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State Bank of India (SBI), India's largest bank, racked up another win this year, in what has
proved yet another highly active 12 months for the giant Indian institution.

The bank introduced a number of new products and businesses, including mobile banking, online
trading, custodial services and financial planning and advisory. Further to introducing new
products and business lines, the bank substantially expanded its branch and ATM network to
create a staggering 3843 new distribution outlets. This strategy has evidently paid off, with the
giant Indian bank significantly increasing its market share of deposits during 2008. An increase
in worker productivity through the roll out of new business processes, meanwhile, has allowed
SBI to bring down its cost-income ratio by 241 basis points to 52.65%. The bank posted a return
on equity of 17.93% for 2008. More recently, SBI unveiled its plans to expand into Africa.
·Team SBI is thrilled at being acknowledged as the Bank of the Year for India in 2009, for the
second consecutive time,· says O x Bhatt, chairman of State Bank of India. ·In a turbulent year
for the financial services industry, the bank has excelled by posting financials which are far
higher than the industry average. SBI has entered a number of new business areas including
general insurance, custodial services, pension funds, financial advisory, mobile banking and
payment solutions, while simultaneously increasing its market share in its traditional business.·

The Banker also notes the impressive progress made by Andhra Bank, which migrated all its
branches to a new core banking system during the past year and substantially expanded its ATM
network, as well as entering into a life insurance joint venture with Bank of Baroda and Legal &
General of the UK.



Although some form of banking, mainly of the money-lending type, has been in existence in
India for thousands of years, it was only a little over a century ago that Western-style banking
was introduced to the country. Indian households account for nearly 90 percent of the national
savings. Whereas in 1980, as little as 10 percent of all savings of Indian households were held in
financial form (as in bank deposits, shares, and insurance policies) rather than physical form (as
in money under mattresses). As of 2001, that figure has surpassed 50 percent. In addition,
although the percentage of people who own company shares or have invested in mutual funds is
still low as compared to more affluent and Western countries, those numbers are also on the rise.
Government banks still play an important role and own more than four-fifths of the banking
business. However, private (especially foreign) banks are gradually taking up an increasing share
of the financial market. There are an estimated US$400 billion worth of private savings in India,
some 44 percent of which is in bank deposits, another 5 percent in mutual funds, and less than 25
percent in postal savings and pension funds. Despite considerable openness in the Indian
economy, increasing liberalization of the financial sector is hindered by that fact that nearly 30
percent of assets are considered to be non-performing. This is due to an excessive number of
loans having been extended to businesses and individuals through political pressure rather than
economic merit. As a result, the rate of bankruptcy of financial institutions has been high, which
in turn has forced interest rates to be high as well. As a result of these and other factors, Indian
industry's access to proper credit has been limited.

Market liberalization in India has led to the sale of shares of private and some public companies
to domestic and international bidders. Jurrently, there are more than 6,000 companies listed on
India's largest stock market, the Bombay Stock Exchange, but only about 8 percent of them are
actively traded. The stock market has attracted a good amount of international institutional

%investment, such as foreign pension schemes and mutual funds. However, the Indian
stock market, not unlike others worldwide, has had periods of intense volatility. In 2000, for
example, 



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Looking at profitability of the Top 1000 from a global perspective, the winners have been those
banks that stuck to the basics of banking ± taking deposits and lending in their home markets.

Jhina has five banks in the Top 25 by pre-tax profits, and three banks in the top three ± more
than any other country. Industrial Bank of Jhina leads the ranking with $21.2bn, followed by
Jhina Jonstruction Bank with $17.5bn and Spain¶s Santander with $15.8bn (see table, Top 25
by pre-tax profit).

As Western economies search for the bottom of their recessions, the World Bank last month
raised its forecast for Jhina¶s 2009 GDx growth rate to 7.2% from its earlier forecast of 6.5%,
citing the success of the government¶s stimulus package.

For those who posit the notion that the crisis is just one more marker in the shift of power and
profitability from West to East, the Top 1000¶s aggregate country performance is very revealing.
Jhina¶s banks are way out in front, with aggregate pre-tax profits of $84.5bn. Japan comes
second with $16.5bn and Brazil third with $11.7bn.

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It is hard to argue against the idea that the rise of Asian banks, led by Jhina, signifies a
continued reordering of world finance ± especially when as it runs alongside the growing
economic importance of the region. With their vast domestic market, huge liquidity and
supportive government policy, Jhinese banks are the natural eventual successors to the US
crown. The reality is that the`re are four Jhinese banks in the Top 25 ± three of them in the top
13 ± whereas six years ago there were none. But it is far too early to write off US banks ± or
European banks such as HSBJ and Banco Santander ± which still dominate the ranking in terms
of size and strength, if not all in profitability.

It is also worth remembering that the 2009 Top 1000 listing is based on 2008¶s year-end figures
± the worst year in the industry¶s history since the depression; Q1 and Q2 this year have already
seen better results, with either smaller net losses or small net profits (even large, in some cases).
Equally, last year some banks with big trading operations, for example, went from super-charged
results to very bad results; it is unlikely that such extremes will occur next year.

With next year¶s profits largely determined by the ability of Western economies to emerge from
recession and generate growth, it may seem axiomatic that Jhina¶s banks ± and those from other
emerging economies that are weathering the downturn a little more smoothly ± will climb even
higher up the Top 1000. This cannot be taken for granted. For one thing, the very creativity that
got the West¶s banks into this mess will be the thing that gets them out of it. Over and over
again, Western banks have displayed a remarkable ability to reinvent themselves to keep pace
with global change.

Moreover, it is only a few years ago that the Jhinese banking system was weighed down with
non-performing loans (NxLs). The banks did well then to eliminate bad debt from their balance
sheets, but many fear that one unwanted side-effect of the Jhinese government pumping money
into the economy to offset falling export markets may be the return of NxLs.

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The issue of bank capital will be high on the political and regulatory agenda for some time to
come as policy makers seek a formula that both reins in excess but frees up banks to play a full
role in economic growth. If regulators decide that only equity qualifies in the broadest definition
of Tier 1, this could lead to further deleveraging by the banks and a knock-on effect in the
broader economy at a time when lending is already scarce.

Bankers are lobbying hard that more innovative forms of Tier 1 still have a role to play in bank
capital structures. They argue that a tiering of capital is perfectly valid, allowing for better return
on equity and alignment with liquidity.

Japital structures will be moving targets for the foreseeable future, because of capital injections,
regulatory initiatives, subordinated debt buybacks and deleveraging. Ratios will see further
change as regulators apply lessons learned from this crisis. It is already possible to see an
increased focus on the capital ratio

denominator, for example, with the Swiss regulator FINMA, the Basel Jommittee and the UK
Financial Services Authority¶s Turner Review all implementing or discussing the idea of
leverage ratios based on non-riskweighted balance sheets.


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By Rekha Menon | xublished: 31 March, 2010
Eighteen months ago, India's largest bank, the government-backed State Bank of India (SBI),
concluded a huge and extended computerisation exercise that it had initiated in 2003. The branch
automation platform at SBI and its six associate banks was replaced with a centralised core
banking system in one of the largest core banking migrations undertaken globally. Analyst firm
Jelent, which has written a report on SBI's technological overhaul, estimates that the programme
involved 17,500 branches, 20,000 ATMs, more than 260 million accounts and 37 million peak
transactions a day.

Unlike the earlier system that was implemented in a distributed manner with branch-level
processing, the new core banking platform has centralised operational functions, ensuring
unification of all processes across the State Bank Group. ·Today, a customer is a customer of the
bank, not a branch,· says A Krishna Kumar, deputy general manager for IT at SBI. Jommenting
on the impact this technology renewal has had on the bank, he asserts: ·State Bank of India today
is not what it was 10 years back.·

This last statement is applicable to the entire Indian banking sector. Over the past decade,
technology has helped to dramatically transform the face of Indian banking. But while mass-
scale IT modernisation has dramatically improved operational capacity, there is still much work
to be done, particularly where customer relationship management (JRM), payments and
financial inclusion are concerned.

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Banking in India was mostly manual until the 1970s and even the 1980s. Around the mid-1980s,
when banks first started computerisation, the pace of automation was very slow, largely due to
sub-optimal infrastructural issues, opposition from trade unions and a lack of interest from the
top management. Regulatory intervention in the form of high-level committees under the
chairmanship of Dr J Rangarajan, then governor of the Reserve Bank of India (RBI), the
country's central bank, that strongly recommended automation of the banking, did to an extent
help the cause. However, although a few banks did take to computerisation, they opted for
disparate branch automation solutions.

This uninspiring automation landscape changed dramatically in the mid-1990s with the advent of
a handful of new private sector banks such as IJIJI Bank and HDFJ Bank. A pre-condition of
receiving bank licences was a mandatory deployment of technology, which they used to their
advantage. xrivate sector banks aggressively adopted technology to compete against well-
entrenched players that had vast branch networks. Although most of the new banks started with a
decentralised branch automation model, they were among the first in the market to move to a
centralised core banking solution in the early 2000s. All along, these banks offered anytime,
anywhere banking through electronic delivery channels, rapidly introduced new products and,
most importantly, focused on customer convenience.

This was a paradigm shift for the average Indian retail customer so far exposed to indifferent,
lackadaisical banking services and they gravitated in large numbers towards these new private
sector banks. A plethora of economic liberalisation measures in the early 1990s had transformed
the Indian middle class and the tech-savvy new players were able to capture the imagination of
the rapidly burgeoning urban middle class segment. Despite their much larger branch network,
the older banks not only saw their existing customer base being eroded, they also found that they
were unable to attract new customers. In the corporate banking segment, foreign banks with their
superior automated platforms gained market share.

Today, IJIJI Bank, HDFJ Bank and Axis Bank, the front-runners among the new private sector
brigade, are ranked among the top 10 banks in the country.

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Technology is the bedrock of IJIJI Bank, says xravir Vohra, the bank's group chief technology
officer. IJIJI, which is the second largest bank in the country after SBI, has about 1600
branches, 4700 ATMs and 27 million customers that actively use alternative delivery channels.
Only about 11% of IJIJI's transactions take place in the branch today, says Mr Vohra.

At Axis Bank, which has about 1000 branches and 3600 ATMs, the 11 million retail customers
conduct nearly 94% of all transactions through an ATM or online. Sisir Jhakrabarti, executive
director for retail banking, small and medium-sized enterprises and agribusiness at Axis Bank,
says: ·The bank was established in 1994 and, going by RBI guidelines, we were fully
computerised from day one. Initially we were on a distributed platform, but when, in 2000, we
moved to core banking, our ability to reach clients seamlessly across all geographies increased
manifold. We were also able to offer innovative products in the area of cash management and
internet banking.·

Finally, in response to competitive threats and regulatory mandates, the older banks started
actively modernising their systems. Falling hardware costs along with an improved
telecommunication infrastructure also helped the cause.

Dr KJ Jhakrabarty, deputy governor of RBI, says: ·Technology adoption in Indian banking

happened primarily as a response to a business push. Older banks were forced to implement
modern technology to deal with the competitive business environment created by the new private
banks. At the same time, regulatory diktats by the RBI helped bank management counter
resistance from trade unions.·

Over the past decade, domestic Indian banks have made huge investments in modernising their
systems. RBI estimates that from September 1999 to March 2009, public sector banks invested
Rs18,168 crores (one crore equals ten million rupees) ($4bn) in computerisation and
development of communication networks. Jentralised core banking is now the norm rather than
the exception and public sector banks have caught up, or in some cases even surpassed their
private banking counterparts in their technological efforts. The RBI estimates that by the end of
March 2009 almost 80% of public sector bank branches were already on core banking systems.

The main benefits of a core platform are 'anywhere' banking, process efficiencies and product
innovation, says Haragopal M, global head of Finacle at core banking technology vendor Infosys
Technologies. With core banking adoption, banks have seen their existing footprint deliver much
more business, he says. ·In the past 10 years, India's gross domestic product grew by 175% to
180%. But bank deposits and loan portfolios in this period saw a 400% to 500% growth, with a
minimal increase in the workforce. A leading bank JEO told me recently that ever since he
implemented the core banking system, business grew by three times, while the workforce has
actually reduced.·

SBI has experienced tremendous growth in business volumes and an increase in overall
productivity as a result of its technology upgrade, says Krishna Kumar. Reportedly, between
2004 and 2009, the business per employee at SBI increased by 250%. Mr Kumar says that a key
benefit of SBI's core banking initiative is process standardisation, adding: ·Earlier, processes
varied between branches but centralisation has brought uniformity in operations.·

Dr KJ Jhakrabarty, deputy governor of the Reserve Bank of India

A Krishna Kumar, deputy general manager for IT at the State Bank of India

xravir Vohra, group chief technology officer at IJIJI Bank


 

% 

With the basic computerisation infrastructure in place, some of the leading Indian banks are
looking at other technological initiatives. IJIJI Bank, which has invested in the areas of risk
control, analytics and business intelligence, is now focusing on ·enriching these existing
applications·. SBI, on the other hand, is building a data warehouse with IBM in order to gain a
·scientific understanding· of customer behaviour. Other technology initiatives at SBI include
replacing its existing ATM switch and creating a payments hub.

Dr Jhakrabarty of RBI says that banks need to focus on improving their internal processes.
·Although banks have managed to enhance their back-end transaction processing, they still need
to improve their internal managing information systems and audit-trail reporting,· he says.
Understanding customer data is also a key technological imperative for India's banks, going
forward, says G Srinivasa Raghavan, country head for India business at banking technology
vendor TJS. ·Banks need to ensure accuracy of data and then figure out ways of utilising this
data for enhancing the business and customer service.·

Joydeep Sengupta, director of McKinsey in India, also highlights the need to be more customer
focused. Technology modernisation at Indian banks has so far been more inward-focused, on
improving operational efficiency rather than being customer friendly, he says, ·The past 10 years
was an era of sheer growth. Now banks need to go beyond customer acquisition. More thought
needs to go into servicing this customer base and enhancing the wallet share.· On average, banks
in India sell only 1.2 products per customer. This cross-sell ratio can be increased by enhancing
JRM efforts, he says. In the US and Europe the average cross-sell ratio is two or three, with
some banks claiming a cross-sell ratio as high as 5.5.

An area where Indian banks have an edge over their peers in developed nations is their modern
technology infrastructure. By coming late into the tech scene and boasting the latest technology
platforms, many Indian banks have managed to leapfrog legacy system issues that continue to
trouble banks in Europe and the US. A 2007 benchmarking survey of leading banks in India by
McKinsey revealed that the best banks in India are the most technology-efficient in the world,
spending less than $11 per account on IT systems and services, compared with an average spend
of $76 per account in European banks.

·From a cost and efficiency perspective, Indian banks are at an advantage in general, but from an
application perspective the degree of sophistication is not yet good enough,· says Mr Sengupta,
explaining that banks in the US and Europe are much further ahead of Indian banks in areas such
as JRM applications, corporate cash management, trade finance systems and payment systems.

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Mr Jhakrabarti of Axis Bank complains that a key challenge for banks in India lies in the
payments space: ·Banks need to reduce their over-dependence on cash and cheques and
encourage electronic and plastic payment transactions.·

The RBI has, over the past two decades, been assiduously working to develop and promote an
electronic payments infrastructure in the country. To that effect, it launched the Electronic
Jlearing Service (EJS) for low-value credit and debit payments in 1995. In 2004, it introduced
the Real Time Gross Settlement (RTGS) system for large value payments, while the National
Electronic Funds Transfer (NEFT) system was launched in 2005 as a way for customers to
transfer funds between banks. RBI is also piloting a cheque truncation system.

Over time, the bank/branch network coverage of these electronic payment systems has increased,
but the growth in retail electronic payment transactions is not fast enough, according to Mr
Jhakarabarti. ·Today, about 70% of retail payment transactions are through cash or cheque,· he
says. EJS is gradually becoming popular for payments such as dividends, but not for utility
payments, he adds. While RTGS and NEFT are popular with larger companies, the need now is
to onboard customers at the small business and retail level.
Indian banks' IT spend per 1000 accounts ($'000s) 2007

*

  
 

Mr Jhakrabarti says that another technological challenge for Indian banks, going forward, is
financial inclusion: ·We need to find a low-cost technology-based solution to reach out to the
rural and urban poor.·

Much of banks' efforts today in leveraging technology, from JRM and data warehousing to
payments, is geared towards servicing urban customers. However, a significant majority of the
Indian population lives in villages. The banking regulator has, in recent years, been pressurising
banks to enhance their rural banking services as well as to work on financial inclusion. Industry
experts suggest that including this population in the banking system will not only fulfil a social
obligation, but has revenue-generation potential as well. The trick is in putting in place the right
business model at a low cost. Technology remains the lynchpin for initiatives in this sector as
without technology it would be impossible to provide low-cost banking services across the vast
rural hinterland of India.

Several banks are piloting projects based on smart cards and mobile banking in the area of
financial inclusion and it still remains to be seen which business model will finally emerge.
Regarding rural banking, the RBI has directed the 86 regional rural banks in the country to move
their 15,000 or so branches to a core banking platform by 2011.


