RESEARCH REPORT

ON

WITH SPECIAL REFERENCE TO

SBI & ICICI BANK

Submitted To:

SCHOOL OF MANAGEMENT IPEC-SAHIBABAD

For the partial fulfillment of MASTER OF BUSINESS ADMINISTRATION (2007-2009) UPTU University LUCKNOW

Submitted by: AAKRITI JAIN Roll NO. 0703070002 MBA-IV SEMESTER

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DECLARATION

I here by declare that the research report entitled: OPERATIONAL EFFECIENCY OF PUBLIC AND PRIVATE SECTOR BANKS IN INDIA with special reference to SBI & ICICI bank Submitted in partial fulfilment of the requirement for the degree of Masters of business Administration to UP Technical University, India, is my original work and not submitted for the award of any other degree, diploma, fellowship, or any other similar title or prizes.

Date: (Aakriti Jain) Roll No. 0703070002

TABLE OS CONTENTS PART I

1. 2. 3. 4.

Objective of the study Scope of the study Introduction to the project Introduction to the company

5 6 8-25 26-68

PART II
5. Research methodology

69-72

PART III
73-83

6. Data analysis

PART IV
7. Result and findings.

84-88

PART V
8. Recommendation 9. Conclusion

89-90 91-92

PART VI
10. Appendix/annexure

11.Bibliography

93-95 96-97

ACKNOWLEDGEMENT
At the commencement of my project work I wish to express my deep sense of gratitude to my project guides, Mrs. Nidhi Mathur Mam IPEC for her most valuable and inspiring guidance rendered through out the course for my project work. Her ideas and suggestion encouraged me to accomplish this project and made it success. I will never forget her uncountable assistance to me for this project. I am extremely thankful to Mr. Rajan Yadav Sir, IPEC who gave me his valuable guidance and advice during the process of conducting this study report. His suggestions help me at each and every stage of my project, his kind and cordial behavior let me to work in the right direction. I am also thankful to IPEC, who gave me the permission to conduct this study.

(Aakriti Jain)

OBJECTIVE OF THE STUDY

Basic objective of this report is to focus on achievement and performance of public sector banks vis--vis private sector banks. For this purpose performance of banks of different categories are compared with special reference to SBI and ICICI bank. Basic objective id to find out:: 1. Profitability - its ability to earn income and sustain growth in both short-term and long-term. A company's degree of profitability is usually based on the income statement, which reports on the company's results of operations; 2. Solvency - its ability to pay its obligation to creditors and other third parties in the long-term; 3. Liquidity - its ability to maintain positive cash flow, while satisfying immediate obligations; 4. Stability- the firm's ability to remain in business in the long run, without having to sustain significant losses in the conduct of its business. Assessing a company's stability requires the use of both the income statement and the balance sheet, as well as other financial and non-financial indicators. Parameters selected for the evaluation of performance of banks are: 1. profitability 2. productivity Thus we have tried to compare banks on productivity and profitability front. Productivity has been assessed in terms of : Business per employee and per office, profit per employee, deposit per employee and per branch. Profitability has been assessed in terms of : 1 2 3 Interest earned ratio = total interest earned/Volume of business* Interest paid ratio = total interest paid/Volume of business. business Operating expense ratio = total expense interest expenses/volume of

*Volume of business = Deposit + Advance

SCOPE OF THE STUDY

The banking sector is considered to be an important source of financing for most businesses. The common assumption, which underpins much of the financial performance research and discussion, is that increasing financial performance will lead to improved functions and activities of the organizations. The subject of financial performance and research into its measurement is well advanced within finance and management fields. It can be argued that there are three principal factors to improve financial performance for financial institutions; the institution size, its asset management, In order to evaluate the internal performance of a commercial bank, financial indicators are constructed from the bank financial statements. Financial ratios like ROA, asset utilization, and operational efficiency are calculated, Also, measures as assets size, and the interest income size are used to assess the performance of a commercial bank. However, it is hypothesized for this study that 102 International Research Journal of Finance and Economics - Issue 3 (2006) there exist positive correlations among return on assets, asset management, operational efficiency, bank size, and the interest income size. In addition, there exist an impact of asset management, operational efficiency, and the bank's size on the financial performance of the bank. Generally, the concept of efficiency can be regarded as the relationship between outputs of a system and the corresponding inputs used in their production. Within the financial efficiency literature, efficiency is treated as a relative measure which reflects the deviations from maximum attainable output for a given level of input.

INTRODUCTION

The new millennium has brought along challenges and opportunities in the various fields of economic activities including banking. The entry of various private sector and foreign banks exposed the inefficiencies in the public sector banks. This paper compares various categories of banks on their productivity and profitability. While there is no remarkable difference in the spread ratio, there is a significant difference in Burden ratio among the public sector and private sector & Foreign banks. The key to profitability for the public sector banks is increased productivity. Those public sector banks that have been able to increase the productivity found themselves at par with the private sector banks. The new millennium has brought with it challenges and opportunities in various fields of economic activities including banking. Indian banking, which was operating in a highly comfortable environment till the beginning of the 1990s, has been pushed into the choppy water of intense competition. The modern banking activity is marked by itineraries into un-chartered horizons mingled with risks and heavy competition. Immediately after nationalization, the Public Sector Banks spread their branches to remote areas at a rapid pace Their main objective was to act on behalf of the government to fulfill economic obligations towards the common man. They acted over enthusiastically in penetrating into far-flung and remote corners of the country. The social responsibility that was entrusted upon the Public sector Banks digresses them from the profit motive. On the other hand private and foreign banks did not make such moves. Instead, they pursued profit making as the objective for their operations. Banking industry is pre-eminently a service oriented industry. For successful survival and successive growth a bank has to be efficient and effective in utilization of resources and provide exellent service to the customer. Efficiency of banks is reflected in profitability. Profit provide cushion to the bank to support its credit risk and withstand any unfoseeable developments. A

profitable banking organization has sufficient resources in its command to finance its growth and diversification program in future. Since profitability is an index of efficiency a banking enterprise, a profit making bank can infuse confidence in public at large which is necessary for its survival and growth. Productivity is also one of the important measure affecting profitability of a banks In 1992 the RBI launched banking sector reforms, as per the recommendations made by the Narasimhan Committee on financial reforms to create a more profitable, efficient and sound banking system. The reforms opened the banking sector for private players

Indian Banking Sector

ORIGIN AND EVOLUTION OF INDIAN BANKING Opinions differ as to the origin of the work "Banking". The word "Bank" is said to be of Germanic origin, cognate with the French word "Banque" and the Italian word "Banca", both meaning "bench". It is surmised that the word would have drawn its meaning from the practice of the Jewish money-changers of Lombardy, a district in North Italy, who in the middle ages used to do their business sitting on a bench in the market place. Again, the etymological origin of the word gains further relevance from the derivation of the word "Bankrupt" from the French word "Banque route" and the Italian word "Banca-rotta" meaning "Broken bench" due probably to the then prevalent practice of breaking the bench of the money-changer, when he failed. Banking is different from money-lending but two terms have in practice been taken to convey the same meaning. Banking has two important functions to perform, one of accepting deposits and other of lending monies and/or investment of funds. It follows from the above that the rates of interest allowed on deposits and charged on advances must be known and reasonable. The money-lender advances money out of his own private wealth, hardly accepts deposits and usually charges high rates of interest. More often, the rates of interest relate to the needs of the borrower. Money-lending was practised in all countries including India, much earlier than the recent type of Banking came on scene.

DEFINATION AS PER BANKING REGULATION ACT 1949 A Bank borrow by accepting deposits of money from the public, the deposits are to be repaid on demand or after fixed period. They can be withdrawn by the depositors by means of cheque, draft, order or any other way. A Bank accepts deposits (i.e. borrows) for the purposes of lending mainly to traders, industrialists and manufacturers and the like as also, for the purposes of investing in government securities to fulfill statutory obligations. Thus, Banking Regulations Act, 1949 defines Banking as accepting for the purposes of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft , order or otherwise. By and large, this definition can be satisfactory. As per the provision of the Banking Regulation Act, every company willing to do banking business must obtain license from the Reserve Bank for carrying on banking business in India. Besides, all companies carrying on banking business must use the word bank, banker or banking as per of their names. It may be noted that moneylenders are not bankers.

Basic Concepts of Banking

Banking is different from money lending, but the two terms, usually carry the same significance to the general public. The money lender, advances money out of his own private wealth, hardly accepts deposits from general public and usually charges high rate of interest. More often, the rates of interest relate to the needs of the borrower and at times the rates may be exorbitant. On the other hand the banking is defined in section 5(b) of the Banking Regulation Act, 1949, as the acceptance of deposits of money from the public for the purpose of lending or investment. Such deposits of money from the public are used for the purpose of lending or investment. Such deposits may be repayable on demand or otherwise and with drawable by cheque, draft order or otherwise.

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Thus a bank must perform two basic and essential functions: (i) acceptance of deposits and (ii) lending or investment of such deposits. The deposits may be repayable on demand or a for a period of time as agreed by the banker and the Customer. In terms of the definition, the banker can accept deposits of money and Not Anything Further accepting deposits form frolic unapplied that a banker accepts deposits form anyone who offers money for such purpose Accepting of deposits for lending and investments have been the original functions of banking but gradually there functions were extended and others were added from time to time and presently banks perform a number of economic activities which may affect all walks of economic life.

Indian banking sector can be divided mainly into four broad categories namely public sector banks, old private sector banks, new private sector banks, and foreign banks. The other categories of banks include co-operative banks and regional rural banks. Since these banks dont form a substantial chunk of the banking system, we will focus on the first four categories. There were as many as 222 scheduled commercial banks in India as at the end of Mar 2006. "Banking sector in India has undergone remarkable changes since the nationalisation of 14 major commercial banks in 1969. The geographical and functional coverage of banks has surged at a rate that is unprecedented in the world. Similarly, services rendered by banks witnessed major changes after liberalisation of the financial sector carried out from the early 1990s. Banking system has now transformed itself into a vibrant financial service sector with many innovative and technology-driven services at their end.

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Wider commercial role

The commercial role of banks is not limited to banking, and includes:

issue of banknotes (promissory notes issued by a banker and payable to bearer on demand)

processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means

issuing bank drafts and bank cheques accepting money on term deposit lending money by way of overdraft, installment loan or otherwise providing documentary and standby letters of credit (trade finance), guarantees, performance bonds, securities underwriting commitments and other forms of off-balance sheet exposures

safekeeping of documents and other items in safe deposit boxes currency exchange acting as a 'financial supermarket' for the sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products

Economic functions
The economic functions of banks include: 1. issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.

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2. netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. credit intermediation banks borrow and lend back-to-back on their own account as middle men 4. credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).

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Total no. of banks in india

Indian banking driven by structural factors The Indian banking sector in recent years is driven mainly by structural factors such as corporate capex cycle, retail loan boom, and infrastructure funding with low incremental defaults. Robust macroeconomic performance continued to strengthen the financial performance of scheduled commercial banks (SCBs) in recent years and this trend continued in 2005-06 as well. The banking sector has been driven by vigorous credit growth during recent years. The heartening factor was that the credit offtake was more broad-based with all the sectors of the economy going for credit. Housing and retail segments were joined by the demand for credit from agriculture and industry segment as well. The credit demand was not entirely financed by the customer deposits as the growth of deposits slowed down marginally in 2005-06. In order to meet the increased demand for credit, banks increased their dependence to non-deposit resources. In addition to this, number of banks curtailed their fresh investment in Government securities to finance the credit demand. The strong credit offtake was primarily responsible for the improved net interest income of many banks. In fact, the strong credit demand was able to more than offset the impact of sharp decline in non-interest income. Profitability of public sector and new private sector banks improved, despite hardening of sovereign yields.Asset quality of SCBs has been improving since the past three years as reflected in the decline in gross non-performing assets in absolute terms. This is despite the fact that, RBI has asked banks to switch over to the 90-day delinquency norm with effect from March 2004. With the sharp increase in risk-weighted assets, many banks shored up their capital by way of new issues.

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Banking structure in India

Basel-II norms some breather for banks In its mid-term review of Annual Policy for FY07, RBI pushed back the deadline for implementation of Basel II norms. While foreign banks in India and Indian banks operating abroad are to meet Basel-II nor ms by March 31, 2008, all other scheduled commercial banks will have to adhere to these guidelines pertaining to risk provisioning by March 31, 2009. This will provide banks some more time to put in place appropriate systems so as to ensure full compliance of Basel II.

