EXECUTIVE SUMMARY
The rise of retail lending in emerging economies like India has been of recent origin. Asia Pacific’s vast population, combined with high savings rates, explosive economic growth, and underdeveloped retail banking services, provide the most significant growth opportunities for banks. Banks will have to serve the retail banking segment effectively in order to utilize the growth opportunity.
Banking strategies are presently undergoing various transformations, as the overall scenario has changed over the last couple of years. Till the recent past, most of the banks had adopted fierce costcutting measures to sustain their competitiveness. This strategy however has become obsolete in the new light of immense growth opportunities for banking industry. Most bankers are now confident about their high performance in terms of organic growth and in realising high returns. Nowadays, the growth strategies of banks revolve around customer satisfaction. Improved customer relationship management can only lead to fulfilment of long-term, as well as, short-term objectives of the bankers. This requires, efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship.
The banking system in India is significantly different from that of the other Asian nations, because of the country’s unique geographic, social, and economic characteristics. Though the sector opened up quite late in India compared to other developed nations, like the US and the UK, the profitability of Indian banking sector is at par with that of the developed countries and at times even better on some parameters. For instance, return on equity and assets of the Indian banks are on par with Asian banks, and higher when compared to that of the US and the UK.
Banks in India are mainly classified into Scheduled Banks and Non-Scheduled Banks. Scheduled Banks are the ones, which are included in the second schedule of the RBI Act 1934 and they comply with the minimum statutory requirements. Non-Scheduled Banks are joint stock banks, which are not included in the second Schedule of the RBI Act 134, on account of the failure to comply with the minimum requirements for being scheduled.
STRENGTH
• Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
• Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.
• Bank lending has been a significant driver of GDP growth and employment.
• Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.
• The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
• In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.
• India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
• Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.
WEAKNESS
• PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital.
• Old private sector banks also have the need to fundamentally strengthen skill levels.
• The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies.
• Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.
• Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.
• Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.
OPPORTUNITY
• The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.
• banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.
• With increased interest in India, competition from foreign banks will only intensify.
• Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
• New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity
• Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset.
• reach in rural India for the private sector and foreign banks.
• With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.
• the Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.
• Liberalisation of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.
• Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.
THREATS
• Threat of stability of the system: failure of some weak banks has often threatened the stability of the system.
• Rise in inflation figures which would lead to increase in interest rates.
• Increase in the number of foreign players would pose a threat to the PSB as well as the private players.
The rise of retail lending in emerging economies like India has been of recent origin. Asia Pacific’s vast population, combined with high savings rates, explosive economic growth, and underdeveloped retail banking services, provide the most significant growth opportunities for banks. Banks will have to serve the retail banking segment effectively in order to utilize the growth opportunity.
Banking strategies are presently undergoing various transformations, as the overall scenario has changed over the last couple of years. Till the recent past, most of the banks had adopted fierce costcutting measures to sustain their competitiveness. This strategy however has become obsolete in the new light of immense growth opportunities for banking industry. Most bankers are now confident about their high performance in terms of organic growth and in realising high returns. Nowadays, the growth strategies of banks revolve around customer satisfaction. Improved customer relationship management can only lead to fulfilment of long-term, as well as, short-term objectives of the bankers. This requires, efficient and accurate customer database management and development of well-trained sales force to develop and sustain long-term profitable customer relationship.
The banking system in India is significantly different from that of the other Asian nations, because of the country’s unique geographic, social, and economic characteristics. Though the sector opened up quite late in India compared to other developed nations, like the US and the UK, the profitability of Indian banking sector is at par with that of the developed countries and at times even better on some parameters. For instance, return on equity and assets of the Indian banks are on par with Asian banks, and higher when compared to that of the US and the UK.
Banks in India are mainly classified into Scheduled Banks and Non-Scheduled Banks. Scheduled Banks are the ones, which are included in the second schedule of the RBI Act 1934 and they comply with the minimum statutory requirements. Non-Scheduled Banks are joint stock banks, which are not included in the second Schedule of the RBI Act 134, on account of the failure to comply with the minimum requirements for being scheduled.
STRENGTH
• Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.
• Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.
• Bank lending has been a significant driver of GDP growth and employment.
• Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country.
• The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
• In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region.
• India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
• Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.
WEAKNESS
• PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital.
• Old private sector banks also have the need to fundamentally strengthen skill levels.
• The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies.
• Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.
• Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.
• Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.
OPPORTUNITY
• The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations.
• banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.
• With increased interest in India, competition from foreign banks will only intensify.
• Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.
• New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity
• Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset.
• reach in rural India for the private sector and foreign banks.
• With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.
• the Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.
• Liberalisation of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.
• Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.
THREATS
• Threat of stability of the system: failure of some weak banks has often threatened the stability of the system.
• Rise in inflation figures which would lead to increase in interest rates.
• Increase in the number of foreign players would pose a threat to the PSB as well as the private players.
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