 
 


One of the biggest challenges in rural areas remains infrastructure, or the lack of it, says Mr
Kumar of SBI. ·Infrastructure in rural areas is still a big issue. Many places don't have a regular
supply of electricity, while many places do not have telephone lines, so we have to set up
satellite dishes there. The cost of running an operation in these places is very high.· With SBI's
social agenda of extending the banking service across the country, almost 35% of its branches
are in rural areas and another 30% in semi-urban areas.

In an innovative step, SBI recently announced plans to roll out 300 solar-powered ATMs in rural
areas, the first large-scale deployment of its kind in the country. These solar powered ATMs are
said to consume less than 5% of the electricity that a normal ATM consumes.

Ashvin xarekh, partner and national leader for global financial services at Ernst & Young,
supports this move by SBI. Such technological innovations will make financial inclusion and
rural banking a successful reality in India, he says. ·Even three years ago, all the technological
innovation we would see in the country would come from foreign banks. It is heartening to see
domestic banks come up with such innovations that are uniquely tailored to help banks meet the
challenges of the Indian market.·


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The dramatic growth experienced by India over the past couple of decades might have
transformed the country into an economic powerhouse, and in the process improved the
economic status of millions of Indians, but the benefits of economic growth have yet to be
equitably shared. If anything, social, financial and economic inequalities have become further
exacerbated.

While on the one hand India has experienced among the highest growth rates worldwide in the
number of high-net-worth individuals with investable assets of more than $1m, on the other hand
a vast majority of Indians remain financially excluded. Various studies estimate that about 60%
of India's 1.1 billion population has little or no access to formal finance and less than 6% of
India's 600,000 villages have a bank branch. A 2008 study by the National Sample Survey
Organisation, a body that conducts large-scale, country-wide sample surveys on various socio-
economic issues, revealed that out of a total of 89.3 million farmer households in India, 45.9
million do not have access to credit, either from institutional or non-institutional sources.

India's banking industry regulator, the Reserve Bank of India (RBI), has long pushed the banking
sector towards greater penetration through initiatives such as commercial bank nationalisation in
the 1960s and the establishment of regional rural and co-operative banks. As a result, today India
boasts an expansive bank network of 61,000 commercial bank branches, 100,000 credit co-
operatives and 12,000 non-bank financial institutions. The level of banking penetration has
improved from one bank branch per 63,000 people in 1969 to one branch per 16,000 people in
2007. But the country is still a long way from achieving total financial inclusion.

·Though banking has made rapid strides in the country in many areas, a large portion of the
population is still deprived of basic banking and financial services. In rural India, where the bulk
of India resides, this is as high as 50%. Making flexible, timely, hassle free, and affordable
financial services, not just loans, available to this section of society is the biggest challenge.
Though the potential is high, the task is not easy. There are impediments, such as lack of proper
infrastructure, viable technical solutions and financial literacy,· says Manohara Raj, business
head of microfinance at HDFJ Bank.

Notably, the financially excluded unbanked population in India is not restricted to the rural areas.
At a broad level it comprises marginal farmers, landless labourers, self-employed and
unorganised sector enterprises, urban slum dwellers, migrant labourers and women.

Jommenting on the challenges India faces in ensuring financial inclusion, Dr Will Derban, head
of community relations - emerging markets at Barclays Global Retail & Jommercial Bank, says:
·The sheer size of the population of India and the levels of poverty that people suffer from poses
a major challenge to any financial institution. The number of poor people that needs to be
reached, 360 million was the estimate in the last census, and the quantum and complexity of
services that they require, is unparalleled anywhere else.·

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There has, however, been a noticeable shift in the momentum towards financial inclusion over
the past two years, in large measure due to efforts by the banking regulator, as well as
technological developments. The RBI has promoted several measures since 2006 to attract the
financially excluded into the structured financial system, such as the introduction of a basic 'no-
frills' account with low or zero minimum stipulated balances as well as charges; and relaxation of
know-your-customer norms for low-income group members. Several banks have introduced no-
frills accounts and according to the RBI the total number of such accounts has grown from less
than half a million in March 2006 to 33.03 million by the end of March this year.

In 2006, the RBI introduced another critical initiative, allowing intermediation of banking
services through entities called 'business correspondents' (BJ). These intermediaries can be
institutions such as non-governmental organisations, microfinance institutions and post offices.
Moreover, BJs can appoint sub-agents to render services on their behalf.

The BJ model has bought in the concept of the ·barefoot banker·, says Dr KJ Jhakrabarty,
deputy governor of RBI. ·No longer do we have to aim to have a physical bank branch in the
more than 600,000 villages in the country to extend the reach of the banking sector. A mobile
banking agent with a handheld device and biometric card can be equally or more effective in
reaching customers and helping them open and transact on their bank account,· he adds.

·Financial inclusion in India has received a huge boost after the business correspondent model
came into play. It has acted like a catalyst allowing banks to have outreach in locations that were
previously not accessible,· says Sonjoy Mohanty, JEO of A Little World (ALW), a technology
firm that operates as a BJ through its partner firm, Zero Microfinance.

Technology is the cornerstone of the BJ model, says Mr Jhakrabarty. ·Not only does
technology enable banks to automate their operations and centrally network their branches, it is
essential in empowering the BJs to provide banking services as well.· Financial inclusion failed
to take off earlier because of the absence of appropriate banking technology, says Mr
Jhakrabarty, but now technology is no longer a constraint. Smart cards and mobile are the two
main technologies currently being deployed by the BJs.

Union Bank of India, one of the largest state-run banks in the country, is working with Financial
Information Network and Operations (Fino), a multi-bank promoted technology firm that
provides a smart card-based multi-application card and also acts as the BJ for the bank. It
provides customers with a biometric smart card carrying their fingerprint data, demographic data,
banking information and photograph. This then acts as their passbook-cum-ATM card enabling
customers to make deposits and withdrawals when interacting with the banking agents.
Union Bank has ·taken banking to the doorstep of the financially excluded through biometric
smart cards·, said MV Nair, chairman and managing director of Union Bank, speaking at the
bank's annual general meeting in Mumbai last year. ·BJs assist the customers in the usage of
biometric cards at the point of sale and facilitate collection of cash from account holder and
payment of cash to them,· he added. Mr Nair stated that Union Bank had issued 153,791 cards to
the rural poor and 146,849 cards in impoverished urban areas.

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Fino acts as a BJ to more than 10 banks and has enrolled 5.5 million customers for its smart card
solution. The Zero platform from ALW, on the other hand, is based on a mobile phone. With
Zero, customers do not carry their banking records with them, it resides on Zero's customer
service agents' near-field communication (NFJ) mobile phones that can store up to 50,000
customer records, including fingerprints, photos, voice tags and a five-year transaction history
for each customer.

·The Zero platform converts the mobile phone into a secure, self-sufficient bank branch, with
biometrics-based customer ID. The local banking agent or customer service point operator acts
as a teller for customer enrolments for no-frills accounts and all types of transactions,· says Mr
Mohanty. At the end of each day, the mobile phone connects to the bank's server for transaction
uploads, downloads and application updates. Zero has thus far partnered with 22 banks and has
signed up almost 4 million customers.

·There is hardly any difference between a smart card-based service and mobile-based service.
The only thing is that more data can be stored on smart cards and for customers they are a prized
possession. Smart cards are also more secure than mobile phones,· says Rishi Gupta, director
and chief financial officer at Fino.

However, Mr Mohanty disagrees. He says: ·While there could be concerns regarding security of
transactions on ordinary mobiles, the same was not applicable for NFJ mobiles where the data
security is ensured through high levels of encryption. The proof lies in the pudding. Banks would
not have partnered with us if there would have been any concerns about the security of
transactions.· As such he points out that the cost benefits of a mobile platform are very high. The
transaction costs of a mobile platform are nearly half that of a smart card, he says.

·Despite security concerns, mobiles have a huge potential in the financial inclusion space. Today
there are many more mobile phone users than bank account holders in India,· says Mr
Jhakabarty, quoting figures from the Jellular Operators Association of India, which state that as
of the end of April this year there were 403 million mobile phone users in the country out of
which 187 million (46%) do not have a bank account.

Another BJ to base its service on the mobile phone is financial services provider Eko, which has
tied up with the country's biggest bank, State Bank of India (SBI). Meanwhile, noting the
immense potential of the mobile, Fino has also decided to enter the mobile space. Fino's new
product will enable enrolment as well as banking transactions through the use of mobile
technology, thus increasing scalability at reduced costs, according to a press release from the
company, which adds that the customers will also be able to use their mobiles as an e-wallet and
for mobile commerce as well. Manish Khera, JEO of Fino, says that the mobile-based solution
will ·ensure that Fino is able to reach out to a large segment of the 8 million rural subscribers of
mobile phones who are currently deprived of basic banking facilities·.

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Over the past two years, 26 out of the 50 private and state-backed public sector banks in India
have adopted the banking intermediation business correspondent model, through which nearly 9
million no-frills accounts have been opened. The top few banks in the country, such as SBI,
IJIJI Bank, Axis Bank, Union Bank and xunjab National Bank, have taken the lead in trying out
the business model. ·Banks are divided in their attitude towards the BJ model,· says Fino's Mr
Gupta. Those who are keen to gain market share among the hitherto financially excluded
population are the ones that have taken the lead, he says, while most of the others are merely
making suitable noises only because of the RBI's push.

State-owned SBI, which is the largest bank in the country both in terms of assets and branch
network, is by far the most active bank in the financial inclusion arena. Not only does it have the
largest presence in rural India, it is also the most aggressive player, says Anurag Gupta of ALW,
which has partnered with 22 banks along with SBI. Abhishek Sinha, JEO of Eko, adds: ·SBI is
an extremely proactive and innovative partner. It is open to trying out new things, does not have
a bias and is experimenting with several BJ service providers.·

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Despite tougher conditions in the global economy, India's banking sector has so far been largely
protected from the financial crisis. The large role played by state-owned banks in the country's
financial system, strict regulatory controls and the absence of widespread foreign ownership in
the banking sector have all helped to keep India largely free from signs of financial contagion.

The 32 Indian banks in this year's Top 1000 ranking increased the US dollar value of their total
assets by an average of 37.01%, while Tier 1 capital increased by an average of 45.38%. And
although the average return on capital of the five largest Indian banks dipped to 19.97% in 2008
from 22.8% in 2007, the financial year ending March 31, 2009 has delivered encouraging
increases in profitability. State Bank of India increased its return on Tier 1 capital to 24.15% as
of March 31, 2009, from 21.28% as of March 31, 2008. HDFJ Bank also recorded a similar
increase in return on capital for its latest financial year end, increasing its return on capital to
24.1% from 20.44% in the previous year.

Indian banks have so far not experienced the levels of asset deterioration already reported in
many countries. Jompared with the Top 1000 banks' average ratio of non-performing loans
(NxLs) to total loans of 3.18%, Indian banks' average NxL ratio is just 2.07%.

Levels of impaired assets reported among the largest Indian banks remain similarly lower.
Jompared with the Top 1000 average of 5.11% of impaired assets to total assets, as of March 31,
2009, State Bank of India reported impaired assets equal to just 1.51% of its total balance sheet.
Meanwhile, HDFJ Bank's impaired asset ratio as of March 2009 is even lower at just 1.08%.

xart of the reason why India has yet to experience deteriorating asset quality is that the country's
banks have typically taken an unaggressive approach to lending. Total bank lending in India
remains relatively low, at about 64% of gross domestic product. Many Indian banks have
reported falling loan-to-deposit ratios in recent years. India's largest bank, State Bank of India,
reported a ratio of 74.1% as at March 31, 2009, with other Indian banks reporting similar ratios
of between 70% and 75%.

Jost-to-income ratios also remain healthy. The average Indian banks achieved a cost-to-income
ratio for 2008 of 50.89%, compared with the world average of 63.37%.

Indian Asset Growth (Rs Bn) 2005-09

Indian xre-Tax xrofit Growth (Rs M) 2005-09


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While cataclysmic events began to unfold in the US financial services sector last September,
with Lehman Brothers' demise and Bank of America's takeover of Merrill Lynch, the Indian
banking industry also witnessed a crisis of public confidence.

A run began on the country's largest private sector bank and second biggest lender, IJIJI Bank.
There were concerns that its UK subsidiary had an $80m exposure to Lehman Brothers, leading
to several hundred customers lining up to withdraw their cash from branches and ATMs in
several Indian cities.

Top management tried to reassure customers that the bank was stable and, in a rare move, the
Reserve Bank of India (RBI), the country's central bank, pitched in with a statement confirming
there was enough liquidity at IJIJI Bank and affirming that it had arranged to provide adequate
cash to the bank to meet customers' demands.

† 
 



The situation finally settled down after a tense few days, but several naysayers predicted a
doomsday for India. They expected the same scenario that had befallen the US and UK, where a
run on a bank caused its near or total demise. They also feared the contagion would spread to
other banks ± but nothing like that happened.

Albeit a little battered at the edges, IJIJI Bank is now back to normal. And most other Indian
banks appear to be cruising along too, posting strong third-quarter results for 2008. HDFJ Bank,
one of the strongest in the private sector, reported net profit of Rs6.2bn ($121.5m) for the 2008
third quarter, a year-on-year growth of 44.8%. Similarly, Axis Bank, another leading private
sector bank, reported a strong 63.2% year-on-year increase in net income. In the meantime,
publicly owned State Bank of India, the largest bank in the country, showed a 35.5% year-on-
year growth in net interest income, while another leading public sector bank, xunjab National
Bank, reported an 85.8% year-on-year increase in net profits. State-owned banks account for
nearly 75% of the industry's assets and private sector banks about 20%.
Some of India's 30-odd foreign banks have also announced stellar 2008 results. While HSBJ
Holdings announced a 68% drop in net profit, its Indian operation reported a 26% increase in
pre-tax profit. And Standard Jhartered's Indian business was one of the main contributors to its
overall revenue, with its wholesale operation growing by 16% and its consumer banking arm by
13%.

The unexpectedly strong results can be largely attributed to Treasury gains made by banks in the
third quarter due to a steep decline in bond yields. Nonetheless, compared to the level of distress
evident in US and UK banking, the Indian system appears remarkably robust.

So why hasn't Indian banking suffered the calamitous meltdowns suffered by banks in the West?

Î

+ 

RBI governor, Duvvuri Subbarao, explained at a conference late last year: ·The Indian banking
system is not directly exposed to the subprime mortgage assets. It has very limited indirect
exposure to the US mortgage market, or to the failed institutions or stressed assets.·

·All the reasons for which you had financial destabilisation in other parts of the world have
really been missing in India,· adds Dr xJ Nayak, chairman and JEO of Axis Bank. ·We didn't
have toxic assets because credit default swaps weren't permitted in India. We are more 'boring
bankers'. We believe that the borrower and lender need to know each other. That's the way we
have always done banking ± over the recent period that has actually protected us.·

Jhanda Kochhar, the new managing director and JEO at IJIJI Bank, credits the regulator,
banks and consumers for not being predisposed towards over-leveraging. It is the ·Indian
mindset· she says.

The Indian banking industry today is safe, sound and secure, states HDFJ Bank managing
director, Aditya xuri. ·We have sufficient capital adequacy. There are no unexploded bombs in
the system. We are sufficiently strong in terms of funding and leverage and banking credit has
been growing at 24%.·

Notably, the banking industry regulator, the RBI, having taken flak in the past for its
conservative approach, is now showered with unmitigated praise from all quarters for ·prudent·
policies that experts say have helped shield the industry from the global financial crisis. ·We
need to credit the RBI for its policies, because of which we have a sound banking and financial
system at a time when the rest of the world is under pressure,· says Uday Kotak, executive vice-
chairman and managing director at Kotak Mahindra Bank, one of the youngest banks in India.

  


Reforms initiated by RBI 15 years ago have been a considerable help in improving the solvency
of Indian banks. However, it is the long-standing mandate of statutory reserve requirements that
is key. Banks in India need to maintain certain percentages of their deposits in liquid cash with
the RBI (the cash reserve ratio [JRR]) and in government bonds (the statutory liquidity ratio
[SLR]). Since September last year, the RBI has reduced JRR by 400 basis points to 5% and SLR
by 100 basis points to 24%.

·We have very sound regulation. Some exceptional measures have been adopted in the past to
insulate the banking system from shocks,· says Rana Kapoor, managing director and JEO of
Yes Bank, which commenced operations in 2004. In particular, Mr Kapoor points towards
counter cyclical measures adopted by the RBI about 18 to 24 months ago. These increased
provisioning in the system by almost 2% and stepped up capital adequacy to nearly 150% in
sensitive sectors such as unsecured consumer loans, capital markets and real estate. This was a
very timely strategy, he says, because it built a cushion in the system on the back of strong
earnings, which has stood banks in good stead in the current economic climate. Another
extremely important step, in the present context, notes Mr Kapoor, was the RBI disallowing
securitisation and credit derivatives in the Indian market ·much to the disappointment of banks at
that time·.

While the Indian banking sector might have escaped the full force of the financial crisis suffered
by its European counterparts, it has not emerged totally unscathed. The financial crisis has
entered India through other channels.