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Foreign banks eager to enter Indian market India offers tremendous opportunities for banks in India. This is the reason why a number of foreign banks are eager to set up shop in India. However, the government is moving cautiously in opening up the market to foreign banks. The government has set up a roadmap for the foreign banks to tread on. The roadmap has two phases. During the first phase between March 05 and March 09, foreign banks may establish a presence by setting up a wholly-owned subsidiary or conversion of existing branches into a wholly-owned subsidiary. The second phase is to commence in April 09 after consultation with all stakeholders in the banking sector. The review is expected to examine issues such as dilution of stake and permitting mergers/acquisitions of private sector banks in India by a foreign bank. A large number of foreign banks are queuing up to enter India despite a regulatory iron curtain that is restricting entry. This is regardless of the fact that most foreign banks seems to be unhappy with the Reserve Bank of Indias roadmap for liberalisation of entry norms for foreign banks proposed in February 05. Foreign banks wants the government to relax regulations such as priority sector lending, ownership rules and statutory liquidity requirements, branch licensing, single borrower limits etc. Foreign banks have targeted India for a variety of reasons. They are impressed by the pace of reforms, huge market, interest of foreign institutional investors and the countrys changing image. This is evident from the levels of investment and expansion plans for the country. Union Bank of Switzerland (UBS) and Australia-based Macquarie Bank are some of the banks which are interested in India. Performance of listed banks Strong growth in Indian economy assisted banks to increase their asset base. Comparison in asset base indicates that the private sector banks are in better position than the public sector banks in terms of asset growth. In the private banking space ICICI Bank, HDFC Bank & UTI Bank showed strong growth in their asset base whereas in the public sector bank Allahabad Bank, Canara Bank and Bank of Baroda lead the sector. State Bank of India which has the largest asset base in the country recorded a modest growth of 7.4%.

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Assets of Some of the Listed Commercial Banks (Rs.bn)

Since the past few years, customer deposits of banks recorded strong growth. Private sector banks reported excellent performance as compared to their government owned peers. However, some of the public sector banks are giving tough competition to their private sector peers. In the private banking space, ICICI Bank was the leader in customer deposit growth as its deposit grew by 65.4% followed by HDFC Bank (53.5%) and Kotak Bank (52.7%). In the public sector banking space, IDBI Bank reported stellar performance as its deposits grew by 72% followed by Corporation Bank with growth rate of 20.7%. SBI, which is the largest bank in India, reported a growth of just 3.5%.

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Customer Deposits of Some of the Listed Commercial Banks (Rs.bn)s

Federal Bank reported a sharp jump of 150% in its earnings at the end of FY06 over FY05. Other major banks which reported strong growth in net profits include and IDBI (45%). In the public sector domain Bank of India reported a growth of 106.3% followed by IDBI Bank with 82.3% growth. Laggards included IndusInd Bank, whose net profit declined by 82.3%, followed by Bank of Maharashtra (-71%) and Vijaya Bank (-66.7%).

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Net Profit of Some of the Listed Commercial Banks (Rs.mn)

Most of the banks have CAR more than required 9% but considering the excellent credit growth, banks have to expand their capital base. IDBI Bank has one of the highest CAR in the industry with 14.66% followed by ICICI Bank (14.34%).

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Capital Adequacy Ratio of some of the banks as of September 2006

Asset quality of Indian banks has improved significantly in the last 2-3 years. Most of the banks have provided substantial amount so that average net NPA of Indian banking industry is around 1-2.25%. In the select banking universe as indicated below, Bank of baroda has the largest gross NPAs of around 3.44% at the end of H1FY07 followed by Bank of India, Bank of Baroda having gross NPAs of 2.96% during the same period. UtiBank has the best asset quality as its gross NPAs stood at just 1.2% of advances. RBI hikes CRR by 50bps to control overheating RBI has recently announced a 50 basis points hike in cash reserve ratio. This step by RBI preserved to curb overheating of the economy, check inflationary expectations and suck out excess liquidity from the system. This would absorb Rs135bn from the system and this could put a pressure on the cost of funds as money supply would be constrained. This move could also force banks to reduce their credit exposure. Interest rates may also be impacted as a result. This hike to be undertaken in two stages, in first step, the CRR will be raised from the present 5% to 5.25% effective from the fortnight beginning December 23, 2006. The second 25-basis point hike will be effective from the fortnight beginning January 6, 2007.

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Business growth of all scheduled commercial banks During the last financial year ( up to March 31, 2006) incremental gross bank credit increased by 36% as compared to a growth of 31.9% (net of conversion) in the same period of previous year. The year on year growth of gross bank credit as on 31st March 2006 was 29.9% as against 26.9% (net of conversion) on the corresponding date of last year. Non food credit up to FY06 registered a growth of 37.3% as compared to 32.8% during the same period last year. The year on year growth rate of non food credit was 30.8% as compared with 27.7% on the corresponding date of last year. : Business growth of Indian banking sectors

Banks faced a resource crunch in FY06 and FY05, with loans growing more than deposits in absolute terms. This has forced many banks to go on overdrive to woo depositors by offering attractive rates on term deposits. Banks have raised deposit rates by over 50 basis points over the last six months. In recent weeks, many private banks have started offering higher returns on nine-month to one-year term deposits. PSBs have raised rates on term deposits offering returns comparable to small savings schemes. Besides from August 1, 06 bank deposits for over five years are eligible for tax benefits. However, with the government asking PSBs to roll back lending rate hikes, banks may not be 21

able to offer better returns on deposits. However, private and foreign banks could still come out with more attractive rates as they are not governed by this. Hence, for private banks and foreign banks deposit mobilization is not much a constraint

Public sector banks dominate the Indian banking system though their market share is dwindling The public sector banks (PSBs) account for a major share of all the banking indicators like assets, deposits, advances etc. However, the private sector banks, especially new private banks like ICICI Bank, HDFC Bank and UTI Bank etc. are giving tough competition to their government owned peers. Public sector banks which comprise State Bank of India group and other nationalised banks are continuously losing their market share in bank deposits since the opening up of the banking sector to their private counterparts. According to latest Reserve Bank of India (RBI) figures, private banks and foreign banks have gained during the year. The data indicates that SBI groups market share in deposits dipped to 23.4% in FY06 from 24.2% in the previous year. The share of nationalised banks, as a group, accounted for 48.4%, down from 49.8% in the previous year. The share of foreign banks, regional rural banks and private banks aggregate deposits were 5.3% and 19.4%, respectively, as against 4.45% and 18.1%, respectively, in the previous year. As regards loans extended by commercial banks, there has been no significant change in the market share of various bank groups. The share of nationalised banks was 47.5% in FY06 as against 47.4% in the previous year. The share of the SBI group was stable at 23.1%. The share of private banks was 20.2% (20.1%). However, foreign banks recorded a marginal dip in their share in bank credit to 6.5% as against 6.7% in the previous year Private sector banks having higher operating cost Foreign banks in India have one of the highest operating expenses to total assets ratio in India at 2.7% during the first quarter of FY07. Foreign banks were followed by new private sector banks with the operating expenses to total assets ratio of 2.6%. The reason behind the higher operating expenses for the foreign banks and new private sector banks is their heavy investment in technology as compared to the government owned banks. The operating cost for public sector 22

banks took a breather in FY06, on the back of the base effect of higher staff costs in FY05 (staff cost account for over 65-70% of the total operating expenses Scheduled commercial bank- operating expence/total asset

Operating costs are not likely to take a breather for private sector banks as the banks are aggressively increasing their delivery channels and investing heavily in technology. The new formats include specialised offices where banks extend low-ticket credit and raise low cost deposits. High volume growth is likely on the back of higher operating costs. However, we do not expect any rise in operating cost to income ratio, despite the rapid increase in infrastructure as we believe that the income is also expected to go up sharply going forward. NIM improved for efficient players Scheduled commercial banks in India have a net interest margin of around 3% during the first quarter of FY07. Foreign banks in India have one of the highest net interest margins to total assets ratio of 4% followed by public sector banks and old private sector banks. We believe that net interest margins had come under pressure due to competition, a better regulatory environment and lower risk charge for default on loans. We believe that net interest income growth will be robust due to growth in volumes of credit-off take.

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Table 8: Scheduled Commercial Banks - Net Interest Income/Total Assets.

Net profit remains flat Total income of SCBs declined from 8.21% of their assets in 2004-05 to 8.03% in 2005-06, as both interest and non-interest income moderated during the year. Total expenditure (as % to total assets), on the other hand, was unchanged from the previous year. As a result, earnings before provisions and taxes, as % to total assets, during 2005-06 were lower than the previous year. However, in view of lower provisions, profits after tax, as % to total assets, at 0.88% during 2005-06 were almost the same as during 2004-05 (0.89%). As many as 45 banks (out of the total of 85 banks) recorded an increase in the profits ratio during the year. : Scheduled Commercial Banks - Net Profit/Total Assets

Credit cycle likely to sustain

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Low real rates and a sharp rise in bank credit have been at the heart of Indias growth story over the past three years. Nominal bank credit growth has accelerated from the bottom of 10.7% in September 2003 to 30.5% currently. The current credit cycle is the longest credit cycle India has witnessed since the early 1970s. Commercial credit to GDP has increased to 47% as at end-June 2006 from 35% in January 2003. Though it is still lower as compared to East Asia and Pacific nations with the credit to GDP ratio of around 105%. Credit outstanding has increased by almost US$190bn to US$380bn over the past three years. The most important point here is the rising interest rates. Even though there is sharp rise in real interest rates, credit growth would not be impacted due to higher demand from every sector like corporate, retail and agriculture. With the banks increasing its deposits rates there will be a relatively higher time deposit growth in the banking system, which will ensure easy flow of credit to the corporate sector. RBI has been concerned about the strong credit growth in the retail and real estate sectors. Over the past three years, only 44% of the incremental credit disbursed flowed to the industrial and agriculture sectors. In a bid to slow this aggressive credit growth in sectors other than industry and agriculture, RBI has initiated number of restraining measures which include increasing risk weightage for commercial real estate-related loans to 150% from 100%, for housing to 75% from 50% and for consumer loans (unsecured credit and credit cards) to 125% from 100%. RBI has also increased the mandatory standard loan provisioning in specific sectors (personal loans, capital market-related loans, residential loans greater than Rs2mn and commercial real estate loans) to 1% from 0.4%.

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State Bank of India

Listing: Bombay Stock Exchange National Stock Exchange London Stock Exchange Ahmedabad Stock Exchange Kolkata Stock Exchange

Chennai Stock Exchange

Background State Bank of India is the largest and one of the oldest commercial bank in India, in existence for more than 200 years. The bank provides a full range of corporate, commercial and retail banking services in India. Indian central bank namely Reserve Bank of India (RBI) is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extent of Rs.646bn with the public holding (other than promoters) at 40.3%. SBI has the largest branch and ATM network spread across every corner of India. The bank has a branch network of over 14,000 branches (including subsidiaries). Apart from Indian network it also has a network of 73 overseas offices in 30 countries in all time zones, correspondent relationship with 520 International banks in 123 countries. In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774 as on 31st March, 2006. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were sub-staff. The bank is listed on the Bombay Stock Exchange, National Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and Ahmedabad Stock Exchange while its GDRs are listed on the London Stock Exchange. SBI group accounts for around 25% of the total business of the banking industry while it accounts for 35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued performance in the last few years in scaling up its efficiency levels. Net Interest Income of the bank has witnessed a CAGR of 13.3% during the last five years. During the same period, net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%. Management The bank has 14 directors on the Board and is responsible for the management of the banks business. The board in addition to monitoring corporate performance also carries out functions

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such as approving the business plan, reviewing and approving the annual budgets and borrowing limits and fixing exposure limits. Mr. O. P. Bhatt is the Chairman of the bank. The five-year term of Mr. Bhatt will expire in March 2011. Prior to this appointment, Mr. Bhatt was Managing Director at State Bank of Travancore. Mr. Bhatt has more than 30 years of experience in the Indian banking industry and is seen as futuristic leader in his approach towards technology and customer service. Mr. Bhatt has had the best of foreign exposure in SBI. We believe that the appointment of Mr. Bhatt would be a key to SBIs future growth momentum. Mr. T S Bhattacharya is the Managing Director of the bank and known for his vast experience in the banking industry. Recently, the senior management of the bank has been broadened considerably. The positions of CFO and the head of treasury have been segregated, and new heads for rural banking and for corporate development and new business banking have been appointed. The managements thrust on growth of the bank in terms of network and size would also ensure encouraging prospects in time to come. Total deposits of the bank grew at a CAGR of 9.4% over the last five years to reach Rs3,800.5bn, with low cost deposits registering an impressive CAGR of 15.4% during the same period. Contribution of low cost deposit to total deposit during the period too has moved up sharply from 36.3% in FY01 to over 47.6% in FY06. However, current and saving account (CASA) contribution in H1FY07 has declined to 43.65%, thereby significantly increasing cost of funds and hence margin contraction. On a sequential basis, margins of the bank declined by 8bps to 3.32%. The capital adequacy ratio of the bank stood at 12.63% (Tier-I of 8.74% and Tier-II of 3.89%) at the end of H1FY07. To augment its CAR to provide a stable platform for further growth, the bank plans to raise upto Rs.100bn as subordinate debt during the next few months. The bank also has a cushion to raise further Rs40bn in the form of Hybrid Tier 1 capital. SBI has been a net seller in the bond market and is using its excess investments to fund its loan growth. As on September 2006, investment book size of the bank stood at Rs1,470bn which declined from Rs1,650bn as of March 2006. Of the total book size, Rs1,020bn is in Held To Maturity (HTM). Of the Available for Sale (AFS) book, the duration of the portfolio of less than

