI from time to time. An amount of which shall not, at the close of the business on any day, be less than 25 per cent or such other percentage not exceeding 40 per cent as the RBI may from time to time, by notification in gazette of India, specify, of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. Repo (Repurchase) Rate (RR): Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.

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If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. Reverse Repo Rate (RRR): This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system. If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Opportunity Cost: CRR and SLR result in lock up of funds of the banks which could have been otherwise be lent to the customers. This results in forgo of some interest earning capacities of the banks and results in its Opportunity Cost. Opportunity Cost is the cost incurred for forgoing the next best alternative.
TIME LINE Of Various Essential Rates:
Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 RR % 11.00 10.75 10.25 10.75 10.75 11.50 12.50 13.00 11.75 RRR % 6.75 5.75 4.50 4.75 5.25 5.50 5.75 6.00 3.25 CRR % 6.73 4.98 4.54 4.77 5.00 5.23 7.03 7.00 5.00 SLR % 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 24.00

TIMELINEOFVARIOUSRATES
RATES(RR/RRR/CRR/SLR/SBI PLR)% 30.00 25.00 20.00 15.00 10.00 5.00 0.00 2000 2002 2004 2006 2008 2010 RRR% CRR% SLR% RR Poly.(RRR%) Poly.(CRR%) Poly.(SLR%) Poly.(RR) TIMELINE

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DEMAND SIDE: Demand is the amount of goods and services consumers are willing to purchase at a given price. Demand is the function of Price, Income of Consumers, Consumers Tastes & Preferences and Future Expectations regarding change in prices. D = (P, Y, T, E). A Commercial Banks Demand is the quantity of loan and advances its clients are ready to avail at given interest rates. A Banks major service offering is the quantum of Loans and Advances it is ready to offer to its clients at a given rate of interest it can charge from its clients. Its loans and advances can either be in the form of Business Loans, Personal Loans, Educational Loans and Credit Card interest. METHODOLGY of DEMAND SIDE ANALYSIS OF SBI: In case of our project we are trying to establish a composite interest rate of various loans and advances made by SBI. For this we have collected past years figures of total Advances made and total Interest Earned by SBI from its past Financial Statements. On dividing the total Interest Earned by total Advances we get the required composite offering interest rate. Composite Offering Interest Rate (COIR %) = (Total Interest Earned Total Advances) 100. This rate is the price of offering of loans and advances by SBI and we take it on the Y- Axis of Demand graph. On the X- Axis we take the total Advances made by SBI. Then we arrange the rate on Y Axis in ascending order to generate the Demand Curve of SBI.

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Factors Affecting Demand side of SBI: Economic Conditions: In a Boom period when the entire economy is growing, demand for money increases with increase in consumption and investment. In recession, demand for money decreases with decrease in consumption and investment levels. RBI Guidelines: RBI regulates the functioning of the Commercial Banks by imposing various restraints such as CRR and SLR so as to regulate the flow of money in the economy to cope up with inflationary or deflationary conditions. Calculation of Demand Schedule of SBI: 1.Data of Past 10 Years:
F.Y. End: Advances (Rs. Crores): Interest Earned (Rs Crores):

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

938101.97 113590.27 120806.47 137758.46 157933.54 202374.45 261641.53 337336.49 416768.20 542503.20

22202.26 26138.91 29810.09 31087.02 30460.49 32428 35794.93 39491.03 48950.31 63788.43

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2. Composite Offering Interest Rate (COIR %) of Past 10 Years:

F.Y. End: Advances (Rs. Crores): Interest Earned (Rs Crores): COIR % :

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09

938101.97 113590.27 120806.47 137758.46 157933.54 202374.45 261641.53 337336.49 416768.20 542503.20

22202.26 26138.91 29810.09 31087.02 30460.49 32428 35794.93 39491.03 48950.31 63788.43

2.37 23.01 24.68 22.57 19.29 16.02 13.68 11.71 11.75 11.76

3.DEMAND SCHEDULE of SBI:

F.Y. End: Advances (Rs. Crores): Interest Earned (Rs Crores): COIR % :

Mar-00 Mar-07 Mar-08 Mar-09 Mar-06 Mar-05 Mar-04 Mar-03 Mar-01 Mar-02

938101.97 337336.49 416768.20 542503.20 261641.53 202374.45 157933.54 137758.46 113590.27 120806.47

22202.26 39491.03 48950.31 63788.43 35794.93 32428 30460.49 31087.02 26138.91 29810.09

2.37 11.71 11.75 11.76 13.68 16.02 19.29 22.57 23.01 24.68

4.DEMAND CURVE of SBI:

DemandCurve
30.00 25.00 20.00 15.00 10.00 5.00 0.00 0 200000 400000 600000 800000 1000000 COIR%

Demand DemandCurve

Advances(Rs.Cr)

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SUPPLY SIDE: SUPPLY is the amount of product or services a producer is willing to provide at different prices. Supply is the function of price of offering and cost of production i.e. (Rent for Land, Wages for Labour and Interest for Capital). S = (P, R, W, I). Commercial Banks are the major supplier of Financial Services in an Economy. A Banks major service offering is Loans and Advances it is ready to offer to its clients. Its loans and advances are funded by the deposits it accept from the public in from of Savings Accounts, Fixed Deposit Accounts and Recurring Deposit Accounts. These are broadly classified into Demand and Time Deposits. Demand Deposit is the amount deposited by a banks customer in form of Savings Account deposits. A customer can withdraw the money on demand either in cash or by way of drawing cheques. Time Deposit is the amount deposited by a banks customer in form of Fixed and Recurring Deposit Accounts. A customer can withdraw the money only on expiry of the agreed time period. METHODOLGY of SUPPLY SIDE ANALYSIS OF SBI: In case of our project we are trying to establish a composite interest rate of various deposits held by SBI from the public. For this we have collected past years figures of total Deposits and total Interest Expended of SBI from its past Financial Statements.