In the wake of the global slowdown, foreign institutional investors (FIIs) withdrew nearly $13bn
last year and, for the first time in 11 years, there was a net outflow of FII money from India. As
credit lines and credit channels overseas dried up, some of the credit demand previously met by
overseas financing is shifting to the domestic credit sector, putting pressure on domestic
resources. The BSE Sensex (Bombay Stock Exchange Sensitivity Index) has dramatically
slumped from its peak of 21,000 in January 2008 to sub-8500 levels at the beginning of March
2009. Reduced global demand has badly impacted exports, which fell in the last quarter for the
first time in seven years. On the domestic front, the auto and manufacturing sectors have
witnessed a slowdown. The Indian economy, which grew at an average 9% in the past four years,
is now expected to grow at about 5%.

Dr Nayak says: ·In the US and Europe, the direction of distress originated in the financial sector
and then moved on to the real economy. Here, the direction of causality has been the reverse.
Other than currency and equity markets, which had a first order impact in India because of pain
in financial markets overseas, the adverse impact has actually come via the real sector. Exports
are slowing down, and the Index of Industrial xroduction has also shown negative growth.

·However, it is my intuition that banks which have been relatively prudent in the way they
expanded assets during the upswing of the business cycle will suffer much less pain during the
downswing ± and in that sense you will see a differentiation driven by asset quality among
Indian banks by the time the downturn ends. Every business cycle downswing is
transformational for market structure and I expect a significant market structure change in Indian
banking as the present cycle plays out.·

The results of a study of the top 25 banks by the Associated Jhambers of Jommerce and
Industry of India (Assocham), released in January, highlighted the growing problem of non-
performing assets (NxAs) in the Indian banking industry. According to the study, net NxAs in
the third quarter of 2008 showed an average year-on-year increase of 34.5%. Assocham's
secretary-general, DS Rawat, said: ·In divergence to the turmoil in the global banking
institutions, the Indian banking sector stands tall with stupendous growth in profits. However, the
rise in NxAs may remain a key challenge.· Ashwin xarekh, partner and national leader ± global
financial services, at Ernst & Young agrees. ·Recovery management of NxAs is a key challenges
facing banks in the coming months,· he says.

*
  



The central bank recently announced a restructuring package to ease the NxA situation. Mr xuri,
whose bank, HDFJ Bank, registered the highest growth in net NxAs in the Assocham study,
contends that the NxA issue is well under control. He says: ·The average NxA is 2.08% gross,
net is 1%.

General reserves are 1% and capital adequacy is at 12%. So, definitely, this is not an alarming
situation. When the economy slows down, there will be some increase in NxAs. It always
happens. Even if the NxAs double from their current level, it wouldn't even dent one year's profit
of the banking system, let alone hitting reserves, contingency or equity.·

In the retail sector, NxAs comprise the small-ticket personal loans business dominated by banks
and non-banking financial companies. These were dogging the Indian banking sector even before
the current financial crisis began. ·It was India's own version of the subprime crisis, albeit at a
much smaller level,· says Mr Nayak, whose Axis Bank chose to stay away from this market.
This business includes unsecured personal loans and two-wheeler loans where ticket costs
sometimes went as low as $200. Several players such as GE Money, Jitifinancial (the consumer
finance arm of Jitibank in India), Standard Jhartered and IJIJI Bank got badly burnt by the
high levels of delinquencies in this business and many have exited the arena. xroblems include
high transaction costs, the absence of a fully functional credit bureau, and the lack of a strong
and quick legal redress mechanism in cases of default. ·Jollection issues are the main reason
behind the high NxAs,· says Mr Kochhar.

Leading brokerage firm Sharekhan stated in a recent report that there were ·tough challenges·
ahead for the Indian banking industry. Banks, it said, would be hurt by moderating advances
growth as slowing economic activity catches up with credit demand. The treasury gains enjoyed
by banks in the third quarter, said the brokerage firm, would probably no longer be available
since bond yields are not expected to decline much further.

( 

 

Jredit growth in the Indian economy has indeed slowed down considerably. According to data
released by the RBI, credit growth between October 10, 2008, and February 13, 2009, was only
$7.6bn, compared with $37.8bn during the corresponding period of the previous fiscal year.
Banks need to increase their lending, says Abizer Diwanji, head of financial services at KxMG
India. ·Banks' fee-based income has dried up in the current economic environment and they need
to focus on growing their interest income which is only possible if credit off-take occurs,· he
says.
In a bid to encourage banks to lend more, the RBI introduced a series of rate cuts from mid-
September last year, but these have not had the desired impact. While the state-owned banks
have responded to some extent by reducing their lending rates, private sector banks have not.
The problem lies with high deposit rates, says Mr Diwanji. ·There is enough liquidity in the
system, but unless the RBI cuts deposit rates, private banks will not be able to lower interest
rates since they have a high cost of funds. Reduction in rates would increase asset demand and
hence make loans more viable at lower rates.·

The current economic scenario is a wonderful opportunity for the regulator to introduce further
financial sector reforms, states Mr Kapoor. The last major set of banking reforms were
introduced in the early to mid-1990s. These included steps such as interest rate deregulation, the
introduction of competition in the hitherto state-controlled banking sector through the launch of
new private sector banks, and a dramatic reduction of JRR and SLR rates.

Mr Kapoor suggests that the JRR and SLR rates need looking at again: ·In India we block
almost 29% of our deposits into JRR and SLR. On SLR, banks have a negative U-turn, while on
JRR the return is zero. This sequestered capital is a big loss of productive growth capital in the
system.· With another 40% of capital being directed into priority sector lending, Mr Kapoor
adds, only 31% of the banking sector's funds are actually available to meet the country's core
funding requirements. ·There isn't enough funding from the Indian banking system, which is
why we are so dependent on foreign capital. The banking system needs to be able to make more
funds available for bona fide commercial purposes. There needs to be some serious
rationalisation of JRR and SLR norms. This is one very big reform that we are keenly awaiting
and now is the time to implement it.·

Opinions differ on this subject. While some experts support Mr Kapoor's views, others argue that
the current JRR and SLR levels provide the requisite cushion in the system, pointing out that
their role in protecting the banking system has been borne out by recent events. Mr xuri says:
·We need to look at JRR and SLR levels again and decide whether the current levels provide
safety or not. There are two views to it ± that it provides tremendous safety to the banking
system and that it pre-empts liquidity for the government.·

Mr xuri adds: ·We have a situation where credit demands may exceed what the banking sector
can provide. That is something where the development of a long-term debt market comes into
play. We need an appropriate set of equity investors, credit derivatives and currency derivatives.
These are important to create a deep bond market.· While the regulator has been steadily
working in this regard, Mr xuri believes that in the current global financial situation, the pace
needs to quicken.

An oft-repeated criticism of Indian banks in the past has been lack of size, with consolidation
mooted as a possible remedy. According to The Banker's 2008 rankings, there is only one Indian
bank, the State Bank of India, in the list of top 25 Asian banks. It is also the only Indian bank
among the top 100 banks globally. By contrast, Asia's other giant, Jhina, has eight banks among
the top 25 Asian banks, and the top three Jhinese banks ± IJBJ, Bank of Jhina and Jhina
Jonstruction Bank ± are among the top 15 in the world.





Size has been the biggest casualty of the financial crisis, says Mr Kochhar of IJIJI Bank. ·If the
Indian economy had continued to grow at the phenomenal rate it was growing, there would have
been commensurate growth in the banking sector as well. There would also have been a huge
opportunity for consolidation, but that is no longer the case. Apart from some consolidation
among public sector banks, most banks will grow organically.· Ranked 150th globally, IJIJI
Bank has, in the past, grown extremely aggressively, both through organic and inorganic means.

Mr xuri of HDFJ Bank, ranked 219th globally, counters this. ·Size beyond a point is a fallacy as
proved by RBS and Jitibank. Every bank that is big is down the tube,· he says. Jhinese banks
might be big, adds Mr xuri, but the Indian banking system is much better. ·We are better
positioned, better provisioned and better capitalised. We have better systems and better risk
management procedures.·

He agrees with Mr Kochhar that the Indian banking industry will not witness much consolidation
in the coming months; instead the focus among banks will be to consolidate existing positions
and build robust risk management systems.

In the current economic scenario, that certainly seems to be the best option.



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In spite of these woes, the Top 25 Asian bank ranking remains relatively stable this year, with
the overall Asian representation in the Top 1000 continuing to grow: Asian banks, in number,
constituted 19.3% of the Top 1000 for the 2009 ranking, compared with 18.4% in 2008. The
region's aggregate Tier 1 capital, as a percentage of the Top 1000 aggregate, has grown from
15% in 2008 to 17%. Two new entrants to the regional Top 25 include Jhina's Industrial Bank
and India's IJIJI Bank, which jumped 30 and 69 places, respectively, in the global rankings.

In what has become a familiar trend, Jhina dominates the list with the country's banks holding
the top four regional positions. Australia's banks were pushed downwards slightly by the
ascendance of Agricultural Bank of Jhina and Singapore's DBS Bank, although the country
continues overall to stay strong, at second place.

Following a troubled six months for South Korea, the country's banks have suffered some
downward movement, with Kookmin Bank, Hana Financial Group and National Agricultural
Jo-operative Federation each dropping seven places. It was another poor year for Taiwan whose
sole representative in the Top 25 in the 2008 rankings, Bank of Taiwan, fell 12 places, pushing it
out of the Top 25 this year.

In terms of profit on capital, the region experienced a slight overall decline from 13.36% last
year to 12.31% this year, with Jhina, South Korea, India and Singapore each displaying a slide.
Taiwan was this year the exception, managing to drag up its abysmal figure of -17.05% in the
2008 listings to -6% this year.

As the Asian recession deepens, the IMF forecasts that the entire region will grow just 1.3% in
2009, down from 5.1% in 2008, suggesting that many of the region's banks have yet to feel the
full impact of the slump.
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The financial system has stood right at the edge of a precipice on several occasions recently.
Regulation has failed to prevent this and so-called free markets and some of their proudest
defenders are looking to governments to rescue them. The fiercest debate is now under way
about what should be done, and includes calls from the private sector for massive intervention.

One of the leading thinkers in global banking, George Magnus, who is a senior economic adviser
to UBS Investment Bank, says: ³The consequences of non-intervention in the financial system is
to invite such systemic financial failure that you would be inviting a nefarious economic
outcome which would be politically, and from a democratic point of view, not acceptable.´

Mr Magnus continues: ³The government has to act forcefully and put in place the regulatory
environment under which those institutions which receive help from tax payers are going to be
properly administered and told how to go about their business.´

The credit crunch and subsequent crises have placed the financial system in a

a. The
era of steady assumptions is over. The shape of tomorrow¶s financial sector is anyone¶s guess.
What seems established yesterday is up in the air today. The unthinkable in financial markets is
today¶s norm.
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The phrase recalls former US Federal Reserve chairman Alan Greenspan¶s view that the markets
were overtaken by irrational exuberance. How that exuberance has changed to despair and
depression.

What is to be done? Responses to this rout are as random as they are desperate, as driven by
panic as they are contrived. Opinions range widely.

The Basel capital regime needs to be thrown out and Glass-Steagall restored, says UK economist
Tim Jongdon, founder of Lombard Street Research. Banking regulation needs complete
revision, says Stephen Lewis, chief economist at Monument Securities. Bad banks need to be
forced to close or merge by government diktat, says Mr Magnus. The financial system needs to
be cut down to size, says Mr Buiter. Middle American banks should be swept away wholesale,
say US analysts. This is the time for big ideas and painful thoughts.

†




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Bad times call for grand schemes. Bankers, advisers and economists are scraping around for
solutions and explanations.

Mr Jongdon lambasts regulation: ³The Basel rules have failed utterly. The notion that these
rules would sort out the banking system has failed. International regulation has failed. They
should close down Basel. The internationalisation is a large part of the trouble. The Basel rules
are inflexible. Split up these large banking organisations, stop this nonsense of these conflicted
businesses, and there must be local regulators who know the management.´

He believes that the 1933 Glass-Steagall Act, which prevented the combination of investment
banking and commercial banking, was ³the right thing to do´. Mr Jongdon says that allocation
of capital between these businesses is very difficult as commercial banks have deposits as
liabilities. ³They can¶t have lots of assets that swing widely in value. Investment banking is
potentially that kind of business because they are taking bets all the time.´

Today¶s solutions may lay the seeds of tomorrow¶s crisis, he says. ³The purchase by Barclays of
parts of Lehman Brothers is fundamentally wrong. These are businesses that are clearly
conflicted. Regulators around the world should stop them from being in one bank holding
company. Jombining them causes trouble. That is the message of the past 15 years.´

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Mr Jessop argues that the parameters for interest rate policy should be widened to include
financial stability as well as inflation. ³Interest rates have been kept very low to deal with a
perceived deflation threat. They weren¶t raised quickly enough to control growth in asset prices.
This can be blamed on the narrow mandate of central banks, with inflation first and foremost and
not thinking about broad issues of financial stability.´

ü





Mr Magnus of UBS has a five-part plan to save the financial industry. It requires government
intervention on a scale unthinkable for many bankers and politicians.

State-sponsored recapitalisation is at the core of the Magnus plan. He says: ³The most urgent
issue is to reconstitute the capital. The state can¶t do it for everybody, it has to make political
decisions to make capital available for banks. The government has to divide banks into good and
bad banks.´

Bad assets should be shunted off, courtesy of the government, into an asset management
company like the Resolution Trust Jorporation set up in the US to deal with the 1980s savings
and loan crisis or the Reconstruction Finance Jorporation set up in Japan. Mr Magnus says this
³would enable problem banks or assets to be sold or run down in an orderly way, rather than in
the cave of a firesale´.
Banks will be pushed together, in the Magnus blueprint, by regulators to create larger
consolidated entities, in total distinction to ³the small is beautiful´ thesis laid out by Mr
Jongdon. ³It is a question of getting stronger brethren taking over weaker competitors. The
problems are so widespread, particularly with many institutions relying on wholesale funding
which has either been cut back or shut down completely. Some markets have stopped
functioning completely.´

Mr Magnus also wants regulators to ease accounting rules for banks harbouring large losses. ³No
one suggests that the banks should be excused accounting for their losses but there may be legal
and regulatory ways so that these losses can be taken in a more orderly fashion. The collapse of
the real estate sector also needs attention.´

Government intervention into the direction of the financial system is a last but necessary resort
for a system whose internal mechanisms have failed, he says. ³For free market people it is not
the preferred solution. But I am not convinced that there is any other way forward than to have
the government, maybe in cahoots with senior industry leaders, try to sketch out a plan of which
banks are worthy of surviving and have sound business practices and which have blown it and
should be swallowed up.

³Government intervention is a political as well as as economic and financial issue. In the

medium to long run, the greater activism of the state in the financial system will fade over time,
much as it did in the decades after the 1930s, and again after the 1980s.´

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The small matter of moral hazard, that is the banks need to take responsibility for their own
failures, is a dead letter in today¶s crisis, says Mr Magnus. ³It is too late for [worrying about]
moral hazard. The time to worry about moral hazard is in the good times and to put in place the
rules and regulations and structures to make the financial system safer. We are long past that
point.

³I am not saying the state should rescue every single financial institution. But there may be some
institutions where it is essential to help them survive, particularly if they are not badly run and
just caught in awkward funding difficulties. Yet there may be cases where the state has to say we
have to intervene.´

Less catastrophic measures are required to restore sanity, says Mr Lewis of Monument. He
believes that investment bankers have had their fingers so badly burnt by this imbroglio that they
will adopt traditional and conservative paths. However, he believes the authorities need to import
a system ³which will ensure that in the good years they are required to lay aside reserves to
cushion them in the bad years´.

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Remuneration packages must also more accurately reflect risk and success for investment
bankers, he says. ³The time horizons of bank management are very short, they are always
thinking about the next quarter and the implication of those results for their own remuneration.
That linkage has to be broken as well. This applies as much to commercial bankers as investment
bankers.´

The crisis will trigger further regulation, says Mr Buiter, although he says it is as yet unknown
what form it will take. He greets its inevitability with trepidation. ³New regulation is required
and I dread to think what is being dreamt in the offices of Whitehall and Washington. Many
babies will be thrown out with the filthy bathwater.´

There are some certainties for the UK government, says Mr Buiter. One is the decision in
Westminster that ³none of the major clearers will be allowed to go to the wall. If these banks can
no long fund themselves in the markets because of the fear and loathing and panic, the UK
government will make finance available. This may involve extending the range of eligible
collateral or it may involve buying assets outright from the banks, the way the US Treasury has
done from Fannie Mae or Freddie Mac. The government will also encourage shotgun mergers
between the weakest of the brothers and sisters. None of these institutions will be allowed to be
taken into administration.´

Mr Buiter attacks the Bank of England for excessive caution in placing a deadline on the Special
Liquidity Scheme window. The scheme was due to close in October, but it has been extended
until January. ³That is very nice from the point of view of moral hazard, but it doesn¶t address
the problem that no mortgage lending is taking place. xotential mortgage lenders can¶t fund
themselves because the wholesale market has dried up. If the Bank of England doesn¶t want to
accept new mortgages in this facility, the Treasury should do it itself. The facility doesn¶t require
the Bank of England. It doesn¶t make available Bank of England liquidity, it only makes
available Treasury bills and who better to do that than the Treasury.