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two years has been maintained, with mark-to market cushion up to 8.12%. SBI is the market leader in the Indian banking space. At the CMP, stock trades at 14.5x and 12.1x of its earnings for FY07E and FY08E respectively and 3.3x and 2.96x of its adjusted book value. We have valued SBI on a sum-of-the-parts methodology to capture the true value of the associate banks and non-banking businesses. SBI has seven associate banks and comprised a significant portion of the book value. Similarly, other businesses of the bank are growing significantly faster than the core banking business and will make an increasing part of the market value. We initiate our coverage of SBI with a Hold rating and value the banks share at an intrinsic value of Rs.1,209 based on the sum-of-the-parts valuation methodology. Though the bank is the proxy for Indian economic growth, the current market price already aptures the future growth potential. Hence, we recommend a Hold on the stock with amedium term perspective. Shareholding & Liquidity Reserve Bank of India is the largest shareholder in the bank with 59.7% stake followed by overseas investors including GDRs with 19.78% stake as on September 06. Indian financial institutions held 12.3% while Indian public held just 8.2% of the stock. RBI is the monetary authority and having majority shareholding reflects conflict of interest. Now the government is rectifying the above error by transferring RBIs holding to itself. Post this, SBI will have a further headroom to dilute the GOIs stake from 59.7% to 51.0%, which will further improve its CAR and Tier I ratio.

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Shareholding Pattern of the Bank as on 30th September 2006

As of Sep 2006, SBI has 526.3mn shares outstanding and going by the actual trading volume, the stocks liquidity seems to have decreased in the past two years. In the first half of FY2007, 93mn shares exchanged hands. The daily share turnover during the year 2006 was 0.22% down from 0.39% witnessed in 2005. But the sentiment in the stock market improved in the first six months of the current fiscal with the bank clocking further gains. As of January 12, 2007 banks market capitalisation stood at Rs.643.6bn.

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Liquidity of SBIs stock

Key Areas of Operations The business operations of SBI can be broadly classified into the key income generating areas such as National Banking, International Banking, Corporate Banking, & Treasury operations. The functioning of some of the key divisions is enumerated below:
Key Business Areas of the Bank a) Corporate Banking

The corporate banking segment of the bank has total business of around Rs1,193bn. SBI has created various Strategic Business Units (SBU) in order to streamline its operations. These SBUs are as follows: a.1) Corporate Accounts This SBU is important for the bank as its loan portfolio constituted about 27.05% of the banks commercial and institutional non-food credit and 12.85% of the total domestic credit portfolio as on 31st March 2006.

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Some of the products under corporate accounts SBU are as follows: SBI-FAST, which is the cash management product offered by this SBU, had a turnover of Rs.4,705.75bn as of 31st March 2006. This product is now a comprehensive cash management solution, offering payments in addition to collections. Vendor financing activity is being integrated with core banking through the internet platform. This is identified as a focus area to capture the credit portfolio of vendors. The foreign exchange business grew by around 55% y-o-y and reached Rs.1,747.70bn as of 31st March 2006. This SBU now handles nearly 12% of the countrys visible trade and about 43% of banks forex business. a.2) Leasing This SBU is not writing any leases since the past few years as unfavorable business climate and availability of alternative funding options at cheaper cost. As at the end March 2006, the disbursements and capitalization were zero and profit amounted to Rs.245.9mn. a.3) Project Finance This SBU focuses on funding core projects like power, telecom, roads, ports, airports, special economic zones and others. During FY06, total sanctions for 18 projects involving a total amount of Rs.42.11bn were in place as against 13 projects involving Rs.25.08bn in the previous year. It also handles non-infrastructure projects with certain ceilings on minimum project costs. During FY06 sanctions for 29 projects involving a total amount of Rs.55.80bn were in place as against 27 projects involving Rs.51.63bn in the previous year.

As a whole, this SBU achieved total sanctions of Rs.238.86bn (fund based and non fund based) including syndication amount of Rs.140.95bn during the period ended March 2006.

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During FY06, this SBU entered into financing of aviation sector actively by sanctioning loans for modernization of airports and acquisition of aircrafts. a.4) Mid Corporate Group The Mid Corporate Group (MCG) created in June 2004 has 7 MCG Regional Offices controlling 28 large branches with high concentration of Mid Corporate (MC) business. The entire Off-Site MC business of all branches at 31 identified centres has been brought under the fold of MCG. The average processing time of credit proposals is about 15 days and quicker decision making on credit proposals of the Mid Corporate units has resulted in greater customer satisfaction. As of March 2006, 21 MCG branches have been migrated to core banking platform. New technology products like RTGS, CINB, Multi-City cheque facility and Core Power have been introduced in all these branches. These technology products coupled with quick Turn Around Time (TAT) have enabled Mid-Corporate Group to increase its business substantially and generate higher income, both interest and fee based. a.5) Stressed Assets Management During FY06, the banking industry witnessed a major policy initiative by Reserve Bank of India with the opening up of sale / purchase of non performing assets to banks, FIs and non-banking finance companies (NBFCs). During FY06, the bank sold NPAs to the tune of Rs.8.9bn against security receipts and Rs.11.41bn on cash basis to Asset Reconstruction Company (ARCIL). The progress in enforcing the security interest has somewhat slowed down due to the requirement of withdrawing suits pending before the tribunal prior to action being initiated against the defaulting borrowers under the SARFAESI Act.

b) National Banking The national banking group has 14 administrative circles encompassing a vast network of 9,177 branches, 4 sub-offices, 12 exchange bureaus, 104 satellite offices and 679 extension counters, to reach out to customers, even in the remotest corners of the country. Out of the total

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branches, 809 are specialized branches. This group consists of four business group which are enumerated below: b.1) Personal Banking SBU This SBU is mainly responsible for retail business. During FY06, personal banking advances increased from Rs.464.51bn to Rs.610.67bn, showing a growth of Rs.146.16bn at the rate of 31.47 % against a growth rate of 40.12% in the previous year. On the home loan front, several new products were introduced, tailored to fit the needs of specific customer segments, such as SBIMaxgain (minimize interest burden, earn on savings, at no extra cost), SBI NRI-Home Loans, SBI Freedom Home Loans (Loans given without mortgage of property, but against alternate securities, instead), SBI Tribal Plus Home Loans. The auto loans portfolio has shown a growth of Rs.17.74bn in absolute terms and 65% which is considerably higher than last years growth, mainly due to implementation of well planned strategies. b.2) Small & Medium Enterprises The SME Business Unit implemented comprehensive strategies, revamped business processes and with its focus on market dynamics and customer preferences, achieved commendable business growth. The initiative was implemented by focusing on specific industry segments, and concentrating on various players in the value chain. Debt restructuring mechanism for units in SME sector has been devised to ensure restructuring of debt of all eligible Small and Medium Enterprises (SMEs) on favourable terms. Focused on the SME sector, projects under Uptech are taken up in location specific and activity specific industry clusters. So far the bank has taken 28 projects for modernisation under the Project Uptech covering industries like foundry, pumps, glass, auto components, and knitwear, etc. The bank has also covered agro based industries like rice mills, sago and starch and horticulture activities like Apple Orchards and grape farming under the scheme The deposits of the SME SBU increased to Rs.1,042.70bn as at the end of March 2006 from Rs.890.60bn of previous year recording a growth of 17.08% during the year. SME advances increased to Rs.456.53bn from Rs.328.30bn of previous year, recording a growth of 39.06 %. The criteria laid down by the Government of India for growth in SME advances is 20%.

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b.3) Agricultural Banking This SBU is accountable for agricultural credit both traditional and new thrust areas like contract farming, farmers financed through Agri Export Zones (AEZs) and value chain financing. Increase in disbursements during FY06 was 83% against the Govt. of India target of 30%. Agricultural advances grew from a level of Rs.205.26bn in FY05 to Rs.305.16bn as at the end of March 06. As on November 2006, agriculture loans contribute 11% of the total loan book. b.4) Government Banking With the establishment of the government business unit and the consequent focus on marketing, business turnover of this segment has grown substantially over the years.Banks business turnover from the government business segment during 2004-05 was Rs.8,843.81bn. The turnover increased by 10.52 % to Rs.9,773.90bn during FY06. c) International Banking SBI has a network of 73 overseas offices in 30 countries in all time zones and correspondent relationship with 520 international banks in 123 countries. The bank is keen to implement core banking solution to its international branches also. During FY06, 25 foreign offices were successfully switched over to Finacle software. SBI has installed ATMs at Male, Muscat and Colombo Offices. In recent years, SBI acquired 76% shareholding in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. in Indonesia. The bank incorporated a company SBI Botswana Ltd. at Gaborone.

d) Treasury The bank manages an integrated treasury covering both domestic and foreign exchange markets. In recent years, the treasury operation of the bank has become more active amidst rising interest rate scenario, robust credit growth and liquidity constraints. The bank diversified its operations more actively into alternative assets classes with a view to diversify the portfolio and build alternative revenue streams in order to offset the losses in fixed income portfolio. Reorganisation of the treasury processes at domestic and global levels is also being undertaken to leverage on

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the operational synergy between business units and network. The reorganization seeks to enhance the efficiencies in use of manpower resources and increase maneuverability of banks operations in the markets both domestic as well as international. e) Associates & Subsidiaries The State Bank Group with a network of 14,061 branches including 4,755 branches of its seven Associate Banks dominates the banking industry in India. In addition to banking, the Group, through its various subsidiaries, provides a whole range of financial services which includes Life Insurance, Merchant Banking, Mutual Funds, Credit Card, Factoring, Security trading and primary dealership in the Money Market. e.1) Associates Banks: SBI has seven associate banks namely State Bank of Indore State Bank of Travancore State Bank of Bikaner and Jaipur State Bank of Mysore State Bank of Patiala State Bank of Hyderabad State Bank of Saurashtra

All associate banks have migrated to Core Banking (CBS) platform. Single window delivery system has been introduced in all associate banks. SBIs seven associate banks are the first amongst the public sector banks in India to get fully networked through CBS, providing aytimeanywhere banking to its customers to facilitate a bouquet of innovative customer oferings.

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e.2) Non-Banking Subsidiaries/Joint Ventures i) SBI Life: SBI Life is the third largest private insure with the market share of 10.21% among the private layers and number one in terms of number of lives insured amongst private players (no.of ives insured and policies is 25mn). In H1FY07 gross premium was Rs.7.68bn. ii) SBI Capital Markets Limited (SBICAP) SBI Caps forged ahead in issue management, project advisory and structured finance, sales distribution. To capitalize on the emerging opportunities, SBI Caps has promoted four holly owned subsidiaries viz. SBICAP Securities Ltd. for undertaking stock broking activities, SBICAPS Ventures Limited, SBICAP Trustee Company Limited for undertaking vnture capital business and SBI CAP (UK) LTD., for carrying on the Financial Services Authority (FSA) regulated activities. On the international front, the expertise of SBI Caps in the infrastructure and project advisory has received international acclaim. In addition, the company has been placed 11th globally in the Mandated Project Advisor league tables by Thompsons, and one of the projects handled by the company has been selected as the Asia Pacific Infrastructure deal of the year for FY06. SBI Caps booked gross income amounting to Rs.1.79bn in FY06 as against Rs.1.75bn in the previous year, while PAT of the company was at Rs.906.2mn in FY06 as against Rs.881.2mn in the last year. iii) SBI DFHI LTD SBI group holds 67.01% of the companys paid up capital, while other nationalized banks hold 22.46%. All India financial institutions and private sector banks hold 5.84% and the Asian Development Bank holds 4.69% as on March 31, 2006. For the year ended 31st March, 2006, the company has earned a PAT of Rs.24.4mn. Total secondary market turnover of the company was Rs.285.39bn which amounted to a market share of 12.89% among all primary dealers. iv) SBI Cards & Payments Services Pvt. Ltd. (SBICSPL) SBICSPL is ranked 2nd in industry with cards in force over 3mn as on September 06. During

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FY06, the aggregate revenue generated by the SBICSPL was Rs.5.27bn while pre-tax profit was Rs.558.6mn. v) SBI Funds Management (P) Ltd. (SBIFMPL) SBI Mutual Fund is the mutual funds arm of the bank. SBIFMPL reported a total inflow of Rs.481.67bn in the various schemes during the year. The total assets under management are Rs.132.49bn. The company reported a net profit of Rs.186.4mn as at the end of March, 2006. f) Human Resources The bank had total staff strength of 198,774 on the 31st March, 2006. Of this, 29.51% are officers, 45.19% clerical staff and the remaining 25.30% were sub-staff. SBI had launched VRS scheme for its employees in FY01 in which it has reduced it staff by approxima5,000 and estimates natural retirement of another 5,000 employees in next 4-5 year.