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On dividing the total Interest Expended by Deposits we get the required composite acquisition interest rate. Composite Acquisition Interest Rate (CAIR %) = (Total Interest Expended Total Deposits) 100. This rate is the cost of acquisition of funds by SBI and we take it on the Y- Axis of Supply graph. On the X- Axis we take the total Deposits held by SBI. Then we arrange the rate on Y Axis in ascending order to generate the supply Curve of SBI. 1.Data of Past 10 Years:
F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores) Mar00 196821.07 15272.58 Mar01 242828.38 17756.02 Mar02 270560.14 20728.84 Mar03 296123.28 21109.46 Mar04 318618.67 19274.18 Mar05 367047.53 18483.38 Mar06 380046.06 20159.29 Mar07 435521.09 23436.82 Mar08 537403.94 31929.08 Mar09 742073.13 42915.29

2.Composite Acquisition Interest Rate (CAIR %) of Past 10 Years:

F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores) CAIR% Mar00 196821.07 15272.58 Mar01 242828.38 17756.02 Mar02 270560.14 20728.84 Mar03 296123.28 21109.46 Mar04 318618.67 19274.18 Mar05 367047.53 18483.38 Mar06 380046.06 20159.29 Mar07 435521.09 23436.82 Mar08 537403.94 31929.08 Mar09 742073.13 42915.29 7.76 7.31 7.66 7.13 6.05 5.04 5.30 5.38 5.94 5.78

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3.SUPPLY SCHEDULE of SBI:

F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores) CAIR% Mar05 367047.53 18483.38 Mar06 380046.06 20159.29 Mar07 435521.09 23436.82 Mar09 742073.13 42915.29 Mar08 537403.94 31929.08 Mar04 318618.67 19274.18 Mar03 296123.28 21109.46 Mar01 242828.38 17756.02 Mar02 270560.14 20728.84 Mar00 196821.07 15272.58 5.04 5.30 5.38 5.78 5.94 6.05 7.13 7.31 7.66 7.76

4.SUPPLY CURVE of SBI:

SupplyCurve
10.00 CAIR% 5.00 Supply 0.00 0 200000 400000 600000 800000 1000000 SupplyCurve

Deposits(RsCr)

Supply and Demand Observation: From the above tables and diagrams we may conclude that supply side of SBI is more elastic as compared to its demand side. Hence we can say that supply of deposits to SBI is sensitive to interest rates however its demand of loans and advances are relatively less elastic.

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Equilibrium Point: Equilibrium Point is the point where Demand and Supply are equal in other words it is the point at which Demand and Supply Curve intersects. In our graph the Supply and Demand Curves intersect at a point where COIR and CAIR are both 5.50 % and amount of Deposits and Advances are Rs.70,000 Crores. At this point Total Demand is equal to Total Supply.

Demand&Supply
30.00

25.00

20.00 Rattes(CAIR/COIR)%

15.00

Supply Demand SupplyCurve

10.00

DemandCurve

5.00

0.00 0 200000 400000 600000 800000 1000000

Quantity(AdvancesandDeposits)

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Market Analysis o SBI: of For bett underst ter tanding th market s he structure of SBI we have to b o bifurcate th he analysis in two tim periods: s me 1.Pre-Liberalisatio i.e. befo 2003, a on ore and Liberalisati i.e. afte 2003. ion er 2.Post-L In the Pre Libera P alisation pe eriod priva players were not allowed t enter th ate s t to he banking sector as a result Public Sec g s ctor Banks (PSB) su as SB ruled th uch BI he banking sector ma g arkets. In Post Liberalisation period Private players gained en t e ntry into the bankin t ng sector a started to lure cu and d ustomers w better service qu with uality, lucr rative offer rs and low processin time. w ng SBI and its Nearest Competi d itors as on FY End 2009: 2

From t above table we can obser that af the rve fter liberal lisation th hough man ny private players ha entered into the b ave d banking se ector SBIs position and marke et share is still strong g.

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Conclusion: Though there has been increase in number of players in the banking sector since 2003 the SBI still is having a strong market share. With changing times and increase in competition SBI revamped its service quality at par with private players in the industry. SBI is having its branches spread through out India and have penetration even into the deepest corners of Rural India. Also it has access to cheaper funds as compared to other players which enables it to provide competitive rates of interest for its loan products. Moreover SBI has also expanded its operations in various other financial services such as Insurance, Mutual Funds, Investment Banking and NRI Banking Services. With its Pan India presence and back up of government, people are having high faith in parking their savings with SBI as they understand the low risk involved with operating with SBI. Thus, SBI commands huge amount of funds at low cost.

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References: Website URLs :1.RBI Repo Rate: http://in.biz.yahoo.com/090728/137/batyeg.html 2.RBI Reverse Repo Rate: http://in.reuters.com/article/domesticNews/idINBOM18464220090724 3.SBI PLR: http://in.reuters.com/article/domesticNews/idINBOM23779820090427 4.RBI CRR: http://in.reuters.com/article/GCA-election/idINIndia39137120090420?pageNumber=2&virtualBrandChannel=0 5.RBI SLR: http://in.reuters.com/article/domesticNews/idINBOM42977620090420 6.Past Financial Statements of SBI: http://www.statebankofindia.com/user.htm http://www.moneycontrol.com/financials/statebankindia/balance-sheet/SBI

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