³The Bank is the agent of the Treasury and it should not have veto power over what it accepts.
So you have to widen the range of collateral you accept, price it aggressively, make it expensive
if you want the facility to minimise the moral hazard, but nevertheless broaden the range of
collateral and the parties eligible to use the facilities.

³They are being overly worried about moral hazard and not appreciating the extent to which they
can have their cake and eat it. They believe that if you accept rubbish collateral, you have to
accept it and value it as if it were great collateral. But it is still worth something and that is
enough to keep the businesses afloat.´
Longer term will come the serious thinking about how governments must rethink financial
systems and their regulation. The much vaunted 

system that politicians proclaimed
in the late 1970s as the solution to society¶s ills has fallen into disrepute. The state will save the
banks, but there will be a heavy price to pay.

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The first, the oldest, the largest, the biggest, get all such types of informations about Banking in
India in this section.

The first bank in India to be given an ISO Jertification Janara Bank

The first bank in Northern India to get ISO 9002 certification for their xunjab and Sind
selected branches Bank
xunjab National
The first Indian  to have been started solely with Indian capital
Bank
The first among the private sector banks in Kerala to become a scheduled
|
 Bank
bank in 1946 under the RBI Act
India's oldest, largest and most successful   
|, offering the
widest possible range of domestic, international and NRI products and State Bank of India
services, through its vast network in India and overseas
India's second largest private sector bank and is now the largest scheduled The Federal Bank
commercial bank in India Limited
Bank which started as private    banks, mostly Europeans Imperial Bank of
shareholders India
Bank of India,
The first Indian bank to open a branch outside India in London in 1946
founded in 1906 in
and the first to open a branch in continental Europe at xaris in 1974
Mumbai
The oldest xublic Sector Bank in India having branches all over India and
Allahabad Bank
serving the customers for the last 132 years
The first Indian commercial bank which was wholly owned and managed Jentral Bank of
by Indians India

Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a branch
outside India in London in 1946 and the first to open a branch in continental Europe at xaris in
1974.


 http://www.ibef.org/industry/Banking.aspx

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The Indian banking system is financially stable and resilient to the shocks that may arise due to
higher non-performing assets (NxAs) and the global economic crisis, according to a stress test
done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7
billion towards the purchase of 200 metric tonnes of gold from the International Monetary Fund
(IMF) in November 2009. The purchase has increased the country's share of gold holdings in its
foreign exchange reserves from approximately 4 per cent to about 6 per cent.

Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Jredit of Scheduled Jommercial
Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the
aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per
cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in
aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of 50.5 per cent
in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled
commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per
cent and 2.5 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,709 banked centres. Of these
centres, 28,095 were single office centres and 64 centres had 100 or more bank offices.

The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI
fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the
RBI's February bulletin. Most of this has come through Foreign Jurrency Non-resident (FJNR)
accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to
US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

0
 †




The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months
ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months
ended December 2008.

The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160
by March 2010. This will cement its leading position as the bank with the largest global presence
among local peers.

Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4 million on
21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, over
the corresponding period last year. HDFJ Bank has posted a 32 per cent rise in its net profit at
US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$ 128.05
million for the same quarter in the previous year.
ü

 


In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on
June 25, 2009, said that banks should link more branches to the National Electronic Jlearing
Service (NEJS). Ideally, all core-banking-enabled branches should be part of NEJS. NEJS was
introduced in September 2008 for centralised processing of repetitive and bulk payment
instructions. Jurrently, a little over 26,000 branches of 114 banks are enabled to participate in
NEJS.

In the Third Quarter Review of Monetary xolicy for 2009-10, the RBI observed that the Indian
economy showed a degree of resilience as it recorded a better-than-expected growth of 7.9 per
cent during the second quarter of 2009-10.

In its Third Quarter Review of Monetary xolicy for 2009-10, the RBI hiked the Jash Reserve
Ratio (JRR) by 75 basis points (bps) to 5.75 per cent, while keeping repo and reverse repo rates
unchanged.

According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be
to:

Y| Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly
through policy adjustments,
Y| Actively manage liquidity to ensure credit demands of productive sectors are met
adequately,
Y| Maintain an interest rate environment consistent with financial stability and price
stability.

The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009,
remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of
July 2009. The main source of M3 expansion was bank credit to the government, reflecting large
market borrowings of the Government.

Meanwhile, outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4.32
billion, pointing to a revival in credit growth. This is the highest year-on-year growth recorded
since August 14, 2009.

Exchange rate used:

1 USD = 46.29 INR (as on January 2010)
1 USD = 46.66 INR (as on December 2009)

RBI to buy back Rs 20,000 cr bonds to inject liquidity Business Standard: June 17, 2010

Mumbai: The repurchase will be funded from the current account surplus of the government.
The Reserve Bank of India on Wednesday offered to buy back government bonds for up to Rs
20,000 crore to increase liquidity in the banking system. xayments towards advance taxes,
licence fees for 3G telecom spectrum and broadband wireless access have taken cash out of the
system.

As a first step, the RBI will offer to repurchase bonds for up to Rs 10,000 crore, the central bank
said late today. The repurchase will be funded from the current account surplus of the
government. There was short-term mismatch in funds, it said.

³The move is looking at addressing liquidity concerns in the market ... It doesn¶t necessarily
preclude any rate action to tackle the inflation problem,¶¶ said Krishnamoorthy Harihar, treasurer
at FirstRand Bank.

RBI will offer to repurchase 12.25 per cent government bonds maturing in 2010, 11.30 per cent
2010 bonds and 6.57 per cent, 2011 bonds on June 18. RBI will retain the right to vary the
amount it may accept, or even reject all offers, it said.

Banks today borrowed about Rs. 27,705 crore through the two repos. Overnight call money rates
rose to as high as 5.4 per cent, compared with the 5.25 per cent repo rate for borrowing from the
RBI.

The step follows a measure announced on May 27, when the central bank permitted banks to
borrow an additional amount up to half a percentage point of their SLR (statutory liquidity ratio)
holdings. The measures were to be in effect from May 28 to July 2. The steps were initiated to
improve liquidity, as the RBI anticipated pressures on account of the payments mentioned. It also
opened a second auction to ensure funds remained available to banks.

The advance payment in the first quarter this year has been higher than the year-ago period.
Forty four large companies that account for about 40 per cent of the total market capitalisation of
the stocks listed on the Bombay Stock Exchange paid about 19.7 per cent higher advance taxes,
or about Rs 7,273 crore, in the first quarter.

The winners of 3G and BWA licences are estimated to pay the government a little over Rs
1,00,000 crore, respectively Rs 68,000 crore and Rs 34,000 crore.

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Besides scooping up the country awards in Hong Kong, Brunei, Nepal and South Korea this
year, Standard Jhartered Bank put in another exceptional performance for financial year 2008,
with income rising 26% to $13.97bn and operating profit before tax (OxBT) up 13% to $4.57bn,
in what was a challenging operating environment, particularly in the second half of the year.

In Asia, a few key economies put in particularly excellent performances, with Singapore OxBT
rising a staggering 67%, India by 37%, and South Korea by 10%. This strong financial showing
was followed by a record performance for the first half of 2009, with income rising 14% to
$7.96bn and OxBT by 10% to reach $2.84bn.

Standard Jhartered's pre-eminence in the Asia region has been reinforced throughout the year,
with the bank making several key acquisitions in Asia, including the 100% purchase of
Jazenove Asia Limited, a leading Asian institutional brokerage business, from JxMorgan
Jazenove.

In Taiwan, the bank was named as the preferred bidder to acquire the 'good bank' portion of Asia
Trust and Investment Jorporation's Taiwan arm, in a deal that will further increase the bank's
island-wide presence from 88 to 95 branches, and in particular strengthen its presence in Greater
Taipei.

Meanwhile, Standard Jhartered has expanded its existing bancassurance relationship with
xrudential into new Asian markets, including Japan and Thailand. The bank is also poised for
rapid expansion in Vietnam, having been granted a licence by the State Bank of Vietnam in
September 2008 to set up shop in the rapidly growing economy. To this end, Standard Jhartered
also expanded its stake in Vietnam's Asia Jommercial Bank in May 2008.

·We are extremely pleased to receive The Banker's award for best bank in Asia,· says Jaspal
Bindra, JEO of Standard Jhartered Asia. ·Standard Jhartered has been conducting business in
Asia for more than 150 years. The key for us has been to remain focused on our strategy: we do
business in markets we know, deal in products we understand and engage with clients with
whom we have deep relationships. Our strategy has enabled us to emerge strongly from the
crisis, and Standard Jhartered is well positioned for growth given our presence and expertise in
Asia.·


#
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By Brian Japlen | xublished: 04 August, 2009

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India's public sector banks used to be slow-moving bureaucratic behemoths, ripe for attack by
up-and-coming private sector players. But now the sector has been shaken up by the competition
and is producing its own examples of efficiency and progress.

Bank of Baroda, which is eighth in The Banker's ranking of Indian banks by Tier 1 capital, is one
institution which responded positively to the new banking environment in India. It introduced a
factory-type system of processing loans that pools expertise and cuts down decision-making
times. Strong risk management has enabled it to navigate tricky areas such as real estate and
consumer finance, while also keeping non-performing loans (NxLs) below the industry average.
A branding initiative introduced a bright new logo and employed Indian cricket star Rahul
Dravid as brand ambassador, helping to rid the bank of the stuffy image left from the old days of
Indian public sector banking.

The bank's chairman and managing director, M D Mallya, agreed to be interviewed,

appropriately enough, just prior to the Twenty20 Jricket World Jup match in June between
India and England, which turned out to be one of those rare occasions when England triumphed.
·The Indian private sector banks set up in the 1990s and initially took market share from public
sector banks,· says Mr Mallya, who joined the bank in 2008 from another state-owned
institution, the Bank of Maharashtra. ·At that stage, the public sector banks didn't have the
technology, but now we are as good as everyone else and the market share we lost is coming
back.·

Bank of Baroda installed a new core banking system (Finacle from Infosys) in 2005 and adapted
the platform to its specific requirements using Hewlett-xackard as its strategic IT partner. Having
the latest technology has enabled the bank to organise itself in a centralised and more efficient
way.

·We have introduced a centralised hub where we place people with specific expertise. We call it
a 'factory' and we have 32 retail factories and 26 small and medium-sized enterprise [SME]
factories. Most of the credit origination is done in these factories,· says Mr Mallya. ·It is like an
assembly line and enables us to take credit decisions faster than the competition. Retail loans that
used to take three to four weeks to sign off now take six days. SME loans used to take a month to
six weeks and now take 14 days.·

·Jredit origination has been a strong point for the bank. We have a dedicated team in the
branches using software integrated with the core banking system, giving them a continuous flow
of information,· he adds.

J   

Normally in banking the large loans get monitored and the small loans may be ignored, but with
Bank of Baroda's approach to risk management NxLs have been kept at 1.27% against an
industry average of 2%. The bank has very high capital ratio of 14%, sufficient to allow it to
keep up with credit growth of 25% a year.

·The bank has a strong risk management department which enables us to identify industries
under stress, allowing us to restrict our exposure. A couple of years back it was clear that real
estate faced stress [and we cut back our exposure] but many banks didn't take this [threat]
seriously. It was a very important decision that we took,· says Mr Mallya. ·When all the banks
went into consumer loans, we went ahead, but more slowly. At some stage we downsized the
portfolio, whereas competitors built theirs up and then watched as many of the loans went bad.·

The bank is modelled around four vertical businesses - retail, SMEs, corporates and rural and
agricultural. ·This is different from how most banks do it, with every branch doing everything,
whereas we created specialised branches for corporates and for retail and so on. The number of
branches has stayed the same but this allows us to develop expertise and move ahead faster than
our peers,· says Mr Mallya.

As well as its domestic business, Bank of Baroda has an extensive network of international
offices - 75 in 25 different countries - producing 25% of total profits. The bank has had a
business in the UK for more than 50 years and is the only Indian bank operating in the Gulf and
serving a large expatriate population.

Raising one's game is not completely effective, however, without an image overhaul. Bank of
Baroda was a leader among Indian banks in rebranding, introducing the sun logo and bringing
Rahul Dravid on board as brand ambassador. ·At any time of the day in the branches of Bank of
Baroda, the sun is always shining,· says Mr Mallya.


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t is not just the pink papers reporting that foreign financial entities (GE Money, Goldman Sachs
and Merrill Lynch to name a few) are showing interest in Indian banking sector, but the
concerned authorities in the country also seem to be encouraging the same.

Reserve Bank of India's twin-phased roadmap for facilitating entry of foreign banks into India
seems to be a step towards fulfilling the key objectives of competition, consolidation and
convergence in the sector. But what is it that is enticing the foreign entities to the Indian shores?
Here, we try to reason the same.

(






Twenty seven xSU banks, 25 private banks, 30 foreign banks and a host of cooperative and
regional rural banks do not in any sense implicate that India, as a country, is under-banked.
However, a comparison of the total credit outlay (consumer credit as a per cent to GDx) with
some of the smaller economies suggest otherwise.

 )|%

Jonsumer credit accounts for a meagre 28.6 per cent of the country's GDx and the buoyancy in
the economy offers sufficient scope for it to grow. Although corporate credit has shown some
signs of revival over the past few quarters, it has been the 'retail credit' segment that has
accelerated the non-food credit growth. As economy progresses, demand for credit from this
segment will continue to surge.
Despite the fact that the 'banking behemoths' have catered to a substantial portion of the demand,
it is pertinent to note that they account for only half of the total pie and there is a reasonable
room left for others to cash in.

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The fact that the top 8 banks account for barely 54 per cent of the market share suggests that
several smaller players occupy the remaining 46 per cent.

It is here that the foreign players see the 'opportunity'. Although the smaller players together
account for a reasonable share, most of them are undercapitalised, on a standalone basis.
The need to cater to the burgeoning credit demand also calls for additional capital requirement,
for which their foreign counterparts can come to the rescue of the smaller Indian banks.

Also, since the new foreign players will not be allowed to expand freely, the ones taking the
subsidiary route for expansion will not be subjected to rural branch norms (25 per cent of
branches to be set up in rural areas) as well as priority sector lending requirement (35 per cent).
They can thus concentrate their focus on the lucrative urban markets.

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Demand for non-food credit, from retail and corporate segments alike, is set to witness an
uptrend given the economic and demographic changes in the country. The smaller banks
(occupying 46 per cent of market share) have neither the resources nor the ability to raise the
same, to cater to the incremental demand. Foreign banks will thus capitalise on this opportunity,
by either picking up stake in the smaller entities or setting up subsidiaries, thereby eating into the
market share.

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The government mandation of fulfilling the minimum priority sector credit (of which 18 per
cent is food credit) has forced the domestic banks to cater to this segment despite the low
profitability and vulnerability of asset quality. xarticularly, it is the xSU banks that stand to be
the 'scapegoat' in the regard. However, their foreign counterparts (new entrants) have the respite
of being exempted from this and will thus not be looking at this 'not so credible' option.
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Except SBI, no other banking entity in the country has a sizeable portion of market share of the
total low cost deposits. Exemption from setting up branches in the rural areas will also enable the
foreign entities to raise low cost deposits from the urban areas by consolidating the shares of
several smaller players.

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«that, the optimism about the foreign participation in the banking sector, has its own share of
vices. While opening up the sector to more competition and consolidation, it is pertinent to
safeguard the smaller domestic banks from getting cannibalized by their stronger foreign
counterparts. With regulators like RBI and SEBI keeping a close watch we can hope that they do
not fall prey to the vested interests of the foreign players.

†&&%%

xublished: 05 January, 2009

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. 
It was not supposed to happen this way; the decoupling theory was to kick in. Even as advanced
countries went into a downturn, emerging economies ± given their substantial foreign exchange
reserves, improved policy framework, generally robust corporate balance sheets and relatively
healthy banking sector ± were to continue to steam ahead, with, at worst, only minor brushes.
The reality turned out to be the opposite. All emerging economies have been impacted by the
crisis, some quite significantly. Indeed, current indications are that the slowdown in growth of
emerging economies will be sharper than earlier anticipated.



 

India, too, has been affected by the crisis ± and much more than it was suspected earlier. The
banking system was not directly exposed to subprime mortgage assets, and had only limited off-
balance sheet activities or securitised assets, which were at the core of the crisis in advanced
countries. India¶s banks, both public and private, are financially sound, well capitalised and well
regulated. The capital-to-risk weighted assets ratio of Indian banks, at 12.6%, is above the
regulatory norm of 9% and well above the Basel Accord norm of 8%.

Even so, India is experiencing the knock-on effects of the global crisis, through the monetary,
financial and real channels. Its financial markets have all come under pressure, mainly because
of what we have begun to call µthe substitution effect¶. As credit lines and credit channels
overseas dried as a result of liquidity tightening, some of the credit demand that had been met by
overseas financing shifted to the domestic credit sector, putting pressure on domestic resources.
The reversal of capital flows occurring as part of the global de-leveraging process put pressure
on our foreign exchange markets. The global credit crunch and de-leveraging were reflected at
home in the sharp fluctuation in the overnight money market rates in October 2008 and the
depreciation of the rupee.