Financial Performance - FY06 SBI is the largest commercial bank in India. SBI as a group handles more than one fourth business of the Indian banking industry. During the last five years, SBIs total balance sheet size grew at a CAGR of 9.4% and stood at Rs4,938bn at the end of FY06. The bank has wide distribution network with more then 14,000 branches and 5,600 plus ATMs. Currently the bank is focusing on its network and trying to mobilize more low cost deposits. We have analysed the performance of SBI based on various key parameters, which have been enumerated below: Analysis of Income Statement Net interest income growing steadily As mentioned earlier, SBI has reported a steady performance since the past few years. Interest income of the bank grew at a CAGR of 6.5% during the period 2001-2006 and stood at Rs.357.95bn at the end of Mar 31, 2006. During the same period, interest expense rose by a

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modest CAGR of 2.6% due to restructuring of its liabilities. This resulted in a CAGR of 13.3% in net interest income. The bank continued this growth momentum in 2006 to register an impressive year-on-year improvement in financial performance. For the financial year ended Mar 31, 2006 interest income of the bank grew by 10.4% over the previous year to Rs.357.95bn while interest expense rose by 9.1% to Rs.201.6bn. The overall result was that the net interest income of the bank jumped by 12.1% to Rs.156.36bn. The increase in net interest income was primarily driven by the strong balance sheet growth and increase in the share of demand deposits in total deposits during the year.

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Historical Net Interest Income of the Bank

Another major contributor to the growth of net interest income was the rapid growth in low cost deposits, which helped the bank in containing its cost of funds. During 2005-06, low cost deposits grew by 19.3% on a year-on-year basis, which helped contain the cost of funds. In addition, the redemption of India Millenium Deposit and Resurgent India Bonds has also helped the bank to lower its cost of funds. Another positive factor is that the interest expense to interest income ratio declined consistently from 69.5% in 2002 to 56.3% in 2006. We believe that the bank would sustain this ratio and can marginally improve on it mainly because of its resource mobilization power and cost control measures. Interest Income and Interest Expense trends for the Bank

Source: SBI, Global Research Analysis Non-interest income - leading from the front Historically, it has been the non-interest income that gave a fillip to the earnings of the bank The non interest income of the bank increased at a CAGR of 13.7% over the last five years. In 2006 non-interest income (excluding sale of investment) made further headway as it improved by a stupendous 27.26% to reach Rs.73.9bn. The key contributor to strong growth in non interest income has been other income. Other income contributed 14% in 2002 and 25.0% in 2006 to total non-interest income. The fees and commission income, which constituted around 54% of the total non interest income, recorded a growth of 12.7% in 2006 and stood at Rs.39.96bn.

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Going forward, we believe that the bank with its domestic expansion plan will give much needed thrust to its efforts to enhance fees and commission income. Income from foreign exchange transactions also recorded impressive gain of 80.8% to Rs.9.55bn. Forex income contributed 12.92% to the total non-interest income of the bank. Trend in Non-Interest Income

Source: SBI, Global Research Analysis Income from investments also formed a part of the non-interest income of the bank in the past, though it has always been volatile. During 2005-06, there has been a significant decline in profits from trading in investments to Rs.5.9bn compared to Rs.17.75bn in the previous year. Provision for loan assets The bank continues to provide aggressively against loan assets and has also created a floating provision. For the year ended Mar 06, the bank has made total provisions of Rs186.3bn (against Rs.165.96 in the previous year), which includes loan-loss provisions, provisions for standard assets and floating provisions. Pursuant to the change in provisioning requirement for standard assets from 0.25% to 0.4% as notified by RBI, the bank has made an additional provision during 2005-06. The bank has provided Rs.38.92bn towards provision for depreciation on investments in India, including amortisation of premium on Held to Maturity category as against Rs.23.27bn in 2004-05 and Rs.4.05bn towards standard assets as against Rs.1.15bn in 2004-05. Including this amount, the total provision held on standard assets amounts to Rs.9.13bn. Operating expenses Operating expenses of the bank grew in line with the growth in business. The total operating expenses grew at a CAGR of 7.2% in the last five years. For the year ended Mar-06, operating expenses rose by 16.4% over the previous year and stood at Rs.117.3bn. Employee expenses, which always contributed substantial chunk of the total operating expenses, grew by 17.6% in FY2006 to Rs.81.2bn. During the year there was decline in the operational efficiency as the cost to total operating income after provision improved from 60.7% in FY05 to 62.9% in FY06.

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Break up of Operating Expenditures

Source: SBI, Global Research Analysis Impressive Earnings Growth Overall, the bank reported a strong performance in the past five years with its net profitability of the bank recording a CAGR of impressive 22.4%. The year 2006 also turned out to be profitable for the bank with the bank reporting a net profit of Rs.44.1bn, a rise of just 2.4% over FY2005. The improved earnings have also led to the improvement in the earning per share of the bank, which rose from Rs.30.5 in FY2001 to Rs.83.7 in FY06. Manpower productivity has also risen over the years as profit per employee increased steadily from Rs.0.2mn in FY05 to Rs.0.22mn in FY06. During the same period the business per employee has been also increased to Rs29.9mn. Despite the improved earnings over the years, some of the banks profitability indicators like Return on Average Assets (RoAA) and Return on Average Equity (RoAE) seem to have deteriorated. This is primarily due to sharp rise in assets for expansion purpose. The return on average assets declined from 0.94% in FY04 to 0.92% in FY06, while the return on average .

Maintained efficiency SBI has displayed a steady performance in the last few years in scaling up its efficiency levels. Net Interest Income (NII) of the bank has witnessed a CAGR of 13.3% in the last five years. The net interest margin (NIM) of the bank has gone up from as low as 2.9% in FY01 to 3.4% in FY06. Spread of the bank has also increased from 1.7% in FY02 to 3% in FY06.

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Rising NII & NIM

Source: SBI, Global Research Analysis Higher Dividend The bank has recommended a higher dividend rate of 140% on equity shares, compared to the 125% dividend declared for the previous year. With the increase in earnings in future, the bank is expected to distribute handsome dividends to shareholders. Analysis of Balance Sheet Assets growing strongly The asset profile of SBI is spread over a wide array of asset categories similar to the other commercial banks in India. This has enabled the bank to minimise its risk exposure, yet achieve the expected returns. Due to the banks nature of operations, loan portfolio accounted for a substantial portion of the banks assets and it formed 52.98% of the total assets in FY06. Investments portfolio also accounted for the major portion of the banks assets. In 2006, investments portfolio accounted for 32.9% of the total assets. The total assets of the bank grew at a CAGR of 9.4% in the last five years and stood at Rs.4,938.7bn at the end of FY06 representing an increase of 7.4% over FY2005.

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Break up of Assets

Source: SBI, Global Research Due to stiff competition prevailing in the industry total credit book of the bank grew at a CAGR of 18.2% over the last five years. The asset growth in FY06 was mainly fuelled by 29.3% growth in gross loans and advances to customers and banks and stood at Rs.2,616.4bn Project finance achieved total sanctions of Rs.238.86bn (fund based and non fund based) including syndication amount of Rs.140.95bn during the period ended March 2006 while mid corporate credit has increased by 42% to Rs194.3bn. The aggregate advances (excluding food and inter-bank advances) of the national banking group which includes personal , SME, agricultural and government banking increased from Rs.980.50bn in FY05 to Rs.1,337.81bn in FY06 registering a growth of 36.44% during the year. This is on account of an impressive growth of 39.72 % under agriculture and 31.49% growth in personal segment. Housing loans portfolio registered an increase of 28.11% growth. Personal banking advances increased from Rs.464.51bn in the previous year to Rs.610.67bn in FY06, showing a growth of Rs.146.16bn at the rate of 31.47 % against a growth rate of 40.12% in the previous year. The SME advances increased to Rs.456.53bn in FY06 from Rs.328.30bn in the previous year, recording a growth of 39.06 %. The criteria laid down by the government for growth in SME advances is 20%. Agricultural advances grew from a level of Rs. 205.26bn in March 05 to Rs.305.16bn as at the end of March 06. Growth during the year was Rs.99.90bn and 44

the y-o-y growth rate works out to 49%. NPL is declining though provisions have also declined Asset quality of SBI has been improving since the past few years despite sharp rise in asset size. The ratio of gross NPAs to gross loans have come down from 11.95% in March 2002 to 3.88% in March 2006. With continuous cleaning of the balance sheet, net NPAs have now come down to 1.87%. The bank has provided for about 53% of its non-performing loans in 2006. The bank continued to improve its asset quality, as a result of which net NPAs, as a percentage of net customer assets, declined substantially from 2.65% as on 31st March 2005 to 1.87% as on 31st March 2006. The bank is looking forward to clean its balance sheet and write off some of its old problem loans. Gross NPL in absolute terms has declined from Rs 124.56bn in 2005 to Rs103.76bn in 2006. During the same period, coverage has declined from 57% in 2004 to 53% in 2006. In case of economic slowdown, SBIs asset quality is likely to take a hit as the bank has grown its asset coupled with an increase in gross NPLs. This coupled with low coverage ratio, is likely to affect bottom line in case of an economic slowdown. Investment Portfolio The investment portfolio constituted around 32.91% of the total asset size of the bank at the end of FY06. The banks investments declined by 17.54% from Rs.1,971bn in FY05 to Rs.1,625bn in FY06. A major portion of the investment was in the domestic market in government and other approved securities. The overall domestic investment portfolio has, however, shrunk from Rs.1,954bn in FY05 to Rs.1,593bn in FY06 as the bank redeemed some of its investment to divert funds to boost loans and advances portfolio. During the year, the bank further de-risked the investment portfolio to manage interest rate risk through a combination of measures such as shifting securities amounting to Rs.297.88bn from AFS to HTM, use of derivatives, reducing the modified duration, etc. The government is planning to bring an ordinance to empower the RBI to fix the level of banks SLR. A cut in SLR rate at this point would infuse future liquidity into the system. Thought the law allows RBI to lower the banks SLR requirements below exciting 25%, we believe that the central bank unlikely to take such steps, as concerns over excess liquidity in he system and claiming inflation persist.

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Funding Structure Historically, around 5-6% of the balance sheet was funded by shareholders equity with the est coming from customers and inter-bank deposits. The bank has been able to expand its eposit base by rapid expansion in semi-urban and rural areas of the country and by way of ntroducing number of innovative products.

Borrowings and subordinated debt Borrowing from RBI and other banks and financial institutions constituted around 9.5% of he total liabilities and shareholders equity of the bank while subordinated debt comprised round 1.8% of the same. In FY06, borrowings of the bank increased by 59.7% to Rs.1,993bn. Subordinated debt outstanding at the end of FY06 stood at Rs.86.7bn and is a long-term unsecured non-convertible debt which qualifies as Tier II risk based capital.

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ICICI BANK
Vision
To be the leading provider of financial services in India and a major global bank.

Mission
We will leverage our people, technology, speed and financial capital to be the banker of first choice for our customers by delivering high quality, world-class products and services expand the frontiers of our business globally. play a proactive role in the full realisation of Indias potential. maintain a healthy financial profile and diversify our earnings across businesses and geographies. maintain high standards of governance and ethics. contribute positively to the various countries and markets in which we operate. create value for our stakeholders. ISSUANCE OF EQUITY CAPITAL In fiscal 2008, ICICI Bank successfully concluded a capital raising exercise, raising a total of about Rs. 200.00 billion through a simultaneous public issue in India and issue of American Depositary Shares (ADS) in the United States. The public issue in India was subscribed 11.5 times and the ADS issue was subscribed over 5 times. The domestic issue was priced at Rs. 940, representing a premium of 3.6% to the average closing price from the announcement to the pricing date and the ADS was priced at USD 49.25, representing a premium of 6.6% over the domestic issue price.

SUBSIDIARY COMPANIES At March 31, 2008, ICICI Bank had 17 subsidiaries as listed below: Domestic Subsidiaries International Subsidiaries ICICI Securities Limited ICICI Bank UK PLC

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ICICI Securities Primary Dealership Limited ICICI Bank Canada ICICI Prudential Life Insurance Company Limited ICICI Wealth Management Inc.1 ICICI Lombard General Insurance Company Limited ICICI Bank Eurasia Limited Liability Company ICICI Prudential Asset Management Company Limited ICICI Securities Holdings Inc.2 ICICI Prudential Trust Limited ICICI Securities Inc.3 ICICI Venture Funds Management Company Limited ICICI International Limited ICICI Home Finance Company Limited ICICI Investment Management Company Limited ICICI Trusteeship Services Limited 1. Subsidiary of ICICI Bank Canada. 2. Subsidiary of ICICI Securities Limited. 3. Subsidiary of ICICI Securities Holdings Inc. As approved by the Central Government vide letter dated May 15, 2008 under Section 212(8) of the Companies Act, 1956, copies of the balance sheet, profit & loss account, report of the board of directors and report of the auditors of each of the subsidiary companies have not been attached to the accounts of the Bank for fiscal 2008. The Bank will make available these documents/details upon request by any Member of the Bank. These documents/details will be available on the Banks website www.icicibank.com and will also be available for inspection by any Member of the Bank at its Registered Office . & CFO CORPORATE GOVERNANCE ICICI Bank has established a tradition of best practices in corporate governance. The corporate governance framework in ICICI Bank is based on an effective independent Board, the separation of the Boards supervisory role from the executive management and the constitution of Board Committees, generally comprising a majority of independent Directors and chaired by an independent Director, to oversee critical areas.

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I.

Philosophy of Corporate Governance

ICICI Banks corporate governance philosophy encompasses not only regulatory and legal requirements, such as the terms of listing agreements with stock exchanges, but also several voluntary practices aimed at a high level of business ethics, effective supervision and enhancement of value for all stakeholders. Whistle Blower Policy ICICI Bank has formulated a Whistle Blower Policy for the ICICI Group. In terms of this policy, employees of ICICI Bank and its group companies are free to raise issues, if any, on breach of any law, statute or regulation by the Bank and on the accounting policies and procedures adopted for any area or item and report them to the Audit Committee through specified channels. This mechanism has been communicated and posted on the Banks intranet. The increasing globalisation of Indian corporates and financial services presents ICICI Bank with a unique opportunity to leverage its cost effective IT and operations to offer world class solutions to customers across the globe. Code of Business Conduct and Ethics The Board of Directors of the Bank adopted a new Group Code of Business Conduct and Ethics (the Group Code) primarily by strengthening and providing illustrative guidance on the existing Code of Business Conduct and Ethics approved earlier by the Board. The Group Code aims at ensuring consistent standards of conduct and business ethical practices across the constituents of the ICICI Group. Consequently, each constituent of the ICICI Group would review their respective codes and update the same in accordance with the Group Code. This Code is also available on the website of the Bank www.icicibank.com. In terms of Clause 49 of the Listing Agreement, a confirmation from the Managing Director & CEO regarding compliance with the Code by all the Directors and senior management is given on page 32 of the Annual Report.

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CEO/CFO Certification In terms of Clause 49 of the Listing Agreement, the certification by the Managing Director & CEO and Joint Managing Director & Chief Financial Officer on the financial statements and internal controls relating to financial reporting has been obtained. Board of Directors ICICI Bank has a broad-based Board of Directors, constituted in compliance with the Banking Regulation Act, 1949, Companies Act, 1956 and listing agreements entered into with stock exchanges and in accordance with best practices in corporate governance. The Board functions either as a full Board or through various committees constituted to oversee specific operational areas. The Board has constituted nine committees, namely, Audit Committee, Board Governance & Remuneration Committee, Credit Committee, Customer Service Committee, Fraud Monitoring Committee, Risk Committee, Share Transfer & Shareholders/ Investors Grievance Committee, Strategy Committee and Committee of Directors. A majority of these Board Committees are chaired by independent Directors and mainly consist of independent Directors. At March 31, 2008, the Board of Directors consisted of 16 members. There were five meetings of the Board during fiscal 2008 on April 28, July 21, and October 19 in 2007 and January 19 and March 7-8 in 2008. The names of the Directors, their attendance at Board Meetings during the year and the number We are focusing on building equitable partnerships with corporate clients and using our capital optimally to support their domestic projects and international acquisitions. We are growing our operations in select high-potential international markets to consolidate our position in India-linked businesses and build an international retail deposit franchise.

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II.

Audit Committee

Terms of Reference The Audit Committee provides direction to the audit function and monitors the quality of internal and statutory audit. The responsibilities of the Audit Committee include overseeing the financial reporting process to ensure fairness, sufficiency and credibility of financial statements, recommendation of appointment and removal of central and branch statutory auditors and chief internal auditor and fixation of their remuneration, approval of payment to statutory auditors for other services rendered by them, review of functioning of Whistle Blower Policy, review of the quarterly and annual financial statements before submission to the Board, review of the adequacy of internal control systems and the internal audit function, review of compliance with inspection and audit reports and reports of statutory auditors, review of the findings of internal investigations, review of statement of significant related party transactions, review of management letters/letters on internal control weaknesses issued by statutory auditors, reviewing with the management, the statement of uses/application of funds raised through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds utilised for the purposes other than those stated in the offer document/prospectus/notice and the report submitted by the monitoring agency, monitoring the utilization of proceeds of a public or rights issue and making appropriate recommendations to the Board to take steps in this matter, discussion on the scope of audit with external auditors and examination of reasons for substantial defaults, if any, in payment to stakeholders. The Committee is also empowered to appoint/oversee the work of any registered public accounting firm, establish procedures for receipt and treatment of complaints received regarding accounting and auditing matters, engage independent counsel as also provide for appropriate funding for compensation to be paid to any firm/advisors. In addition, the Audit Committee also exercises oversight on the compliance of risk management framework by providing directions to the regulatory compliance function of the Bank.

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IX. Strategy Committee Terms of reference The functions of the Committee are to evaluate various strategic opportunities, including acquisitions/ divestitures, restructuring and other strategic initiatives for the Bank and its subsidiaries and recommend the same to the Board. Composition The Strategy Committee comprises five Directors N. Vaghul, M. K. Sharma, Narendra Murkumbi, K. V. Kamath and Chanda D. Kochhar. The Committee is chaired by N. Vaghul. The Strategy CommitteeCommittee for borrowers identified as Wilful Defaulters (all comprising certain wholetime Directors and executives) and Committee of Executives, Compliance Committee, Product & Process Approval Committee, Regional Committees for India and overseas operations, Outsourcing Committee, Operational Risk Management Committee and other Committees (all comprising executives). These committees are responsible for specific operational areas like asset-liability management, approval of credit proposals, approval of products and processes and management of operational risk, under authorisation/ supervision of the Board and its Committees was constituted by the Board at its Meeting held on March 7-8, 2008 and no meetings of the Committee were held during fiscal 2008. X. Committee of Directors Terms of reference The powers of the Committee include approval of credit proposals as per authorisation approved by the Board, approvals in respect of borrowings and treasury operations and premises and property related matters.

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Composition The Committee of Directors comprises of all five wholetime Directors and is chaired by K. V. Kamath, Managing Director & CEO. XI. Other Committees In addition to the above, the Board has from time to time constituted various committees namely, Asset- Liability Management Committee, Committee for Identification of Willful defaulters,

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ICICI Bank has about 158.98 million ADS (equivalent to about 317.96 million equity shares) outstanding, which constituted 28.58% of ICICI Banks total equity capital at March 31, 2008. Currently, there are no convertible debentures outstanding.

EMPLOYEE STOCK OPTION SCHEME In fiscal 2000, ICICI Bank instituted an Employee Stock Option Scheme (ESOS) to enable the employees and Directors of ICICI Bank and its subsidiaries to participate in the future growth and financial success of the Bank. As per the ESOS as amended from time to time, the maximum number of options granted to any employee/director in a year is limited to 0.05% of ICICI Banks issued equity shares at the time of the grant, and the aggregate of all such options is limited to 5% of ICICI Banks issued equity shares on the date of the grant (equivalent to 55.6 million shares at April 26, 2008). Options granted for fiscal 2003 and earlier years vest in a graded manner over a three-year period, with 20%, 30% and 50% of the grants vesting in each year, commencing not earlier than 12 months from the date of grant. Options granted for fiscal 2004 onwards vest in a graded manner over a four-year period, with 20%, 20%, 30% and 30% of the grants vesting in each year, commencing not earlier than 12 months from the date of grant. Options can be exercised within 10 years from the date of grant or five years from the date of vesting, whichever is later. The price of the options granted prior to June 30, 2003 is the closing market price on the stock exchange, which recorded the highest trading volume on the date of grant. The price for options granted on or after June 30, 2003 till July 21, 2004 is equal to the average of the high and low market price of the equity shares in the two week period preceding the date of grant of the options, on the stock exchange which recorded the highest trading volume during the two week period. The price for options granted on or after July 22, 2004 is equal to the closing price on the stock exchange which recorded the highest trading volume preceding the date of grant of options. The above pricing is in line with the SEBI guidelines, as amended from time to time. 30

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ORGANISATION STRUCTURE Our organisation structure is designed to be flexible and customer-focused. At the same time, we seek to ensure effective control and supervision and consistency in standards across the organisation. The organisation structure is divided into the following principal groups: Corporate Centre, comprising financial reporting; planning and strategy; asset liability management; investor relations; secretarial; corporate communications; risk management; compliance; internal audit; legal; financial crime prevention and reputation risk management; and the Banks proprietary trading operations across various markets . Retail Banking Group, comprising the retail liabilities, retail assets and small enterprises businesses. Rural, Micro-banking and Agri-business Group, comprising the rural and agricultural lending and other banking businesses. Wholesale Banking Group, comprising the corporate & investment banking, project finance and government banking businesses. International Banking Group, comprising the Banks international operations, including operations in various overseas markets as well as products and services for non-resident Indians, international trade finance, correspondent banking and wholesale resource mobilisation. Global Markets Group, comprising our global client-centric treasury operations. Global Operations & Middle Office Groups, which are responsible for back-office operations, controls and monitoring of our domestic and overseas operations.

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 The Human Resources Management Group is responsible for the Banks recruitment, training, leadership development and other personnel management functions and initiatives. The Technology Management Group (TMG) is responsible for enterprise-wide technology initiatives, with dedicated technology teams serving individual business groups and managing information security and shared infrastructure. The Facilities Management & Administration Group is responsible for management of corporate facilities and administrative support functions. The Organisational Excellence Group is responsible for enterprise-wide quality and process improvement initiatives. BUSINESS REVIEW During fiscal 2008, the Bank continued to grow and diversify its asset base and revenue streams by leveraging the growth platforms created over the past few years. We aintained our leadership position in retail credit, achieved robust growth in our fee income from both corporate and retail businesses, strengthened our deposit franchise and significantly scaled up our corporate and international banking operations.

Retail Banking
We were among the first banks to identify the growth potential of retail credit in India. Between 2003 and 2006 the banking system as a whole saw significant expansion of retail credit, with retail loans accounting for a major part of overall systemic credit growth. However, due to the increase in interest rates following inflationary pressures, retail credit growth in the banking system has moderated from about 30% over the last few years to about 1015% currently. We continue to believe that retail credit has robust long-term growth potential, driven by sound fundamentals, namely, rising income levels and favourable demographic profile. At the same time, the retail credit business requires a high level of credit and analytical skills and strong 56

operations processes backed by technology. Our retail strategy is centred around a wide distribution network, comprising our branches and offices, direct marketing agents and dealer and real estate developer relationships; a comprehensive and competitive product suite; technology-enabled back-office processes; and a robust credit and analytical framework. We are the largest provider of retail credit in India. Our total retail portfolio was Rs. 1,316.63 billion at March 31, 2008, constituting 58% of our total loans at that date. During fiscal 2008, we continued our focus on strengthening our retail deposit franchise to create a stable funding base. Our current and savings account (CASA) deposits as a percentage of total deposits increased from 22% at March 31, 2007 to 26% at March 31, 2008, with savings account deposits increasing by 36% during fiscal 2008. During the year, we have expanded our branch network substantially. At March 31, 2008, we had 1,262 branches & extension counters compared to 755 branches & extension counters at March 31, 2007, including the addition of about 200 branches through the merger of Sangli Bank. Our branch network has further increased to 1,367 as of May 31, 2008. We continued to expand our electronic channels, namely internet banking, mobile banking, call centres, point of sale terminals and ATMs, and migrate customer transaction volumes to these channels We increased our ATM network to 3,881 ATMs at March 31, 2008 from 3,271 ATMs at March 31, 2007. Our call centres have a total seating capacity of approximately 6,375 sales and service workstations. Transaction volumes on internet and mobile banking have grown significantly, constituting an increasing percentage of total customer transactions. During the year, we launched a mobile banking service enabling a wide range of banking transactions using the mobile phone.