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Jontrary to hopes and expectations, the collapse of Lehman Brothers in mid-September was not
a one-off event and was followed by several other big financial institutions needing to be
rescued. It became quite clear that the global markets were unlikely to revive soon and central
bank policy changes were warranted. The Reserve Bank of India (RBI) remained on constant
vigil and devised a series of well-timed and calibrated policy packages. Our policy response had
three objectives: to maintain a comfortable rupee liquidity position; to augment foreign exchange
liquidity; and to maintain a policy framework that would keep credit delivery on track so as to
arrest the moderation in growth.

Measures to expand rupee liquidity included a significant reduction in the cash reserve ratio ± the
amount of bank reserves impounded by the central bank ± and a reduction in the statutory
liquidity ratio ± the portion of funds that banks need to keep invested in government bonds. The
RBI also opened a special repo window under its liquidity adjustment facility (LAF), giving
liquidity access to banks for on-lending to non-bank finance companies (NBFJs), housing
finance companies (HFJs) and mutual funds. Defying orthodoxy, the reserve bank also opened a
special refinance window, which banks can access without any collateral.

Measures aimed at managing foreign exchange liquidity include upward adjustment of the
interest rate ceilings on foreign currency deposits by non-resident Indians, substantially relaxing
the external commercial borrowings regime for corporates, and allowing NBFJs and HFJs
access to foreign borrowing. The RBI also instituted a rupee-dollar swap facility for banks with
overseas branches to give them comfort in managing their short-term funding requirements.

Measures to encourage flow of credit to targeted sectors include: extending the period of pre-
shipment and post-shipment credit for exports; expanding the refinance facility for exports;
counter-cyclical adjustment of provisioning norms for all types of standard assets and reduction
in risk weights on banks¶ exposure to certain sectors that had been increased earlier counter-
cyclically; and expanding the lendable resources available to refinance institutions for
refinancing credit extended for small industries, housing and exports.

The RBI, reflecting the declining inflationary pressures and growing concerns about growth
moderation, adjusted its policy stance from tightening to easing. In an effort to improve the flow
of credit to productive sectors, it signalled a lowering of the interest rates by reducing its key
policy rates ± both the repo rate at which the central bank injects liquidity and the reverse repo
rate at which it absorbs liquidity.

The central government, recognising the depth and extraordinary impact of this crisis, invoked
the emergency provisions of the Fiscal Responsibility and Budget Management Act to seek
relaxation from the fiscal targets and in early December launched a fiscal stimulus package of
0.5% of gross domestic product (GDx) that includes additional public spending, cuts in indirect
taxes and a government guarantee for infrastructure spending. This package comes on top of an
already announced expanded safety-net for poor people in rural areas, a farm loan waiver
package and salary increases for government staff, all of which are also fiscally expansionary.


0





Taken together, the measures put in place since mid-September 2008 have ensured that the
Indian financial markets continue to function in an orderly manner. The cumulative amount of
primary liquidity made available to the financial system through these measures is more than
$65bn. This sizeable easing has ensured a comfortable liquidity position starting in mid-
November 2008, as evidenced by a number of indicators. Since November 18, the LAF window
has largely been in absorption mode. The weighted-average call money rate has dropped
substantially; the overnight money market rate has consistently remained within the LAF
corridor; and the yield on the 10-year benchmark G-Sec has declined significantly. Taking their
cue from the repo rate cut, many big banks have cut their benchmark prime lending rates.
The outlook for India is mixed. There is evidence of economic activity slowing down and real
GDx growth has moderated in the first half of 2008/09. The services sector too, which has been
India¶s prime growth engine for the past five years, is slowing, mainly in the construction,
transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven
years, exports have declined in absolute terms for two months in a row, October and November
2008.

Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity
in the system. Higher input costs and dampened demand have dented corporate margins while
the uncertainty surrounding the crisis has affected business confidence. Industrial activity has
slowed and, breaking a 15-year trend, posted negative growth in October 2008, suggesting that
growth moderation may be steeper and more extended than projected earlier.

On the positive side, headline inflation ± as measured by the wholesale price index ± has fallen
sharply, and this decline has been sustained since mid-November 2008, pointing to a faster-than-
expected reduction in inflation. Jlearly, falling commodity prices have been the key drivers
behind the disinflation; however, some contribution has also come from slowing domestic
demand.

The reduction in the price of petrol and diesel and the cut in indirect taxes in early December
2008 should further ease inflationary pressures. Jonsumer price inflation did increase in
September and October, possibly owing to the trend in food articles inflation and the higher
weight of food articles in measures of consumer price inflation. Historically, there has been a
correlation between wholesale and consumer price inflation, and given this, consumer price
inflation too can be expected to soften in the months ahead.

Going forward, the RBI will continue to maintain a comfortable rupee and foreign exchange
liquidity position. There are indications that pressures on mutual funds have eased and that
NBFJs too are making the necessary adjustments to balance their assets and liabilities. Despite
the contraction in export demand, we will be able to manage our balance of payments. The RBI
expects that commercial banks will take the policy rates reduction as a signal to adjust their rates
in order to keep credit flowing to productive sectors. In particular, the special refinance windows
opened by the reserve bank for the micro, small and medium-sized enterprise, housing and
export sectors should see credit flowing in their direction. The government's fiscal stimulus
should be able to supplement these efforts from both supply and demand sides.


/

 


Over the past five years, India clocked an unprecedented 9% growth, driven largely by domestic
consumption and investment even as the share of net exports rose. This was no accident. True,
the benign global environment, easy liquidity and low interest rates helped, but at the heart of
India¶s growth was a growing entrepreneurial spirit and rise in productivity. These fundamental
strengths continue to be in place.
Yet the global crisis has dented India's growth trajectory as investments and exports have
slowed. Jlearly, there is a period of painful adjustment ahead of us. But, once the global
economy begins to recover, India¶s turnaround will be sharper and swifter, given the country¶s
strong fundamentals and untapped growth potential. Meanwhile, the challenge for the
government and the RBI is to manage the adjustment with as little pain as possible.


 
 
 

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Financial exclusion is seen as a purely developing world problem. It is not. In some developing
countries, almost three-quarters of the population are unbanked and access to financial services is
confined to the urban middle classes. But the number of people in mature economies who remain
outside of the financial system is also shocking. In the US, 7.8% of the adult population (17
million) do not have a bank account. In the UK, this applies to 4% of the population (1.75
million adults). Other developed economies boast similarly ignominious statistics.
Should banks care? The smart banks have realised that reaching out to the marginalised can be
profitable, and helps to nurture a client base for the future. In addition, it can also go a long way
to improving a public image badly in need of repair for some banks in the wake of the financial
crisis.

This potential is not lost on banks and many are now targeting the low-income sector, often as
part of a broader corporate and social responsibility (JSR) programme. In April, for example,
JxMorgan invested $10m in the LeapFrog micro-insurance fund. In May, Jiti provided $1m in
grants to three local microfinance institutions (MFIs) in Haiti, and Wells Fargo made a $1m
equity-equivalent investment in non-profit microfinance organisation, Grameen America. It
seems that the time is ripe for more of the world's banks to take up the challenge to bank the
poor.

†



In the developing world, the need is dramatic. A recent survey by JGAx, the independent policy
and research organisation that aims to improve financial access to the world's poor, indicates that
about 70% of adults in developing countries are excluded from the regulated financial system,
despite years of growth in the financial sector and multiple programmes championed by the
World Bank and regional development banks.

The banking system's failure to enfranchise the low waged begins in the remittance sector.

The World Bank estimates that remittances totalled $443bn in 2008, of which $338bn were sent
to developing countries, involving about 192 million migrants that make up a staggering 3% of
the world's population. According to remittance experts, as much as 40% of this traffic bypasses
the regulated banking sector's remittance operations.

Many are critical about the failure of the banking world to capture a greater percentage of the
remittance market, as well as the failure to convert those remittance customers who do use banks
into account holders. If up to 60% of remittances are being sent through banks, credit unions or
other types of deposit institutions, this means that every month, millions of recipients collect
their money at bank branches with little effort being made to retain their services by offering
even the most basic of financial services.

According to the Inter-American Development Bank (IDB), in the majority of transactions where
banks do distribute remittances in Latin America, they serve only as a licensed distribution agent
for a money transfer organisation. Remittance operations are largely kept separate from other
bank operations - sometimes even physically separate from the teller queues available to account
holders.

The banks are missing a trick, because where serious efforts have been made to turn remittance
customers into deposit holders, programmes report a 30% conversion rate. Implemented region-
wide in Latin America, this could easily result in more than 3 million new clients and $1bn in
deposits year after year, says the IDB.
!
 

Banks do seem to be finally waking up to the potential of remittances as the first step in
establishing a banking relationship. The key issue, say bankers, is to understand how to tailor
products and services to an entirely new customer group. ·Banks traditionally have not handled
the majority of remittances in the US,· says Bob Annibale, global director of Jiti Microfinance.
·We need to understand what will make a product appropriate for a customer segment that we've
never reached before.·

But Jiti hopes to change this dynamic. By developing a better understanding of remittance
traffic through partnerships with local and regional banks, Jiti is opening up significant
opportunities to enfranchise family members at both ends of the remittance chain.

Jiti knows which of its remittance customers in the US are unbanked, and through partnerships
such as the one it holds with Ecuador's Banco Solidario to serve New York's large Ecuadorian
population, it has been able to analyse transaction data to find out which recipients have no bank
accounts in their home country either. ·By refining a partnership, we often realise that we're
working with two ends of an unbanked family,· says Mr Annibale. And this provides an
opportunity to turn these family members into a savings customer. ·Someone who does a
remittance is someone who saves,· says Mr Annibale.

The failure to bank the poor has historically been driven by the perceived lack of profitability in
this client segment. But evidence from the UK proves that this need not be the case. According
to data from Spanish bank Santander, a growing force in UK retail banking, reaching out to the
low-waged community is as much about creating the customers of the future as it is about social
responsibility.

Santander offers a basic bank account to the low waged, and such accounts currently represent
about 6% of its total UK accounts. Analysis of account data reveals a promising trend: the swift
migration of customers from these so-called entry accounts to intermediate products. The bank
says that over the past two years, 40% of basic bank account customers have moved to accounts
with some access to credit and other services. This is vital proof that a basic banking product can
quickly become a stepping stone into more sophisticated - and more profitable - financial
services.

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António Horta-Osório, chief executive of Santander UK, underlines the importance of
government and regulatory efforts to encourage banks and ensure that those which increase
financial inclusion do not end up paying a disproportionate cost.

·There has been significant progress made in the past few years, but further progress has to be
made together with the government, banks and [non-governmental organisations]. Financial
inclusion efforts have to be coordinated because otherwise this may create an asymmetry in the
market,· he says.

The importance of legislative support has been clearly demonstrated in Kuwait, where a local
law has forced employers to use bank accounts to distribute payroll to all employees, including
low-income expatriates. As a result, Jommercial Bank of Kuwait (JBK) has been able to
introduce a low-cost labour account dedicated to the low-income segment, which was previously
ignored by the country's banks.

The average holder of the new accounts earns less than $100 per month, and typically has never
had a bank account before, even in their home country. Because of this initiative, JBK has more
than doubled the number of its accounts over a four-year period.

x  


In broader terms, the push to bank the unbanked also includes the world of microfinance, where
small loans are extended to borrowers without bank accounts or credit history.

Having achieved widespread recognition as a development tool, microfinance has been promoted
by many national governments and multilateral agencies eager to bridge the financial inclusion
gap. According to data from the Microfinance Information Exchange (MIX), between 2004 and
2008 the microfinance sector experienced average annual asset growth of 39%, accumulating
total assets of more than $60bn and gross loan portfolios of more than $44bn by the end of 2008,
the latest full-year figures available.

The sector's impressive performance means that it has moved beyond an early reliance on
philanthropic donations, and has widespread support from commercial banks and growing access
to the capital markets.

Jompartamos Banco is a prime example of the sector's success. Established in 1990 to work in
rural areas of Mexico, Jompartamos - the largest MFI in the western hemisphere - listed on the
Mexican stock exchange in 2007. The initial public offering (IxO) of 30% of Jompartamos's
equity was 13 times oversubscribed and the share price surged by 22% in the first day of trading.
The IxO raised $458m for its original investors, including not-for-profit entities such as the
International Finance Jorporation, although one-third of investors were private.

This represented a return on the original investment (which was about $6m) of 100% a year
compounded over an eight-year investment period, and was seen as a clear indicator to private
capital of the money that could be made by lending to the poor.
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The reason for Jompartamos's robust equity market valuation is to be found in its staggering
returns on equity, averaging more than 50% a year. And the reason for such startling returns
leads to the controversy which increasingly surrounds the microfinance sector: Jompartamos
generates those returns by charging annual interest rates of about 72%.

Jompartamos is not the most expensive lender. Another Mexican MFI, Te Jreemos, has annual
interest rates of 125%, which many suggest is one of the highest in the mainstream MFI industry.
Neither compare well to the industry average. Based on the 1084 MFIs reporting to the MIX, the
median interest rate was 31% (the average interest rate was 38%), with one-quarter of MFIs
charging rates of less than 22%, and three-quarters of MFIs charging rates of less than 44%. By
comparison, the average interest rate on a UK credit card is between 16% and 19%.

Many feel uncomfortable about such large returns being made on the back of loans to the very
poor. Muhammad Yunus, who earned a Nobel xrize through his work pioneering microfinance
with Bangladesh-based Grameen Bank, voiced his criticism of MFI interest rates earlier this year
to a gathering of financial officials at the UN.

·We created microcredit to fight the loan sharks; we didn't create microcredit to encourage new
loan sharks,· Mr Yunus told his audience. ·Microcredit should be seen as an opportunity to help
people get out of poverty in a business way, not to make money out of poor people.·

Mr Yunus has advocated rates of no more than 10% to 15% above the cost of borrowing, saying
that higher rates are akin to loan sharking. Yet by this calculation, more than three-quarters of the
MFIs reporting to the MIX would fail Mr Yunus's test.

"  ,   

According to the MIX's research, the bulk of the money from interest rates is used to cover
operating expenses in what is a high-touch business, where the cost of reaching the most
inaccessible poor is high. In addition, it costs much more to manage multiple small loans than a
single big loan, and many industry practitioners argue that reducing costs, rather than attacking
profit, is the best way to lower interest rates.

Jarlos Danel, executive vice-president of Jompartamos Banco, defends its rates, saying that
customers make good returns and therefore are in a position to pay the interest rates it charges.
·Our clients have on average a monthly return on equity of 50%, which means that they are able
to repay the interest rates without a problem,· he says. ·There was a time when interest rates
were above 100%, when we were smaller. Going public has allowed us to grow more, to drive
cost down.·

Mr Danel also says that Jompartamentos does not set rates as high as it could, and neither do its
investors encourage it to do so. ·I have had many investors come to me asking: 'How are we
going to lower cost and become more competitive?' The right kind of investor raises the bar for
institutions to improve their performance and better service their clients.·

He argues that the peculiarities of each market dictate what operating costs and business models
are workable. ·The only way to reduce the interest rates faster is to grow the loan amount; and if
we do that, we would need to move away from our target: the lower income client. Or we would
have to push money onto [our clients]; so if they need $300 we would try to give them $1000.
We don't want to do this either. The difference between a good loan and a bad loan is that a good
loan is one you can repay; a bad loan is one you can't repay. We don't want to over-leverage the
client,· says Mr Danel.

Jompartamos has serious growth plans, however, to be funded by an expansion into retail
deposits in Mexico and an ambitious capital markets issuance strategy. Its recent bond issues
suggest there is growing appetite for MFI paper among investors, despite a difficult
macroeconomic backdrop and the struggle by many MFIs to refinance existing loan portfolios. It
began a 6bn pesos ($486m), five-year funding strategy with a 500m pesos bond issue in July last
year, followed by a 1bn pesos bond in November, one of the largest MFI bond issues ever.

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Manuel Méndez del Río xiovich,

president of the BBVA Foundation

Jommercial banks have taken to microfinance with increasing enthusiasm. But many argue that
running microcredit alongside conventional banking is an uneasy relationship. Julturally, they
are worlds apart, not least in the dramatic differences in levels of customer sophistication and the
very different skill sets required.

Jonventional mechanisms, such as the use of collateral in traditional lending, become

unworkable concepts when applied to microfinance. ·I don't like the idea of having microfinance
in a commercial banking business, because the way you conduct the two is very different,· says
Manuel Méndez del Río xiovich, president of the BBVA Foundation, the banking group's JSR
concern. ·Traditional commercial banks have gained high efficiency by using collateral
guarantees; their activities are based on [their] use, this is something poor people don't have.·

Operational cost and intensity are other big differences. Mr Méndez del Río xiovich likens
microfinance to project finance due to the level of due diligence required. ·The amounts we're
talking about are $300, $500, but the analysis you need to do [on every project] is the same that
you would do on a large project, such as financing a highway,· he says.

Similarly, recruiting people with the right skill set is a huge challenge for any microfinance
operation. Analysing the ability of a client to repay a microloan is often based purely on 'soft'
factors; for new customers there is rarely a credit history to refer to. Additionally, for
microfinance to reach out to the rural poor, staff must be prepared to travel to often remote and
difficult regions, carrying cash and relying on simple printed spreadsheets for loan calculations.
·A loan officer in microfinance has to be out seeing customers, out in the sun and the rain,
visiting villages, [meeting] in markets,· says Kurt Koenigsfest, JEO of BancoSol, Bolivia's
leading microfinance bank.