Small Enterprises
During fiscal 2008, our small enterprises customer base increased by 26% to about 1.1 million accounts. We have introduced our service offerings in over 400 new branches, increasing our coverage to over 1,000 branches. During the year, we have focused on product specialisation including investment banking for SMEs. We have continued to focus on shaping the small and

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medium enterprises sphere in India through initiatives such as the Emerging India Awards, the SME CEO Knowledge Series - a platform to mentor and assist SME entrepreneurs, and the SME Dialogue - a weekly feature in a leading financial newspaper sharing SME best practices and success stories. During the year, we have launched several new products and services like the SME toolkit an online business and advisory resource for SMEs.

Corporate Banking
Our corporate banking strategy is based on providing comprehensive and customised financial solutions to our corporate customers. We offer a complete range of corporate banking products including rupee and foreign currency debt, working capital credit, structured financing, syndication and transaction banking products and services. Our corporate and investment banking franchise is built around a core relationship team that has strong relationships with almost all of the countrys corporate houses. The relationship team is product agnostic and is responsible for managing banking relationships with clients. We have also put in place product specific teams with a view to focus on specific areas of expertise in designing financial solutions for clients. Through our relationship teams working in tandem with product solution teams, we have deepened our client relationships across our product portfolio resulting in significant growth in income and wallet share among all our top corporate clients, as compared to the previous year. We have created an integrated Global Investment Banking Group, which is responsible for working with the relationship team in India and our international subsidiaries and branches, for origination, structuring and execution of investment banking mandates on a global basis. We have also restructured our delivery team for transaction banking products by creating dedicated sales teams for trade services and transaction banking products. This has been done with the intent to increase our market share from transaction banking products, which will translate into recurring fee income for the Bank. We have also focused on increasing market share in trade finance by leveraging and further strengthening correspondent banking relationships.

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Annual Report 2007-2008

Fiscal 2008 saw continued demand for credit from the corporate sector, with growth and additional investment demand across all sectors. We were able to leverage our international presence and deep corporate relationships to work on overseas acquisitions made by Indian companies and infrastructure projects in India. During fiscal 2008 we were involved in 75% of outbound mergers and acquisitions deals from India. We are now a preferred partner for Indian companies for syndication of external commercial borrowings and other fund raising in international markets and have been ranked number one in offshore loan syndications of Indian corporates in calendar year 2007. The resurgence of the Indian economy, the need for infrastructure development and the international expansion of Indian companies provide exciting opportunities for our corporate banking business. We believe that we are well-placed to capitalise on these opportunities by combining our domestic and international balance sheets, and our credit and structured financing expertise. Project Finance The Indian economy is witnessing significant investments with the investment pipeline projected at US$ 700.0 billion over the next few years. Our project finance proposition is based on our constant endeavour to contribute to the project framework and enhance the bankability of projects through our innovative structuring skills, sectoral knowledge and robust due diligence techniques. In fiscal 2008, we consolidated our lead arranger position across a variety of signature project finance transactions in diverse sectors and also forayed into select international project finance transactions. We believe that there is significant potential in the infrastructure and manufacturing sectors. The power sector is expected to witness large investments involving significant capacity additions of more than 70 gigawatts over the next five years predominantly driven by increased private sector participation. The ultra mega power projects, increasing interest in hydroelectric generation, and offering of transmission projects through competitive bidding are expected to provide attractive funding opportunities. In the transportation sector, road development is being undertaken across both the national highways (through the National Highway Development Programme) and the state highways. The port sector has been witnessing

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traffic growth of over 14% per annum for the last few years with increased participation of the private sector and international players. There is an increased focus on the railways sector with investments expected in modernization of railway stations, logistic parks and dedicated freight corridors. The modernisation, upgradation and expansion of metro and non-metro airports are underway and are expected to provide significant business opportunities in the future. In addition to the Delhi and Mumbai airports, which have already been transferred to private developers, the airports at Kolkata and Chennai are also proposed to be modernised through a suitable model. Greenfield airports are also proposed to be set up at key business and tourist destinations, such as Bangalore and Hyderabad, which have already seen project completion under private management. The telecom sector is expected to see continued growth given the relatively low teledensity and the fresh impetus provided by the issuance of new licenses, which would result in large investments in rollout of new networks alongside the network expansion of existing service providers. The oil and gas sector is witnessing activity across the entire value chain, from exploration and production through increased private sector participation under the New Exploration Licensing Policy, to setting up of large-scale refineries by both public sector and private sector players. The manufacturing sector has seen significant capacity additions being undertaken and planned including greenfield projects in steel, aluminium and cement. Strong growth in infrastructure, real estate and demand for consumer goods and automobiles is expected to increase the demand for steel, aluminium and cement. Indias advantage in terms of low cost of manufacturing and availability of talent has led to several foreign majors setting up large capacities in auto, auto ancillaries and engineering industries to meet the growing domestic demand and also as a manufacturing hub to serve global markets.

International Banking
In 2001, we identified international banking as a key opportunity, aiming to cater to the crossborder needs of clients and leveraging our domestic banking strengths to offer products internationally. We have made significant progress in the international business since we set up our first overseas branch in Singapore in 2003. ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka, Dubai International Finance Centre, Qatar Financial Centre and the United States and 60

representative offices in the United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The Banks wholly owned subsidiary ICICI Bank UK PLC has nine branches in the United Kingdom and a branch each in Belgium and Germany. ICICI Bank Canada has eight branches including three in Toronto. ICICI Bank Eurasia LLC has six branches including three branches in Moscow and one in St. Petersburg. Our international strategy is focused on building a retail deposit franchise, diverse wholesale funding sources and strong syndication capabilities to support our corporate and investment banking business; achieving the status of a non-resident Indian (NRI) community bank in key markets; and expanding private banking operations for India-centric asset classes. During fiscal 2008, we focused on deepening our presence in existing overseas locations and expanding our operations in key markets. In line with our strategy to establish a presence in large markets with significant savings pools, we entered into Germany through a branch established by ICICI Bank UK PLC. We have been able to successfully leverage our technology advantage to create a growing international deposit base. Currently, we have over 500,000 NRI customers. We have undertaken significant brand-building initiatives in international markets and have emerged as a well-recognised financial services brand for NRIs. We continue to maintain a market share of 25% in inward remittances to India. During fiscal 2008, we launched innovative products like instant money transfer and enhanced our focus on customer relationship management and process automation.

Rural banking and agri-business

We believe the rural economy has high growth potential and offers large credit growth opportunities. Towards this end, our suite of products and services is targeted to address the needs of both the farm and non-farm sectors. Our retail product suite encompasses loans for crop production, purchase of farm equipment, commodity based finance as well as various savings, investment and insurance products. We also offer micro-finance and jewel loans. We have also focused on enhancing credit to farmers by leveraging on corporate partnerships. For example, we have partnered with various dairies to provide financing to farmers for purchase of milch cattle. We also provide credit and banking services to SMEs active in the agricultural value chain. To enhance our service quality and product delivery capabilities we have developed a large network of rural branches which is further augmented by non-branch channels. Rural banking in India is still at a nascent stage and the deployment of technology channels and modern banking methods 61

for rural lending continues to be an evolving process. In line with our learnings from our rural banking operations, we undertook a comprehensive review of and realigned our channel architecture, credit underwriting processes and account management systems. We have put in place a robust risk management structure to mitigate and manage credit, operational and fraud risks. Through this, we aim to create a strong foundation for scaling up of our rural business.

RISK MANAGEMENT
Risk is an integral part of the banking business and we aim at delivering superior shareholder value by achieving an appropriate trade-off between risk and returns. The key risks are credit risk, market risk and operational risk. Our risk management strategy is based on a clear understanding of various risks, disciplined risk assessment and measurement procedures and continuous monitoring. The policies and procedures established for this purpose are continuously benchmarked with international best practices. We have four dedicated groups, the Global Risk Management Group (GRMG), the Compliance Group, Internal Audit Group and the Financial Crime Prevention and Reputation Risk Management Group (FCPRRMG) which are responsible for assessment, management and mitigation of risk in ICICI Bank. During fiscal 2008, we formed the FCPRRMG to design and implement appropriate internal controls in respect of antimoney laundering, fraud prevention and reputation risk management. In addition, the Credit and Treasury Middle Office Groups and the Global Operations Group monitor operational adherence to regulations, policies and internal approvals. These groups are completely independent of all business operations. GRMG is further organised into the Global Credit Risk Management Group, the Global Market Risk Management Group and the Operational Risk Management Group. The internal audit and compliance function are responsible to the Audit Committee of the Board.

Credit Risk
Credit risk is the risk that a borrower is unable to meet its financial obligations to the lender. We measure, monitor and manage credit risk for each borrower and also at the portfolio level. We have standardised credit approval processes, which include a well-established procedure of comprehensive credit appraisal and rating. We have developed internal credit rating methodologies for rating obligors. The rating factors in quantitative and qualitative issues and

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credit enhancement features specific to the transaction. The rating serves as a key input in the approval as well as post-approval credit processes. Credit rating, as a concept, has been well internalised within the Bank.The rating for every borrower is reviewed at least annually. Industry knowledge is constantly updated through field visits and interactions with clients, regulatory bodies and industry experts. In our retail credit operations, all products, policies and authorisations are approved by the Board or a Board Committee or pursuant to authority delegated by the Board. Credit approval authority lies only with our credit officers who are distinct from the sales teams. Our credit officers evaluate credit proposals on the basis of the approved product policy and risk assessment criteria. Credit scoring models are used in the case of certain products like credit cards. External agencies such as field investigation agencies are used to facilitate a comprehensive due diligence process. Before disbursements are made, the credit officer conducts a centralised check on the delinquencies database and review of the borrowers profile. We continuously refine our retail credit parameters based on portfolio analytics. We also draw upon reports from the Credit Information Bureau (India) Limited (CIBIL).

Market Risk
Market risk is the possibility of loss arising from changes in the value of a financial instrument as a result of changes in market variables such as interest rates, exchange rates, credit spreads and other asset prices. Our exposure to market risk is a function of our trading and asset-liability management activities and our role as a financial intermediary in customer-related transactions. The objective of market risk management is to minimize the impact of losses on earnings and equity capital due to market risk. Market risk policies include the Investment Policy and the Asset-Liability Management (ALM) Policy. The policies are approved by the Board of Directors. The Asset-Liability Management Committee (ALCO) stipulates liquidity and interest rate risk limits, monitors adherence to limits, articulates the organisations interest rate view and determines the strategy in light of the current and expected environment. These policies and processes are articulated in the ALM Policy. The Investment Policy addresses issues related to investments in various trading products. The Global Market Risk Management Group exercises independent control over the process of

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market risk management and recommends changes in processes and methodologies for measuring market risk.

Interest rate risk

Interest rate risk is measured through the use of re-pricing gap analysis and duration analysis. Liquidity risk is measured through gap analysis. We ensure adequate liquidity at all times through systematic funds planning and maintenance of liquid investments as well as by focusing on more stable funding sources such as retail deposits. We limit our exposure to exchange rate risk by stipulating position limits. The Treasury Middle Office Group monitors the asset-liability position under the supervision of the ALCO. It also monitors the treasury activities and adherence to regulatory / internal policy guidelines. The Treasury Middle Office Group is also responsible for processing treasury transactions, tracking the daily funds position and complying with all treasury-related management and regulatory reporting requirements.

Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational risks in the Bank are managed through a comprehensive internal control framework. The control framework is designed based on categorisation of all functions into front-office, comprising business groups; mid-office, comprising credit and treasury mid-offices; back-office, comprising operations; and corporate and support functions RBI has mandated all banks to develop an operational risk management framework. In accordance with these guidelines, our board of directors has approved an Operational Risk Management Policy. The policy is applicable across the Bank including overseas offices and aims to ensure clear accountability, responsibility and mitigation of operational risk. We have constituted an Operational Risk Management Committee (ORMC) to oversee the implementation of the Operational Risk Management framework. The framework comprises identification of risks, assessment of controls to mitigate these risks, risks measurement, risks monitoring and mitigation. We have formed an independent Operational Risk Management Group to facilitate its implementation.

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TREASURY
The treasury operations comprise the balance sheet management function, the client-related corporate markets business and the proprietary trading activity. Fiscal 2008 saw the continuation of volatility in interest rates, varying liquidity conditions, global credit tightening and inflationary concerns resulting in significant movement in the yield curve at various points in time. The government bond markets witnessed significant volatility in yields. The balance sheet management function continued to actively manage the government securities portfolio held for compliance with SLR norms to optimise the yield on this portfolio, while maintaining an appropriate portfolio duration given the volatile interest rate environment. The focus of our proprietary trading operations was to maximise profits from positions across key markets including corporate bonds, government securities, interest rate swap, equity and foreign exchange markets. While the adverse market conditions in the last quarter of fiscal 2008 had an adverse impact on equity proprietary trading operations, the Bank capitalised on the opportunities in the fixed income markets realizing gains on its portfolio. The Banks overseas branches and subsidiaries also invest in credit derivatives with a majority of exposures in this portfolio being to Indian corporates. We provide foreign exchange and derivative products and services to our customers through our Global Markets Group. These products and services include foreign exchange products for hedging currency risk, foreign exchange and interest rate derivatives like options and swaps and bullion transactions. We also hedge our own exchange rate and commodity risks related to these products with banking counterparties. In line with the international expansion of the bank, treasury functions have been set up in United States, Hong Kong, Sri Lanka, Bahrain, Singapore and the Offshore Banking Unit in Mumbai to support the operations of these branches.

KEY SUBSIDIARIES
ICICI Prudential Life Insurance Company ICICI Prudential Life Insurance Company (ICICI Life) continued to maintain its market leadership among private sector life insurance companies with a retail market share of about 12.7% in the overall industry in fiscal 2008 (on weighted received premium basis) as against 65

9.1% in fiscal 2007. ICICI Lifes new business premium (on weighted received premium basis) grew by 68.3% from Rs. 39.71 billion in fiscal 2007 to Rs. 66.84 billion in fiscal 2008. Life insurance companies worldwide make losses in the initial years, in view of business set-up and customer acquisition costs in the initial years as well as reserving for actuarial liability. While the growing operations of ICICI Life had a negative impact of Rs. 10.31 billion on the Banks consolidated profit after tax in fiscal 2008 on account of the above reasons, the companys unaudited New Business Profit (NBP) for fiscal 2008 was Rs. 12.54 billion as compared to Rs. 8.81 billion in fiscal 2007. NBP is a metric for the economic value of the new business written during a defined period. It is measured as the present value of all the future profits for the shareholders, on account of the new business based on standard assumptions of mortality, expenses and other parameters. Actual experience could differ based on variance from these assumptions especially in respect of expense overruns in the initial years. ICICI Lombard General Insurance Company ICICI Lombard General Insurance Company (ICICI General) enhanced its leadership position with a market share of 29.8% among private sector general insurance companies and an overall market share of about 11.9% during fiscal 2008. ICICI Generals gross written premium (excluding share of motor third party insurance pool) grew by 11.4% from Rs. 30.03 billion in fiscal 2007 to Rs. 33.45 billion in fiscal 2008. The industry witnessed a slowdown in growth on account of de-tariffication of the general insurance industry whereby insurance premiums were freed from price controls, resulting in a significant reduction in premium rates. The industry also witnessed the formation of the motor third party insurance pool for third party insurance of commercial vehicles. Accordingly, all insurance companies are required to cede 100% of premiums collected and claims incurred for this segment to the pool. At the end of the year, the results of the pool are shared by all insurance companies in proportion to their overall market share in the industry. The motor third party pool had a negative impact of Rs. 0.53 billion on the profit of ICICI General. ICICI General is also required to expense upfront, on origination of a policy, all sourcing expenses related to the policy. ICICI General achieved a profit after tax of Rs. 1.03 billion in fiscal 2008, a growth of 50.5% over fiscal 2007.

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ICICI Prudential Asset Management Company ICICI Prudential Asset Management Company (ICICI AMC) was the second largest asset management company in India with average assets under management of Rs. 543.55 billion for March 2008. ICICI AMC achieved a profit after tax of Rs. 0.82 billion in fiscal 2008, a growth of 69.7% over fiscal 2007.

ICICI Venture Funds Management Company Limited ICICI Venture Funds Management Company Limited (ICICI Venture) strengthened its leadership position in private equity in India, with funds under management of about Rs. 95.50 billion at year-end fiscal 2008. ICICI Venture achieved a profit after tax of Rs. 0.90 billion in fiscal 2008 compared to Rs. 0.70 billion in fiscal 2007. ICICI Securities Limited and ICICI Securities Primary Dealership Limited The securities and primary dealership business of the ICICI group have been reorganised. ICICI Securities Limited has been renamed as ICICI Securities Primary Dealership Limited. ICICI Brokerage Services Limited has been renamed as ICICI Securities Limited and has become a direct subsidiary of ICICI Bank. ICICI Securities achieved a profit after tax of Rs. 1.50 billion and ICICI Securities Primary Dealership achieved a profit after tax of Rs. 1.40 billion, in fiscal 2008. ICICI Bank UK PLC ICICI Bank UK PLC (ICICI Bank UK) is a full-service bank offering retail and corporate and investment banking services in the UK and Europe. ICICI Bank UKs total assets increased by 81.4% from US$ 4,868 million at March 31, 2007 to US$ 8,829 million at March 31, 2008 while total deposits grew by 84.2% from US$ 2,812 million at March 31, 2007 to US$ 5,180 million at March 31, 2008. ICICI Bank UKs profit after tax was US$ 38.4 million during fiscal 2008 after taking into account investment valuation charges. ICICI Bank Canada ICICI Bank Canada is a full-service direct bank established in Canada as a wholly-owned subsidiary of ICICI Bank, and offers a wide range of financial solutions to cater to personal,

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commercial, corporate, investment, treasury and trade requirements. ICICI Bank Canadas total assets increased by 92.3% from US$ 2,002 million at March 31, 2007 to US$ 3,849 million at March 31, 2008. Total deposits increased by 77.7% from US$ 1,796 million at March 31, 2007 to US$ 3,191 million at March 31, 2008. ICICI Bank Canada recorded a net loss of US$ 14.3 million during fiscal 2008, after taking into account investment valuation charges.

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Research methodology
By the word research mean systematic collection of data, recording of data, tabulation of data, draws the conclusion with the help of scientific method is known as research.

TYPES OF DATA
Primary data Secondary data PRIMARY DATA These data are collected first time as original data. These are the actual information which are received by the researchers for the study from the actual field of research, these may also be defined as the data collected for the first time by the researchers for his own purpose. SECONDARY DATA This is also known as published data. These are the data which are not originally collected by the researchers but they are obtaining from the public resources.

SOURCE OF COLLECTION
The time series data on the selected variables/ratios viz. business per employee, profit per employee, employee cost to operating expenses, employee cost to total business, and employee cost to total assets have been extracted from the publications Statistical Tables relating to Banks and Trend and Progress of Banks in India published by Reserve Bank of India To compare the modern and traditional banks on the select parameters of employees productivity and employees cost the data has been presented in tabular and graphical forms. The study is based on secondary data collected from various volume of banking statistics published by Reserve Bank of India (RBI) and Indian Banking Association (IBA). The variable studied are interest paid, interest earned, total deposit and advances, non operating income and expences, number of employees, number of brances, establishment expenses etc. the data on total staff and number of brances was collected from IBA Bulletin

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DATA ANALYSIS TOOLS A five year period has been selected for evaluating the performance (2003-04 to 2007-08). The logic of selection of this period is to find put the impact of governments decontrolled and liberalized policies on public sector banks as compared to other categories of banks like private sector banks. he other reason is that private sector banks which are having share in asset holding, started their business commercially from the year 1996 onward; to segregate the overall result og the new private sector banks it is more appropriate to select this period. The study use ratio analysis to compare profitability and productivity of different categories of banks.Ratio analysis is a powerful tool of financial analysis. In financial analysis ratios are generally used as a benchmark for evaluating the firms position and performance. The absolute values may not provide us meaningful values unless they are related to some other relevant information. Ratio represents the relationship between two or more variables. The common denominator used for developing the common profitability ration os business volume (deposit+advance). Productivity has been measured in terms of outputs (like business, deposits, advances) per input (employee/branch) The ratios used for measuring profitability are: 1. Interest earned ratio (r) = Total interest earned/ Volume of business 2. Interest paid ration (p) = Total interest paid/Volume of business 3. Non-Interest income ratio (n)= Total income-interest income/Volume of business 4. Operating expense ratio (o)-= Total expenses-interest expenses/Volume of Business 5. establishment expense ratio (m) = Establishment expense/Volume of business.

The following equations are derived from the above ratios:

1. Spred ratio (s) = interest earned ratio interest paid ratio 2. burden ratio(b) = operating expense ratio non-interest income ratio

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The profitability ration is worked out as follows:

Profitability ratio = spread burden ratio Ratios used for measuring productivity are: 1. Deposit per employee = total deposit/total staff 2. advance per employee ratio = total advance/toatal staff 3. total business per employee = total business/total staff 4. deposit per branch ratio = total deposit/no. of branches 5. advances per branch ratio = total advances/no. of branches 6. total business per branch = total business/ no. of branches.

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DATA ANALYSIS
Parameters for measuring efficiency in SBI and ICICI:
Operational efficiency of banks can be measured in terms of productivity, profitability, spread and financial soundness. Productivity of banks is generally measured in terms of business per employee, profit per employee, and business per branch. In India, average business handled per employee is taken as a measure of productivity for each branch. Average business here is sum od average deposits and advances which is the output generated by the input of human efforts. Another significant parameter of operational efficiency of banks is profitability. Three important profitability ratios i.e. net profitability as percentage of gross operating income, net profit as percentage of working funds and return on total asset. Financial health of the banks, an important index of efficiency, solvency and sounsnerss can be judged on the basis of asset quality and capital adequacy. Capital adequacy can be judged on the basis of ratio of the capital to risk weighted asset (CRAR)

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Efficiency of banks in terms of productivity. BUSINESS PER EMPLOYEE SBI ICICI 2003-04 210.56 1010 2004-05 243.08 880 2005-06 299.23 905 2006-07 357.00 1027 2007-08 456.00 1008

business per employee

1200 b.p.e.(cr) 1000 800 600 400 200 0 2003-04 2004-05 2005-06 YEAR SBI ICICI 2006-07 2007-08

CHARTS

Interpretation
A comparative study shows that ICICI shows higher productivity as compared to SBI. In 200304 business per employee of ICICI was 1010 cr compared to 210 cr in SBI. When we see individual performance than for ICICI we find from 2003 to 2004 their business per employee dropped down to about 12.8% i.e. from 1010 cr. To 880 cr. This is due to increase in no. of employee by 32% i.e. from 13609 in 2003 to 18029 in 2004. later on it showed an improvement of 13%.

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.PRODUCTIVITY IN TERMS OF PROFIT PER EMPLOYEE 2003-04 1.77 12 2004-05 2.08 11 2005-06 2.17 10 2006-07 2.37 9 2007-08 3.73 10 cr.
14 12 p.p.e. (cr) 10 8 6 4 2 0 2003-04 2004-05 2005-06 year SBI ICICI 2006-07 2007-08

SBI ICICI

INTERPRETATION On measuring productivity in terms of profit per employee we find that in case of SBI profit/employee is increasing but at a fluctuating rate due to decreasing number of employees.it showed a sudden rise of about 50% from 2006 to 2007 While in case of ICICI deposit per employee was decreasing at an constant rate till 2006-07 and then it went up by 11%.

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.PRODUCTIVITY IN TERMS OF DEPOSIT PER EMPLOYEE cr. SBI ICICI 2003-04 1.54 5.00 2004-05 1.78 5.53 2005-06 S1.91 6.50 2006-07 2.34 6.90 2007-08 3.99 6.00

8 7 D.P.E (cr) 6 5 4 3 2 1 0 2003-04 2004-05 2005-06 2006-07 2007-08 YEAR SBI ICICI

INTERPRETATION On measuring productivity in terms of deposits per employee we find that in case of SBI profit/employee is increasing but at a decrasing rate due to decreasing number of employees . While in case of ICICI deposit per employee was increasing at an increasing rate till 2006-07 and then it sell down by 13%. The reason behind this moving down of deposit per employee was trhat they increased their no. of offices and employees rapidly and their deposits had not increased at the same rate.