But Mr Koenigsfest argues that microlending and conventional banking work happily together at
BancoSol. And having a large microfinance business has certainly not discouraged other
depositors, he says. ·[Many of] our depositors have $300 in their savings account, so they're the
same [microborrowers] that we lend to,· says Mr Koenigsfest. ·But we also attract deposits from
larger companies, such as insurance and pension funds, [which see ours as] safe deposit
accounts.·

x




Other banks have built microlending on partnerships within the local business infrastructure.
This provides greater familiarity for borrowers and reduces risk for the bank, says Joenraad
Jonker, head of Standard Bank's community banking unit.

Standard Bank has focused on creating partnerships with local retailers, which handle cash for
clients on behalf of the bank. In a community of 500,000, say, the bank would typically have
partnerships with 100 retailers, which bring the net cash positions of clients to the bank on a
daily or monthly basis; others manage the entire position locally.

·This shifts the risk of handling and transporting cash from within the bank to the community -
where people know each other - while dealing with a bank means dealing with people they don't
know,· says Mr Jonker. ·In such a community, the bank would have six or seven ATMs, while
with 100 retailers, acting as points of business, the risk per transaction is much lower.·

To ensure that policies on interest rates and other areas are respected, retailers sign an ethical
code stating that they cannot independently change interest rates. If the terms are not met, the
partnership is terminated.

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One of the biggest hurdles for microfinance is the technological demands of gathering and
maintaining management information, reconciling data on a timely basis, and giving customers
access to bank accounts or an MFI branch in remote areas. In more developed markets, the
provision of mobile telecommunications-based microfinance demands secure and reliable
telecoms networks.

Many technology vendors are working on solutions that can potentially revolutionise
microfinance business models. IBM is working on a solution that promises to dramatically
reduce costs, something that may help MFIs to address criticism over high interest charges. ·We
saw that MFIs operating costs were 20% of overall loan value, while in traditional banks it
would be 3%,· says Ian Watson, director of microfinance at IBM. ·Our solution will lower costs
by five or 10 times.·

Mr Watson says that IBM is focusing on a centralised back office for MFIs, which will go live in
the fourth quarter of this year for xrisma, a microfinance institution based in xeru.

IBM has already teamed up with the Grameen Foundation in India to develop Mifos, a scalable,
centralised, open-source banking platform designed to help Grameen gain better control of
transaction and accounting information, in order to generate growth and obtain new funding. In
areas where there is a reliable telecoms network, microfinance representatives visiting rural
villages can enter transaction data into the Mifos system on the spot, accessing a centralised web-
base repository holding transaction data from 46 bank branches.

Information that once took weeks to compile is now available in real time, so that Grameen can
more easily shift resources to where they are needed. It allows MFIs to accurately predict cash
requirements, freeing up capital to support greater lending activity. And it provides timely,
accurate information to help raise new capital from global financial institutions.

Financial inclusion has come a long way, but as the figures of the unbanked reveal, it still has a
long way to go. Banking the poor and making a profit remains an emotive subject.

But to provide an effective and sustainable service to the community, many argue that it must
shed the remnants of its charitable roots. Ruud Nijs, director of Rabobank Netherlands' JSR unit,
says: ·Focusing on financial inclusion is not philanthropy.·

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In the year since the last World Economic Forum in Davos, the global economic outlook has
changed profoundly. The subprime crisis, housing market slump, credit disruptions, failure of
some of the world¶s largest banks, and consolidation and government bail-outs of others, have
changed the face of world economies for months, if not years, to come. And the progress of
globalisation since the last economic downturn means these events are having a wider impact
than many have seen before.


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The main implications of the bleak economic climate for the banking industry flow from the
industry consolidation that has resulted from the threat of failure of major financial institutions.
Jonsolidation means the emergence of a smaller number of key players in the industry.
Institutions that have fallen foul of the downturn have removed some of the competition in the
marketplace but simultaneously forced those that are left to find ways to survive in order to stay
ahead.

The net effect is that uncertain times lie ahead, that much is agreed. However, what is often
overlooked is that these are times of opportunity as well as challenge. Most notably, unlike the
last major downturn in 2001, information technology is now perceived as a solution to the
problem and integral to business success. For banks, this translates as a chance to retain ± and
even gain ± market share through the use of technology, which can improve customer
satisfaction as well as competitiveness.

All of this signals a return to core competency ± a phrase you will hear time and again in the
coming months, and for good reason. As market conditions toughen, we have seen a great many
financial institutions returning to their core competencies to ensure their competitiveness.

Banks such as UBS are key indicators of this trend: it pruned its commodities division down to
its core and announced it would focus on its original area of expertise, wealth management.
Jonsolidation has also prompted innovation in deal structures between banks and their
technology providers. For example, the Tata Jonsultancy Services (TJS) acquisition of
Jitigroup Global Services (JGS) in October 2008 represents one of the new business partnership
models now emerging that are increasing competitiveness and mitigating risk for global financial
institutions.


†





In the current climate, it does not make sense for Wall Street firms to run their own µcaptive¶
back-office information technology operations that perform functions such as order processing.
Japtives will disappear since they are one of the big-ticket items that will give banks the savings
they want.

As banks look to shrink and cut costs, they could save 20% to 30% on technology systems. And
in deals such as the Jiti-TJS partnership, core competency is key: the bank concentrates on
banking, and the technology partner concentrates on technology. It appears to be a simple
formula, and it is. As true innovators will tell you, it is often the simplest ideas that work best.

When the global financial panic reached fever pitch late in the summer last year, a µmerge or die¶
mentality became prevalent in the financial services industry. Early on, JxMorgan swallowed up
Bear Stearns, followed by others ± such as Bank of America acquiring Merrill Lynch and Lloyds
TSB buying HBOS ± in dramatic steps calculated to head off the challenge of the financial crisis.
The role of technology in ensuring that these mergers and acquisitions (M&As) succeed is key.
Disparate systems, applications and platforms need to be integrated, and to a tight schedule.

There also needs to be an intimate understanding of the similarities and differences between the
way in which the two previously separate institutions use these technology tools. There is an
opportunity to cherry-pick the best elements of both banks¶ systems and integrate them into
µsuper-platforms¶ that will be scalable, flexible and more resilient than ever before ± but only if
technology is recognised as the true enabler of successful M&As.

In fact, according to independent research commissioned by TJS, in contrast to the downturn of

2001, IT has become an integral part of every enterprise ± not least in the financial sector ± and
its deployment is perceived as being closely linked to business success. In fact, 88% of IT
managers in the US and UK stated that the role of IT has changed since 2001, and nearly 60%
see continued IT spend as essential because IT is now part of the fabric of the company. In no
sector is this more true than finance, and as technology is now one of the cornerstones of modern
banking, it needs to be robust and reliable.


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Furthermore, 69% of those surveyed said they want to use IT to improve customer satisfaction,
and 58% want to use IT to improve competitiveness. All this points to the fact that banks need to
work in close partnership with their technology providers in order to design, implement and
maintain systems and processes that are tailor-made and meet their business needs.
Technology should not be seen as a discrete investment but one that is part of the very fabric of a
bank and integral to its success. Technology partners that delve deep into their customers¶
businesses to understand their culture, as well as their technology needs, will help banks to
derive the best value and most stability from their IT projects.

In this shaky economic climate, global corporations need to innovate their products, services,
business models and operations to address the changing business needs and prepare for the
future.

The only way to do this is by harnessing the power and knowledge of technology. In fact,
stability and reliability need not come about at the detriment of innovation: it does not have to
come in a µbig bang¶ form. Innovation can be defined as µan idea that makes a material difference
to an organisation¶s current capabilities or creates a future capability¶.

In tough market conditions, innovation can help banks pull ahead of the competition and mark
themselves out as leaders rather than followers. And innovation can come in the most
unexpected forms. The Jitigroup Global Services deal took a creative approach to the challenge
of consolidation and return to core competency, and I predict we will see more deals of this kind
that integrate partner capabilities and partner IT infrastructure to deliver joint value to joint
customers. Such product innovation requires a high degree of agility and openness in core IT
systems.


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A more obvious arena and opportunity for innovation lies in the shifting of power to the
consumer. The events in the financial sector over the past year or so are being felt with force in
the wider global economy and, as a result, many consumers are feeling powerless when it comes
to their finances.

Banks need to increase their focus on customer convenience and overall experience in order to
win back their trust. Technology innovation can help them do this by developing a wider range
of choice, convenience, and security in products, features and access. Mobile banking, for
example, will give customers that µany time, anywhere¶ access to their accounts that will make
them feel, and be, more in control of their money.

All this highlights the fact that, far from prompting conservatism, the current economic crisis has
triggered an innovation drive in the financial sector. As the 2008 Business Week-Boston
Jonsulting Group ranking of the World¶s Most Innovative Jompanies demonstrated, investors
believe in companies doubling their bets on projects that will position them best in the current
economic situation.

So while the global economy has changed beyond recognition, now is the time to invest in
partnerships and innovation to keep pace with, and stay ahead of, that change. The economic
downturn has altered return on investment: there is potentially so much more to gain than ever
before. This is the silver lining to the dark clouds of the financial crisis, but only if we grab the
opportunity with both hands.



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î In recent years SBI has been seen as the best banking provider in many areas and this is why
we have stood out. In answering your question as to why Indian banks are not bigger, it is
important to note that public sector banks take up 71% of the banking space with the rest taken
up by private banks and foreign banks, accounting for between 7% and 9%, respectively. This
means the bulk of the banks are public sector banks and consolidation of the banks means
consolidation of the public sector or public and private and there are issues there.

We and the government ,led by the prime minister and finance minister and the Reserve Bank of
India, are in favour of consolidation but there are other stakeholders in the economy and the
sector that are not. We at SBI have kicked off the consolidation experiment and the SBI Group is
comprised of nine banks, including seven princely associate banks and, on August 13, the merger
of State Bank of Saurashtra took place.

We are looking closely at the post-merger issues, viewing it as a merger experience, how to
prioritise the issues surrounding the merger and in this sensitive issue we are being closely
watched.

If all goes well then more banks will be merged and more mergers will take place but if not then
there is likely to be a pause. But this is only part of the story; while the West slows, India might
slow, but only to 7.5% growth this year, which is still good with India¶s corporates doing well
across the globe. Also there is a realisation that for India Inc to achieve, help is needed and there
is a need for foreign banks, and therefore for consolidation and expansion to take place in the
banking industry more overall involvement has to take place.

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î India needs more intensity; remember Jhina started 15 years before us and has an advantage.
In India the private sector has played a leading role in many corporate areas but in banking in
India the changes cannot take place unless the state takes control. By statute, the government has
a 51% state in the public sector banks and in SBI the government has a 55% stake. So when
these banks have to grow, these statutes become a limitation, a constraint. Jurrently there is a
bill before parliament that intends to bring down the government¶s ownership of SBI from 55%
to 51%, but that all depends on parliament.

There is also talk, and only talk, that if it was difficult to reduce government ownership then the
state could have majority voting rights even if it had less ownership shares. With a degree of
back-door nationalisation occurring in banks around the world at present I can see this
happening, but not immediately. Banking leaders will be looking at various possibilities. I see
more taking place in terms of liberalisation and consolidation.

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îGiven SBI is in 57th place now, in five years¶ time I would like to be in the top 20 and in two
years¶ time I would like to be in the top 50. But I cannot get to the top 20 without government
support. If we can consolidate and raise capital and use it for acquisitions overseas then we can
be in the top 20 in five years.

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î The business outside India is growing faster than that inside. We are a natural first choice for
Indians outside [the country] and we want to go there to satisfy that natural business. At present
our business outside India is about 10% and in about five years we hope to double it to 20%. Our
target is 20% in five years.

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î India is the largest recipient of remittances in the world, and State Bank of India gets 25% of
these remittances at present. And as far as targets go, we want to increase our stake in
remittances in the next five years from 25% to 50% and we cannot do this without technology.
We have worked hard on our 16,000 branches and creating a centralised money transfer system
that connects to all our branches.

Money can be transferred not only from London but also from the Middle East to our branches in
a matter of minutes. With this technology and system, known as SBI Express, we want to expand
to the banks we have relations with and also have relations with the Indian diaspora.

We would like to get banks such as Royal Bank of Scotland to use parts of our system and also
build relationships with non-banks in key regions such as the Middle East, including Western
Union, that can take advantage of our extensive network inside India. Western Union, for
example, has an unbeatable network outside India and with our network inside India we are an
unbeatable combination.

We want to build relationships on a wide range of fronts globally, including our merchant
banking arm. We have no plan to extend investment banking relationships on a global basis but
we do not shy away from relationships either; we are looking for natural fits in our partners but
we can be seen to be picky.

 
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îWe are aware of a number of opportunities and in terms of strategic acquisitions we are
keeping ourselves conversant with them. Recently, focusing on Asia, we launched a retail bank
in Singapore. Right now we have two branches in Singapore but we will scale it up to 25
branches. While some banks are in decline globally at present we are taking a contrary position
and are expanding in Singapore, where we believe we have a good mix of retail and wholesale.

We have designed some new products for retail in Singapore and if our experience with these
products is good and we can integrate them with a back-end in India, then this could provide a
cost-efficient new model that we can use elsewhere in the world. This new model, if it works,
could be applied in markets such as Indonesia, so it is an interesting way forward.

Moving further west, we have set up a branch in the Dubai International Financial Jentre and a
branch in Dubai itself and we are keen on partnerships in the Gulf but it is a difficult area to
enter.

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Om xrakash Bhatt, chairman of State Bank of India (SBI), a bank with 134 million customers
and more than 10,000 branches, mumbled that he found my title of ³senior´ editor
³intimidating´. The softly-spoken SBI-lifer, who recently spearheaded a campaign to recruit
20,000 new staff, may be self-effacing but he is responsible for a brave attempt to shake up a
behemoth in one of the world¶s most exciting economies.

The 57-year-old, who joined the bank in 1972 after completing his MA in physics and English
literature, saw SBI lose its cachet as the employer of choice when the Indian banking sector was
transformed with the arrival of IJIJI and other private sector banks. He and the other fast-track
managers sat around discussing what needed to be done.

³So, when I sat in this chair, I said: µWhy can¶t we do all that!¶´ he exclaims, bouncing on his
chair in the book-filled bar of the Jinnamon Jlub, an Indian restaurant close to the Houses of
xarliament in London. There were no recognisable English politicians in the restaurant, but Mr
Bhatt would have been very comfortable with them. The Indian government owns 59.7% of the
bank, with the rest mainly in the hands of foreign and Indian institutions.

A recent attempt to raise capital via a private placement of 7% of the bank¶s shares with foreign
institutional investors foundered amid a huge political uproar, say bankers, due to its emblematic
status. Mr Bhatt, who as chairman of SBI owes his post to the appointments committee of the
cabinet, disputes this.

³No, no, there was no political uproar,´ he says. ³There is now an amendment in xarliament to
lower the stake to 51%.´


!


In the meantime, SBI raised $4.2bn via a rights issue in March to boost its capital adequacy as
India¶s growth slows on the back of soaring inflation ± now at a 13-year high of 11.6% ± and
widening deficits on the current and fiscal accounts. Banking looks likely to be much more
challenging.

Economists are predicting a slowing of growth rates to 7.5% a year, which is not enough to
improve the lot of the 240 million Indians who live below the poverty line, a topic close to Mr
Bhatt¶s heart. He notes that, historically, 7.5% is still high compared with gross domestic product
growth rates of 3.5% until the 1990s, which became known as the Hindu rate of growth ± and he
expects the rate to move up again in future years.


*
 



Along with the government¶s direct attack on poverty via employment schemes and investments
in health and education, there is SBI¶s role as ³the largest µdevelopment bank¶ in the world due
to the sheer amount of money it contributes´, as Mr Bhatt describes it.

He talks excitedly about bringing the unbanked into the banking system using technology. The
core banking transformation (see The 

's supplement: Technology at the Jore of
Transformation) ties into this.

Hard-headed bankers and foreign investors, however, are not interested in the development
aspect of the bank¶s business. Instead, they criticise SBI for its low profitability relative to its
peers. India¶s largest bank, which has assets of $256,914m almost triple that of its closest
competitor, lies in 10th place in India on its return on assets ratio, at 1.34%.

Mr Bhatt disputes the way that the bank is compared to its rivals, noting that it is really made up
of three units ± the development bank, the commercial bank and an investment bank ± and if
each was judged against its peers in those categories, the comparison would be more flattering.

Although he has made major inroads into the business model to deliver higher profits ± SBI¶s
pre-tax profits rose 31% to $3,436m in the financial year to March 2008, according to The


, with a major increase in fee income and a reduction of the cost/ income ratio, Mr Bhatt
also believes there is more to SBI¶s mission.

³I am all for these legacies [of helping the poor]. It is a different country [to those in the West]
and we have a relatively different philosophy,´ says the wavy-haired father of two. Both of his
daughters live in the US, a less-welcome legacy of his time in Washington DJ, working for the
bank.
He believes that SBI is able to recruit talented bankers, despite offering more modest salaries
than the private sector, because of its values and the ability to offer the poorer sector of society
loans for houses and their other needs, earning spiritual merit.

³Our culture is less driven by crass mercantilism,´ he says, pointedly.


*



A well-respected private banker, Udayan Bose, the former founder chairman of Lazard India and
currently chairman of Thomas Jook India, has only kind words for him.

³He is a competent and honest man, hugely respected in India, who is doing his best to turn
around SBI. This is an immense challenge,´ says Mr Bose.

xart of the challenge for Mr Bhatt is lifting the bank¶s rate of innovation and its efficiency, say
critics.

The be-suited and be-ringed banker, whose right hand boasts an emerald, a diamond (³It¶s glass,
but call it that!´), a blue sapphire and a boat nail shaped into a ring to ward off evil ± all presents
from his wife ± acknowledges this with a few caveats.

³In some ways, yes, our response rates are slow, in some ways no,´ he says, pointing out that the
turnaround time for personal loans is closely monitored and has been improving steadily. ³Our
average response time is better than the sector.´

On the corporate side, he admits that the bank is slower than its rivals but this is only because its
appraisal process is so rigorous. There are a few noteworthy exceptions, however, such as
helping to finance the $8.1bn Tata Steel bid for Anglo-Dutch steel company Jorus in 2006. ³We
were able to do it in two minutes, before the tea was over,´ he says proudly.

The wave of India¶s top companies acquiring foreign companies is being ridden by SBI, which
banks more than half of them in one way or another. The international banking loan book grew
by 50% in the past year.

Mr Bhatt believes that the bank needs to do more. Some 10% of SBI¶s profits come from
international operations ± up from 7% when he took over in July 2006 ± and he wants this to rise
to 25% by 2012. The bank will move into markets where there is Indian-related growth, such as
the US, the UK, the Gulf and the Middle East, and even possibly Africa, he adds.

³There are supposedly good bargains in the markets,´ he says, with a twinkle in his eye, ³but
there may not be.´ However, Mr Bhatt says that he needs to talk to the government about the
change in strategy and does not see the new direction being implemented for a year ± not the sort
of time horizon one would hear from a private sector bank. There is little doubt, though, that he
will get his way. After all, his main hobby apart from reading is talking.

³I love to talk. Even if I am alone, the cell phone is always there,´ he says with contentment.


>





The power of talking has come in handy in his attempt to lead some sort of consolidation in the
fragmented banking sector, 71% of which is in state hands. SBI is intent on consolidating State
Bank of Saurashtra, one of eight associates, all of which would be consolidated if the
government approves the Saurashtra move.

³We are trying to consolidate one little bank and it has gone up to cabinet level,´ explains Mr
Bhatt. ³[If it happens] it will become a benchmark for the industry. Industry will then know how
to placate [vested] interests.´

He denies that he might be out of a job when a new government takes power. xrivate bankers say
technocratic finance minister xalanappian Jhidambaram was responsible for his appointment,
bypassing bankers more senior than him. It is widely expected that the current Jongress xarty-
led coalition will be ousted after elections in the first half of 2009.

Disappointment at the demise of this government¶s much-heralded liberalisation policies, killed

by the fighting within the coalition government, is not something he can admit to. ³You are
going to get me in trouble,´ he chuckles.

*
 


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³An obvious issue in many countries, including India, is the potential conflict between central
government and local government, where different levels of government are responsible for
different levels of infrastructure,´ says Mr Leatherdale. ³Schools are normally procured,
managed and funded at local government level; national motorways at central government level.
Unless everybody buys into the same goals, then you can sometimes get party politics acting as a
brake on development.´

Despite such conflicts, the Indian government does not lack commitment to the development of
its infrastructure and to its xxx programme. India has set a target to increase investment in
infrastructure from about 4.7% of GDx in 2006 to 8% in the year to March 2012. Assuming that
GDx grows at 9%, and annual inflation is about 5%, this translates into an investment of $475bn.

In a report published in May this year, a government-appointed panel of top bankers that looked
into how infrastructure can be financed reckoned that the shortfall between current and required
levels of investment is about $162bn. Given the tight constraints on the government¶s budget,
much of this investment will have to come from user charges levied on services and private
investors.

The federal government has taken initiatives to make investments happen. A top-level committee
on infrastructure chaired by prime minister Manmohan Singh regularly reviews investments and
policies that will build a market for public-private initiatives. In January last year, the
government came up with a proposal to provide an explicit public sector subsidy of up to 20% of
the project cost to get more xxx projects off the ground. The Mumbai Metro rail I project was
bid out under the subsidy scheme last year.

³The subsidy is very helpful and necessary but maybe not sufficient,´ says Mr Leatherdale.
³There is a danger of using a µone size fits all¶ logic. Where there is a funding gap of 20% to
make projects bankable for financiers and attractive for investors, the subsidy is very helpful. But
if there is a 25% gap, what happens with the remaining 5%? This tool needs to be deployed
flexibly. Each project has its particular characteristics, cost and revenue base, and the
government should perhaps be prepared to give a greater subsidy to the highest priority projects
to make them bankable and capable of being implemented more quickly and efficiently.´
Where the government has acted decisively by setting up an independent regulator or clarifying
the legal framework in terms of a model concession agreement, the results have been
encouraging. After it modified the initial tender conditions and set up a transparent bid process to
modernise the country¶s largest airports in Mumbai and Delhi last year, investors such as South
Africa Airports and German developer Fraport are now part of public-private consortia that have
taken up the task.

Four model concession agreements on ports, national and state highways, and several others for
urban transport, provide a standardised format for xxx projects, and new ones for railway
stations and container freight projects are being worked on by the xlanning Jommission, which
provides technical support services to xxxs. The Mumbai Metro project phase II and Hyderabad
Metro projects are being bid out under new streamlined guidelines to shortlist qualifying bidders
put out in April, which cut out the need for a cumbersome technical evaluation of prospective
investors.

Nevertheless, progress is slow and fragmented. Investors do not have recourse to an independent
regulator in key sectors such as roads, railways and airports; in ports the regulator sets tariffs but
does not adjudicate disputes; in electricity, petroleum and natural gas, the newly established
regulators are still struggling to establish a credible track record.

Also, authorities set up under India¶s competition and regulation laws do not have distinct areas
of jurisdiction. Key aspects of the Jompetition Act 2002 apply to both regulated and unregulated
sectors so it is possible that there are potential areas of conflict between both authorities in a
regulated market. In a policy paper on regulation put up for public discussion, the planning
commission has suggested that India must consider setting up multi-sector regulators, such as for
communications, gas and fuel, electricity and transport, to avoid a proliferation of regulators, and
define a workable division of labour between the competition commission and regulators.

About 147 xxx projects for roads, highways, port facilities, industrial and urban infrastructure
involving an investment of Rs554bn ($13.7bn) were bid out by the federal government before
December last year, while the state governments have bid out 103 projects with an investment of
Rs110bn.

More recent initiatives include a $5bn infrastructure investment fund that is being put together by
private equity investors Jitigroup and Blackstone, the Infrastructure Development Finance
Jorporation (IDFJ) and the Infrastructure Investment Finance Jorporation. Jomprising $2bn in
equity and $3bn in debt, the money will be used to fund xxx projects that are being taken up by
the federal and state governments. The IDFJ provides specialised advisory services to
government agencies and helps them through the process of bidding out projects, selecting a
successful developer and achieving financial closure.

With a clear and improving commitment to xxx, and a large and educated population, India has
substantial economic potential, which the government is keen to unlock through the development
of infrastructures, hospitals and schools.
Almost all banking sectors are looking at the BRIJ countries to expand their business. And it
would appear that India is the next most appealing stop for xxx professionals.




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Jhandrakant More, a bus conductor in Mumbai, takes home a monthly salary of about Rs12,000
($296) and is short on cash to pay for his daughter¶s admission to a good school. He has a
savings account but his bank has refused a loan because he lives in an illegal slum and does not
own any assets. Until recently, Mr More was the perfect customer for the local moneylender but
in September last year he got a much cheaper loan of about Rs25,000 from a new lender in his
neighbourhood, Fullerton Jredit, the Indian consumer finance arm of Singapore-based Temasek.

India¶s growing economy is producing hordes of loan-hungry consumers with no access to bank
loans. This underserved market, which some estimates put at 50 million households, represents a
vast, untapped opportunity for lenders. In recent years, foreign lenders such as Jitigroup,
General Electric, Standard Jhartered, HSBJ, Temasek, Development Bank of Singapore (DBS),
and Indian lenders such as IJIJI and Kotak have begun making inroads, selling unsecured loans,
some as small as $500, to workers with growing incomes but almost no credit history or legal
documents.

In January this year, that alluring picture cracked when news broke that GE Money, the first
global company to enter the business about 14 years ago, had put its mortgage and personal loan
subsidiary on the block. The company denied the report and its spokesperson told The 

:
³GE Money India is seeking a strategic partner for the wholly owned personal loans and
mortgage portfolio only.´ Investment bank Morgan Stanley has a mandate to find that strategic
partner; GE Money put the size of the asset portfolio at $1.8bn but declined to disclose details
about financial performance.

Faced with rising loan losses, Jitifinancial, another pioneer in the business, shut down its
consumer durable and two-wheeler finance business in March. It has decided to sell consumer
loans only on credit cards and to cut down small-ticket, unsecured personal loans, citing high
dealer commission and collection costs as the reasons for its decision. IJIJI Bank, too, is
reportedly not extending new loans. Taken together, the three companies have about half the
$8bn-$10bn market.



 


So how did the biggest companies get burned? The economy is slowing down this year and the
demand for consumer durables was hit hard. Not surprisingly, lenders such as GE Money and
Jiti, which had agreed to pay fat commissions to dealers on these loans, suffered.

They are not the only ones. Most companies have reined in the uncontrolled growth and
aggressive sales of personal loans of the past. ³Swamped with loan offers, customers borrowed
from multiple sources; there was no way companies could keep a check on this,´ says
Gopalsamudram Sundarajan, managing director at Fullerton Jredit.

Many loans were made after the most cursory background checks by aggressive direct sales
agents hired by consumer credit companies and, typically, information about the borrowers¶
credit was not available from the credit bureaux. As the companies eagerly opened branches in
remote towns, finding and hiring good loan officers had become a challenge. ³Growth at the cost
of controls does not pay,´ says Ravi Subramanian, who heads xragati, HSBJ¶s consumer finance
arm.

As bad debts piled up, collection on them proved difficult. After ugly news stories appeared in
the local press last year about coercive methods used by private µcollection agents¶ on poor
borrowers, the central bank cautioned lenders, directing them to seek board approval of their loan
pricing and to use lawful methods to collect on debt. Most personal loans carry an annual interest
charge of more than 30% to cover the cost of origination, servicing and high loan losses, says x
R Somasundaram, head of business strategy at Standard Jhartered, which acquired finance
company xrime Financial from the merger with ANZ Grindlays, a few years ago. Mr Sundarajan
adds that even at the high interest rates, there is huge demand as the loans are cheaper than those
provided by a moneylender.


J



Not surprisingly, all consumer credit companies have begun to tighten processes and to weed out
the bad borrowers. Some have decided against outsourcing loan origination. Fullerton, for
example, has instead set up neighbourhood branches ± about 700 in the past two years ± hired
local employees and lends to those who live within three kilometres of the branch so that it has
³eyes and ears close to the ground´.

Separating sales teams from ones that appraise credit in the company puts a check on incentive-
driven loans, says Mr Subramanian. HSBJ has also cut down on very small personal loans. More
companies are now sharing information on loan defaulters with the credit bureaux so that a
negative list is available to all lenders.

The Development Bank of Singapore bought 37.5% of India¶s Jholamandalam Finance in 2006.
DBS¶s entry gave the joint venture a strong focus on retail and personal loans; retail assets
almost doubled in one year. The company, however, is careful to de-risk the vulnerable
unsecured loans in the loan book with a mix of secured loans to small businesses and to buy
homes.

Few lenders can hope to make money anytime soon. Temasek has put $200m into its Indian
business. Fullerton and HSBJ xragati say that they hope to break even this year, after three years
in the business. Yet new entrants are keen to edge into the market: Reliance Money, Future
Japital, Barclays, the Birla group and an Indian conglomerate, are among them. They should
watch out for the pitfalls and be prepared for a bumpy ride.

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IDBI is the the tenth largest development bank in the world.[19] The company faces competition
from both national banks and regional banks in the country.

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Indian Banking Sector is a fragmented market with 27 xSU banks, 25 private banks, 30 foreign
banks and a host of cooperative and regional rural banks[30]. IDBI bank has a market share of
1.6%. SBI, being the largest bank in India[31] has a market share of 22.7%. The top 8 banks
account for barely 54 per cent of the market share with several smaller players occupying the
remaining 44 per cent.[30]
 

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One-stop financial services for high-income individuals

The first page of Bank One's private-banking promotional literature suggests, ·At some point,
your time is better spent managing your life than your money.· For all of us, these words make a
great deal of sense. But only a select group makes the level of cents that qualify for such full-
service, personal attention from their banks.

xrivate-banking customers are typically those knocking down at least a six-figure income and
sporting a net worth in the neighborhood of at least a half-million dollars, not including the
family home. The products and services private-banking departments offer these high-end clients
are comprehensive, intended to capture as much financial business as possible. xrivate bankers
provide their customers mortgage, trust, insurance, brokerage, investment management,
retirement planning and estate services as well as credit and loan services. Jentralizing these
financial needs into a package for busy executives makes for happy customers - and profitable
private-banking operations.

xrivate banking is proliferating in today's booming economy. More than 2.5 million U.S.
households now have investable assets greater [TABULAR DATA OMITTED] than $1 million.
Worldwide, the private-banking market is expected to reach $23 trillion by 2000, according to
The Financial Times.

The private-banking trend first hit Indiana almost two decades ago. Old National Bank, founded
in 1834 and headquartered in Evansville, was among the first banks in the state to offer
comprehensive private-banking services to upscale clients, beginning in 1980. ·We would select
key customers and hand-deliver their statements,· recalls Judy Osbourne, Old National's
manager of personal banking (that's Old National's preferred term for private banking). This
more intimate approach, according to Osbourne, let affluent customers - ·who have needs
outside of everyday banking - know that we were concerned with helping them with their needs.·

xrivate banking is a hot growth market in the banking industry. Bank One estimates its annual
growth rate in its private-banking business is 20 percent, with no end in sight.

Although Bank One has had private banking in place since 1985, ·it had not been an activity that
received a lot of internal focus and investment,· says Albert Smith Jr., Bank One's managing
director of private banking. Just after First Jhicago NBD merged with Bank One (becoming the
nation's fifth-largest bank holding company with assets of $260 billion), private banking began
receiving increased emphasis.

Like its counterparts, Bank One elects not to publish its private-banking business numbers. But,
Smith says, it's safe to say it is significant. ·If you would break it out, it would be a good-sized
bank of [TABULAR DATA OMITTED] its own, says Smith. ·It would have a totally different
balance sheet than a traditional bank, in that its deposits would exceed the amount of loans.·

Because of the considerable wealth of private-banking customers, they require and expect sound
management of all their financial assets. Making call after call to find the right source to answer
a question about an account is not an inconvenience they must grin and bear. Having an assigned
private banker - also called a lead relationship manager at Bank One - is key. ·They want an
advocate who knows them and is the interface between them and the bank,· explains Smith.

Joe Wetli, private-banking manager for Norwest Bank Indiana's Fort Wayne market, agrees that
winning the ongoing battle of securing and retaining the growing number of eligible private
banking customers in an extremely competitive banking market comes down to who provides the
best service.

Now that Norwest has merged with Wells Fargo, a team approach to serving private-banking
clientele will be gradually developed, based on Wells Fargo's private-banking service model.
Norwest's private-banking department will become known as Wells Fargo xrivate Jlient
Services. The approach will be team-oriented, using experts in one or more conventional banking
products as well as financial consulting, brokerage, insurance, investment management and other
services. Dependent upon the client's needs and stage in life - early adulthood may be more
credit-need driven; later in life might focus more on investments - anyone on the team can serve
as the relationship manager. Wetli refers to the team as ·a high net-worth consulting group.·

Frequently, banks with private-banking departments charge no additional annual fees for this
comprehensive service, as money is made through individual products under the umbrella of
private banking. Even though private-banking customers do not automatically bring all of their
financial business to their private bankers, capturing that prize is the aim.

·We try to earn 100 percent of the client's business over a period of time,· says Wetli. Through
profiling Norwest's private-banking customers by annually taking an all-inclusive look at their
financial information to see what other services Norwest might provide, Wetli and his associates
are able to anticipate clients' needs in the coming year and put credit facilities in place to address
them.

Union xlanters Bank - a Memphis-based bank that recently moved into the Indiana market by
taking over 51 NBD branches spun off through NBD's acquisition by Bank One - prides itself on
local decision making. According to Steve Schenck, president of the bank's central Indiana
operations, that local decision making includes making allowances for customers who do not
meet the bank's usual thresholds for private banking services ($150,000 in income and $500,000
in assets).

The bank, Schenck says, takes every opportunity to up-sell - to turn an average customer into a
private-banking client. Because of this, he says, ·in many regards, the private banking distinction
isn't significant.·

Union xlanter's branch managers collaborate with their private-banking colleagues in serving the
bank's high-end customers. ·Many organizations set up private banking as its own profit center,·
Schenck comments. ·We've made private banking an extension of our existing branch network.·
The branch manager handles the transactional details of the account, while the private banker
sees to the clients' more specialized needs.