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.PRODUCTIVITY IN TERMS OF DEPOSIT PER BRANCH cr. SBI ICICI 2003-04 34.98 162.5 2004-05 39.96 193.8 2005-06 S40.5 290 2006-07 45.2 321.9 2007-08 51.8 192.7

350 300 D.P.B. (CR) 250 200 150 100 50 0 2003-04 2004-05 2005-06 Y AR E SBI ICICI 2006-07 2007-08

INTERPRETATION As far as deposits per branch is concerned, it is increasing at a constant rate in case of SBI while for ICICI it increased till 2006-07 and then fell sharply about 40%. The basic reason behind this is that no. Of branches opened heavily at 77% but deposits increased merely at 6%.

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EFFICIENCY OF BANKS IN TERMS OF PROFITABILITY

private sector banks have employed their resources mere efficiently and possess greater capacity to generate residual income in comparison to public sector banks and also scheduled commercial banks. There has been substantial improvement in profitability of banks including almost all groups of banks.

CAPITAL ADEQUACY
Financial soundness of different groups of banks in India will be assessed on the basis of capital adequacy and asset quality. As such from the perspective of regulatory and supervisory process the capital to risk weighted asset ratio constitute the most important indicator for assessing soundness and solvency of the banks. Capital adequacy of the banks will be judged on the basis of ratio of capital to risk weighted asset.s

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CRAR
% ICICI SBI 2003-04 10.36 13.53 2004-05 11.78 12.45 2005-06 13.35 11.88 2006-07 11.69 12.34 2007-08 13.97 12.64

ICICI 16 14 FIGURE IN % 12 10 8 6 4 2 0 2003-04 2004-05 13.53 10.36

SBI 13.97 12.64

12.45 11.78

13.35 11.88

12.34 11.69

2005-06 YEAR

2006-07

2007-08

interpreatation
A look into the table shows that capital adequacy od public banks in 2003 was higher than that of private sector bank, by 3.17% but that of ICICI improved steadily from 10.36 to 13.37 cr. While that of SBI kept on fluctuating. To maintain CRAR banks have relied mailnly on retained earning. Also some banks have tempted to supplement their retained earning.

ASSET QUALITY
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The level of NPAs (non-performing asset) is recognized as critical indicator for assessing banks credit risk, asset quality, and efficiency in allocation of resources to productive sectors. There has been considerable improvement in asset quality of banks despites tightening norms in recent years. Non performing asset ratio of ICICI and that of SBI are as follows: NET NPA RATIO 2003-04 3.48 2.21 2004-05 2.65 1.65
ICICI 16 14 12 10 % 8 6 4 2 0 2003-04 2004-05 2005-06 YEAR 2006-07 2007-08

SBI ICICI

2005-06 1.88 0.72

SBI

2006-07 1.56 1.02

2007-08 1.78 1.55

INTERPRETATION: In public sector bank a significant improvement in the quality of assets of the banks was noticed but in private sector bank after 2005-06 NPA showed an increasing trend. This improvement in the quality of the asstes in public sector banks was the outcome of improvement in the credit appraisal process, upturn of business cycle, new initiatives for resolution of NPS, aggressive restructuring of bank in 2004-05 anf greated provisioning anf write off of NPA enabled by greater profialtbility.

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Efficiency of banks in terms of spread

The spread or the net interest income constitute an important indicator of efficiency of banks since it is the most important driver of profiatblity of banks. Behavior of interest rate has a direct bearing on banks profitan\bility. The interest spread of two major banks in India is depicted in the following chart:

ICICI
2003-04 2004-05 2005-06 2006-07 Interest earned 9002 9410 14306 21996 Interest paid 7015 6571 9597 16358 Volume of business* 130757 191224 311246 426376 Interest earned ratio** .069 .049 .045 .051 Interest paid ratio*** .053 .034 .030 .038 Spread ratio**** .016 .015 .015 .013 * Volume of business = deposits + advances **interest earned ratio = interest earned/volume of business *** interest paid ration = interest paid/volume of business ****spread ratio = interest earned ratio-interest paid ratio 2007-08 30788 23484 470047 .065 .049 .016

SBI
2003-04 30460 19274 476553 .063 .040 .023 2004-05 32428 18483 569422 .056 .032 .024 2005-06 35980 30390 641847 .056 .031 .025 2006-07 37242 22184 772857 .048 .028 .020 2007-08 48950 31929 954172 .051 .033 .017

Interest earned Interest paid Volume of business* Interest earned ratio** Interest paid ratio*** Spread ratio****

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0.03 SPREAD (%) 0.025 0.02 0.015 0.01 0.005 0 2003-04 2004-05 2005-06 YEAR ICICI SBI 2006-07 2007-08

INTERPRETATION
persistently declining trend in interest spred of commercial banks in india suring the last deacde can be attributed to number of factors. One such factor id competitive pressure arising from condition of free entry and competitive pricing which tended to raise the functional efficiency by intermediation by decreasing the spread. Secondly low financial cost has acted as source of narrowing intermesiation spread.Thirdly, growing macroeconomic stability abd healty policy environment has also contributed to contraction in interest spresd of the banks. Hardening if interest in the recent year is an added fact.s

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ANALYSIS AND FINDING

Profitability: There is some debate about whether profitability measures are appropriate indicators of performance of public sector enterprises who are required to produce socioeconomic outputs that cannot be reflected in the Balance sheet. This is relevant especially for the public sector banks in India whose objectives have been more social than economic. However, the policy makers laid emphasis on profitability as an important benchmark through which the performance of public sector banks is to be judged in the post reform era In the market oriented economy some public sector banks have gone in for partial privatization and are already listed in the stock market and more banks are likely to approach the capital market to mobilize additional funds. The improved profitability is the only key parameter for evaluating performance from the shareholders point of view. Now it is up to the bank management to decide how to strike a tradeoff between social and commercial banking in order to improve market holdings and services and play the role of governments agent at the same time. In our study, we found that the public sector banks are less profitable than the public sector and foreign banks in terms of overall profitability (Spread Burden ratio; but their proitability is improving over the last 5 years. Foreign banks top the list in terms of the net profitability. Analyzing further, we found that public sector banks are ranked second after the foreign Banks in terms of the spread ratio but they have higher Burden ratios which makes them less profitable as compared to the other categories of banks. The Interest earned ratio is declining over the years for all categories of banks because over the last 5 year RBI has pursued the policy of lowering the interest rates. Still foreign Banks were able to have high Interest earned ratios as compared to the Indian Banks. The Interest earned ratio for the Indian Banks has almost been the same across all categories. The Interest paid ratio is the lowest for the foreign Banks. This can be attributed to the effective and efficient management of the funds done by the foreign banks through which they were able to attract funds at lower cost and dispose them to high interest earning securities. The interest paid ratio of private sector banks are little more than the public sector banks. This is a case of tactful management through which the private sector banks were

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able to fetch huge funds on the basis of attractive interest rates. The RBI administers the interest rates of Public sector Banks and they have little control over the lending and borrowing rates. The private and foreign banks have traditionally been viewed as high cost operators. The reason for high operating expenses ratio is that these banks have been spending heavily on technology up gradation which may affect their profitability in short term but which will improve their longterm returns as they leverage the technology to provide better customer support. Another reason for heavy operating expenses ratio is these banks are spending heavily on their advertising campaign for brand promotion. The nationalized banks do not require spending on promotions, as Government Bank is still a popular brand for Indian customer as far as money matters are concerned. However, the situation has changed very fast in these five years. Public sector banks, in order to compete with the other banks have realized that in order to remain competitive Technology is the key and are now expending heavily on the technology up gradation. This fact is reflected in the other operating expenses ratio which reveals that among Indian banks- public sector banks have higher ratios than their private counterparts. The foreign banks however continue to be much ahead of the Indian banks. Non interest income of private sector banks is higher as compared to public sector banks because private sector banks are offering more and more fees based services to their different customer categories (like commission, exchange brokerage etc). There is a pressing need for introducing more services to the customer by the public sector banks to have an advantage of competitive over private and foreign banks A very important and significant component of other operating expenses is the establishment expenses. The establishment expenses are the expenses incurred on staff and branches. The establishment ratio shows the highest dispersion across the different bank categories. Even the neck-to-neck competitors as SBI and new private sector banks show wide differences. The public sector banks have huge staff and a wide network of branches which are the main reasons for the high establishment expenses in them (Table 2). Though the establishment expenses of the private sector banks are showing a declining trend they are still much ahead of their competitors. The variations in the establishment expenses can be viewed as the main reason for the difference in the profitability among different category of banks.

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Banks with comparatively low establishment expenses are having higher profitability. Though the public sector banks have been trying to reduce the staff via different VRSs, it would take sometime for these banks to be at par with the private and foreign Banks. The declining trend of the ratio suggests that may happen in the near future. Productivity: Productivity is defined as the ratio of Output to Input. In manufacturing organizations the value added or net output is taken as the output measure. In the service sector it is difficult to quantify the output because it is intangible. Hence, different proxy indicators are used for measuring productivity of service organizations. The indicators commonly used for assessing productivity of banks are Business per employee/ Branch, advances per employee/Branch, number of accounts per employee/branch etc. the results obtained by different factors need not be the same and may often be contradictory (Pitre [7]). In our study we have used Deposits per employee, Advances per employee, Business per employee, Deposits per branch, Advances per Branch and Business per branch as indicators of productivity of banks. As seen in Table 2, public sector banks have more number of staff and branches than the other categories. This means they have a higher denominator as compared to other banks. It will be interesting to see whether the high denominator has enabled banks to have higher numerators as well. Looking into the deposit per employee ratio we can easily infer that foreign banks are far ahead of the public banks. Even the private sector banks especially the new private sector banks are very comfortably placed as compared to the public sector banks and expect no challenge from them in the near future. Though the ratio is showing an increasing trend for the public sector banks they have to go a long way to be at par with their competitors. The same holds good for the Advances per employee and Business per employee ratios as well It is true that the public sector banks have a large network of branches and have their presence in the rural and semi urban areas as well; whereas the foreign banks, in some cases even the private banks, do not have branches in both rural and semi urban areas; but when we compare per branch bank deposit, advance and business ratios again the ratios for the public banks are much lower to private and foreign banks. It is also true that public sector banks have a predominantly societal

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orientation but the point to be noted here is that the difference is too high to support the argument.

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Recommendations and Suggestions

Productivity and profitability are interrelated. Though productivity is not the sole factor, it is an important factor influencing profitability. The key to increase profitability is increased productivity. Public sector banks have not been as profitable as the other banks primarily because of two reasons Low Productivity and High Burden ratio. To overcome these drawbacks private banks should chalk out a program to increase productivity. We have the following suggestions for the private sector banks . They should reduce overstaffing Though public sector banks have been trying to reduce the number of staff employed and has been successful in reducing the number from 8.73 lakhs to 7.52 lakhs, but they need to improve further. They should go for a second round of VRS to reduce the staff further They should have a strategic tie up with the rural regional banks - For reaching the far-fetched areas instead of opening branches themselves in the areas which cannot provide them the break even business. They should embrace latest technology - Indian public sector banks have a unique advantage over their competition in terms of their branch network and the large customer base, but it is the use of technology that will enable PSBs to build on their strengths Foreign banks and the new private sector banks have embraced technology right from their inception and they have better adapted themselves to the changes in technology. Where as the public sector banks and old private banks have been slow in keeping pace with the changing technology, which is regarded as one of the major reason affecting their profitability and productivity .

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Conclusion
Since the process of liberalization and reform of the financial in the financial sector were introduced in 1991, banking sector has undergone major transformation. The underlying objectives of the reform were to make the banking system more competitive, productive and profitable. As per the IBA report Banking Industry Vision 2010 there would be greater presence of international players in the Indian Financial system and some of the Indian banks would become international players in the coming years. The key to success in the competitive environment is increased productivity and profitability. Indian banks especially the public sector banks and the old private sector banks are lagging far behind their competitors in terms of both productivity and profitability with the exception of the State bank of India and its associates. The other public sector banks and old private sector banks need to go for the major transformation program for increase their productivity and profitability. We suggest a three point program reduce overstaffing, forge strategic alliance with the rural regional banks to open up rural branches and increased use of technology for improved products and services for the same.

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ANNEXURE

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BIBLIOGRAPHY
1. www.google.com

2. R.M.Shrivastava Management of Indian Financial Institution 2008

3. V.K.Bhalla Management of Financial Services- IV revision edition. 4. Database on Indian banking-2003-04 IBA Bulletin. 5. Profitability and Productivity in Indian Banks Manni Mittal, Aruna Dhade

IBA Bulletin.
6. Pandey I.M. Financial Management, Vikas Publishing House. 7. www.rbi.org 8. www.eurozone.com 9. Menafn.com/updates/research_ center/global/equity_ Val.

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