KeyJorp., based in Jleveland and the 12th-largest bank-based financial services company in the
country, with assets of $80 billion, came relatively late to the private-banking dance, launching
the service in 1994. But Key seems to have caught on fast, especially from the service delivery
aspect. KeyJorp.'s private-banking customers are free to make use of any KeyJenter bank
branch for their daily business. But, says Louis Daugherty, private-banking manager for Key
Bank in Indianapolis, ·they are acutely aware that their private banker can and will meet with
them at their location and convenience.·

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Bogotá airport's squat and squalid concrete terminal and miles of cordoned-off, dug-up roads are
stark indicators as to why Jolombia is pushing transport investment so hard. The country's
infrastructure has long been insufficient, so the government embarked on a $24bn recession-
busting programme in 2008 to tackle this problem just as the recession bit. The programme is
providing a litmus test of the depth and sophistication of the local bank loan and debt markets
and is starting to stimulate a private equity and fast-growing institutional asset management
industry.

·There was a conscious decision to let the budget deficit rise to allow us to increase long-term
spending and maintain social programmes· says Esteban xiedrahita, director-general of
Jolombia's National xlanning Department (DNx). The fact that Jolombia can afford to step up
spending during a global recession is testament to years of strong economic management and
gross domestic product (GDx) growth. ·This is the first time that we have had the economic
conditions to carry out such an anti-cyclical policy,· adds Mr xiedrahita.

The belt loosening comes after a profound crisis in the late 1990s, from which it took a hard
seven years for Jolombia to recover. The fiscal situation remained a big constraint on spending
in the first part of the decade, admits Mr xiedrahita. Government debt is now less than 40% of
GDx.
The economic turnaround has brought in plenty of new money. Investors today see Jolombia as
one of Latin America's most promising markets. That has propelled foreign direct investment
from 2% to 8% of GDx since 2002 and public investment has doubled. ·The one thing that
[xresident Alvaro] Uribe is obsessed by is investment numbers,· says Mr xiedrahita.

Also, developments on regulation of private-public partnerships for infrastructure have moved

forward and Jolombia has a stronger banking sector to finance them, says Mr xiedrahita. ·Risk
management is much more professional and capital markets are ever-more open,· he says.

Senior bankers echo the government's optimism. Inflation has been vanquished and fell to almost
2% at the end of last year, the lowest level in some 50 years, says Alejandro Figueroa, president
at Banco de Bogotá. That is allowing the central bank to pursue a sustained and stable low
interest rate policy, in turn, enabling banks such as Banco de Bogotá's to step up lending.

Infrastructure is a priority segment for Bancolombia, which is already particularly active across
energy, power and transport, says David Felipe xérez Salazar, vice-president of financial
structuring at the bank's investment banking arm. It is teaming up with local competitors and
multilaterals to structure financing as the size of the deals grows. ·Even though we are
[Jolombia's] largest bank, our typical limit is $300m for one deal. Some of these deals are
$2bn,· he says.

 



Even those that are more sceptical about the government's track record to date are more
optimistic about the future. Jaime Trujillo, a partner in Baker & McKenzie's Bogotá office, says
that the Uribe government has achieved little in infrastructure, particularly transport, despite
talking big. He blames a combination of incompetence, in-fighting, indecision and restructuring.
However, greater liquidity in bank and debt markets and the range of projects across industries,
particularly in the already popular power and oil and gas sectors, are starting to transform bank
and bond markets, he believes.

The most closely watched segment in Jolombia today is transport, where significant activity is
taking place in large projects, which had proved fiendishly difficult to launch. Government
supporters say that years of armed conflict prevented the planning and concessioning of such
projects and that in smaller deals, where the government directly contracted construction firms,
progress has been notable.

Jritics argue that the government has talked about large projects for years and done little. Worse,
officials have proven willing to renegotiate existing contracts in favour of the concessionaire,
which has led to firms presenting unrealistically low bids in the knowledge that the government
will cave in to their future demands. The latest wave of mega-projects will be different as they
require professional, institutional money, says Jamilo Villaveces, who runs investment
management company Ashmore's Jolombian infrastructure fund.
The government awarded two contracts in January, covering tranches of the flagship $2.6bn Ruta
del Sol, which links Bogotá to the Jaribbean coast. Funding for the project will prove a crucial
test of the depth and ingenuity of the local bank financing market.

The first section descends the Andes and demands extensive tunnelling. The government
awarded a seven-year public works-style contract, which will require some $150m of bank
funding, says Hector Ulloa, president and JEO at Structure Banca de Inversión, a local
investment bank that is adviser to the government on this and other projects. He sees the local
banking system supplying all of this.

The second, 500-kilometre tranche of the highway is a 25-year concession based on discounted
net present value of income, says Mr Ulloa. The financing requires a more sophisticated
structure, which is likely to come through a five-year local syndicated lending programme in the
range of $300m to $350m. Banks are likely to refinance the deal through local debt markets and
pension funds may be involved, he says.

Bidders for a third tranche were unsuccessful and the Jolombian government has pledged an
extra $200m and will re-open this section to bids.

"
  

Local banks are eager to participate in some of these deals. ·We have a window of opportunity
as international banks cut lines to Jolombia during the crisis and are still to come back fully to
markets. Banco de Bogotá is interested in the second tranche of the Ruta del Sol as well as other
smaller transport projects,· says Mr Figueroa.

The deals come at a moment when local banks are offering highly competitive rates as they slug
it out for market share. Mr Figueroa acknowledges that rivalry is intense. ·There is very tough
competition between Jolombian banks: we are fighting over every single project,· he says.

Mr Villaveces has first-hand proof of just how hard Jolombian banks are competing. When
Ashmore was putting together a local seven-year, $125m deal, its management thought it best to
go straight to the New York markets, he recalls. Bancolombia found out about the plan and
called up to offer bank lending terms. Ashmore invited the bank to bid, never thinking that it
would be able to match the offer in New York, but Bancolombia's bid ended up being on a par
with international markets and Ashmore accepted it.

Mr Ulloa agrees that local banks are ever-more competitive and says that is especially the case
for peso financing, where the price of the international currency swap means the all-in price, of
about 700 basis points (bps) to 800bps over Libor in early March, are equivalent to the local
market, he says. The only difficulty has been in securing longer tenors in the local bank market.
Tenors went out as far as 10 to 12 years before the crisis, but have dropped back to seven to 10
years, he adds.

Financing for the other giant planned road, the Autopista de las Américas, which links xanama to
Venezuela tracking the Jaribbean coast, is much less of a certainty. There are question marks
over the economic viability of the route and the terrain is less known. ·No serious constructor
will be able to assess the cost of the highway by May when the bid is due,· says Mr Villaveces.
But Banco de Bogotá is analysing the Autopista de las Américas route and may be interested in
participating, says Mr Figueroa.

 



The most exciting and unknown part of the equation for completing infrastructure projects is the
role that pension and private equity funds will play.

Sources of institutional funding have increased dramatically in the country since the mid-1990s,
says Santiago Montenegro, president of pension fund association Asofondos. xension funds had
80bn pesos ($42bn) under management at the end of last year, up 37% in 12 months due to high
returns and strong inflows of new contributions.

Moreover, pension funds are undergoing a liberalisation, which will see equity limits for younger
contributors raised, probably to 70% from today's 40%, says Mr Montenegro. If this seems like a
gold mine for the project finance sector, particularly as pension funds tend to like long-term
concessions and stable cash flows, there are still many obstacles before such potential can be
harnessed. Funds currently invest 20% in infrastructure, mostly through general corporate debt
and in the power sector, and have steered clear of transport deals, he says.

Mr Montenegro blames regulations and restrictions for pension funds' reluctance to participate in
the road sector. ·The government has not been able to put together a good model for institutional
investors. Studies to assess risks in areas such as geology, environmental impacts and legal
issues are not very rigorous,· he says. The habit of renegotiating contracts deters funds as well,
he says.

New structures could help to unlock pension assets for projects. xrivate equity fund managers
think they could help bridge the gap between sponsors and pension funds.

xrivate equity players with infrastructure funds are certainly in vogue. International players,
including Janada's Brookfield Asset Management and Darby Overseas of the US, have been
attracted in to the infrastructure fund market. Local funds, such as a $53m infrastructure fund run
by Nexus Japital xartners, are also present.

Banks such as Bancolombia are setting up their own funds, says Mr xérez. The problem is that
many funds have raised the cash but do not have the projects lined up on which to spend the
monies, he says. Bancolombia will identify attractive opportunities first and then raise the money
to pay for them, he adds.

Mr Villaveces says that Ashmore has commitments of some $200m. He believes that pension
funds' reluctance to invest is caused by unsophisticated management and that a diversified
infrastructure fund investing in safe projects will enable them to get on board. More
sophisticated contracts will ease concerns over renegotiations once concessions are awarded, he
adds.
Î






The power generation and oil and gas sectors already show just how attractive Jolombia can be
as an investment destination. After years of running deficits and a major black-out in 1991, rules
for the power sector were overhauled and today Jolombia has one of the best-regulated
industries in the region. The country already exports to Ecuador and is negotiating to export to
Venezuela, which is suffering from severe black-outs, despite strained commercial relations.

Last year was a bumper year for the debt markets and Bancolombia was the most active
manager, bringing 13 deals to market and raising almost $1bn. Jiti came next with $914m
through 14 deals. That increase in activity was in large part due to power and energy companies.

Lower interest rates and difficult international markets made the local market the obvious choice
for deals, says Mr xérez. The bond markets in Jolombia have been growing spectacularly and
blue-chip companies can finance themselves swiftly, adds Mr Figueroa.

The pipeline of deals looks attractive too. There will be $6.5bn in investments between 2009 and
2018 through nine new projects, which will add almost 3500 megawatts in generation. All eyes
are on the build-and-operate contract for the 2400-megawatt Itaungo hydro plant, which requires
investment of $2.3bn. Seven consortia have prequalified for the bid, which will likely be
structured as an international project finance deal.

The oil and gas sector is in fighting form with auctions for a number of new blocks slated. State-
owned Ecopetrol plans nearly $7bn in capital expenditure this year and has had a flurry of deals
in markets. It carried out a $3bn initial public offering in 2007 and went on to issue a heavily
oversubscribed $1.5bn, 10-year bond deal last year. It is planning a $2.86bn bond deal in local or
international markets, if it can get investor approval.

Banks are also directly financing oil and gas companies. Banco de Bogotá is involved in a range
of projects including financing for the Jolombian business of Janada's xacifico Rubiales and
Ecopetrol and pipelines as well as natural gas projects, says Mr Figueroa. The bank is continuing
to evaluate other projects in energy. Despite the fast growth, the bond market is relatively
conservative and is confined to AAA rated companies, he says.

The still-illiquid equity market is also benefitting from the oil and gas sector. xacifico Rubiales,
which operates wells in partnership with Ecopetrol in Jolombia and is bidding for other blocks
in the country, became the first company to list on the Jolombian Stock Exchange and has
become one of the most actively traded stocks since. Other firms in this area, such as Janacol
Energy, are set to list on the exchange.

The positive scenario for Jolombia seems immune to politics. The Supreme Jourt's decision in
February that xresident Uribe could not run for a third term is mostly shrugged off by Jolombian
bankers and markets reacted calmly. The likely policy of the new government is continuity,
analysts agree. That will help Jolombia build out the infrastructure and the financial institutions
and markets it so desperately needs.
# & '(ÿ )
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Whichever way one looks at, banks are likely to be benefited the most from this budget
J
   


The Indian Banking industry has been undergoing rapid changes reflecting a number of
underlying changes. Liberalisation and deregulation witnessed in the Indian markets in the 1990s
have resulted in a spurt in banking activity in India. Significant advances in communication have
enabled banks to expand their reach, both in terms of geography covered as well as new products
introduced. With increased competition in wholesale banking due to the entry of foreign banks
and new private sector banks, the sector has witnessed a squeeze in margins. This has led to
banks increasing their focus on retail banking so as to obtain access to low cost funds and to
expand into relatively untapped, potential growth areas. Banks and financial institutions are thus
continuously exploring new avenues for increasing their footprint and safeguarding their
margins.

Jompetition from multinational banks and entry of new private sector banks has rewritten the
rules of the retail lending business in India. Slow growth in corporate lending, pressure on
corporate spreads due to competition and concerns over asset quality have induced public sector
banks to follow the private sector banks in placing emphasis on growth through expansion of
retail portfolio.

The Indian retail lending market is relatively unexplored with the per-capita usage of retail
product offerings such as housing finance, credit cards, auto loans, consumer finance, etc. lower
as compared to Asian peers. Also the relative size of the Indian market, backed by factors such
as a growing population of bankable households, low penetration rate for retail finance products
and the increased propensity of the urban populace to take credit, offers scope for expansion.

In retail financing most of the players are trying to enter or consolidate their housing finance
segment, as housing loans market is perhaps the least risky segment in the financial sector.
Housing finance companies (HFJs) generally target the retail borrower where the nature of the
loan ensures that defaults are few and far between. The relatively small size of a housing loan
also ensures the risk is well spread out. Moreover pursuance to the government's policy to
provide shelter to a large number of people and concessions provided in the Finance Act to boost
housing and housing finance activities indicates great future potential for this segment. Interest
paid on capital borrowed for the acquisition or construction of property is entitled to a deduction.
A couple of years ago, the maximum amount eligible for deduction was Rs 15,000 and then got
doubled to Rs 30,000. Later, the amount got further enhanced to Rs 75,000 and is now Rs
1,50,000.

The growth of banking industry is closely interlinked with the growth in the economy.
Slowdown in economy in the past few years meant lower credit offtake. With lower demand for
credit, banks had no option but to invest in low yielding Government securities (G-sec).
However with the recent recovery in economy the credit offtake is likey to pick-up and pick-up
in credit offtake means deploying funds to the commercial sector and earning a higher return
than G-sec. Recovery in the select sectors, like steel, textile and capital goods which have high
credit consumption, has lead to pick-up in credit offtake. This clearly means a good topline
growth for the banks.
Moreover falling interest rates have led to appreciation in value of G-sec and given chance to
banks to book huge treasury profits. Last year many banks booked handsome profits on
appreciation in their value of investments. In the current year also the same trend continued, thus
helping banks to continue to make good treasury profits. This year even the interest spreads are
expanding as banks are aggressively reducing their borrowing costs and benefits of past deposits
getting renewed at lower rates are materialising

Apart from above the major problem faced by the banks in India was the rising Non xerforming
Assets (NxAs). While fresh NxAs kept adding every year to the pile of old NxAs, recoveries
was very difficult and time consuming. Besides the genuine business failures, extent of willful
defaults and diversion of funds was rampant. With the enactment of The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (The
Securitisation Act), banks have been empowered to attach assets of the defaulters without
intervention of lengthy and time consuming court procedures.

This has suddenly turned the tables in favour of banks. Till recently, debt recovery was one of
the most hopeless jobs in India due to archaic laws, which were totally tilted towards borrowers.
Banks were in fact at the mercy of borrowers' willingness to pay. Thus in spite of the fact that
most borrowing is against security, the value of which is often higher than the loan, banks still
could not do much except cajole and tempt borrowers to pay up. Huge NxAs were burdening the
entire banking sector. Not only large portion of banks' profits were going towards providing for
these NxAs, they also reduced their capital adequacy reducing their capacity to expand business.
Due to the fear of increasing NxAs, their willingness to lend and expand business was also
adversely affected. It is expected that over the next couple of years, banks will be able to
significantly clean up their NxA mess due to the Securitisation Act.

Further the government is considering a proposal to begin a second round of the Voluntary
Retirement Scheme (VRS) for banks. The manpower for each bank will be determined by
customer profile, network of branches and the level of computerisation. In the first phase, around
100000 people had opted for the VRS scheme offered by various banks. This had reduced the
manpower of banks by 12-15% and helped banks to improve their productivity and profitability
significantly.

Most recently the trend observed in the banking industry is the sharing of ATMs by banks.
Sharing of ATM network will minimise geographical overlap of ATMs and provide better
coverage to customers. At the same time, the sharing helps the banks to develop economies of
scale and minimise the cost of servicing customers.

Advancements in technology have helped aggregation of information as well as effective

dissemination of financial activity, apart from rationalisation of cost structures. Banks are
increasingly adopting technology as a platform for their product offerings so as to differentiate
themselves from competition. Technology has revolutionalized the delivery chain for financial
products and services with ATMs, Home banking and Telephone banking taking the place of
banking at bank branches.

x


+


  
The fiscal policies are the domain of the government, while the monetary policy is the domain of
Reserve Bank of India (RBI). It has taken various measures to adjust the money supply in the
economy in accordance with the internal and external business environment prevailing.

Y| Bank rate reduced to 6.25%

Y| Jash Reserve Ratio (JRR) reduced to 4.75%
Y| Japital Adequacy Ratio is equal to the ratio of TIER-I and TIER-II Japital to the
Aggregate of Risk Weighted Assets (RWA). However, TIER-II capital cannot be more
than 50% of TIER-I capital. Jurrently the banks have to meet the JAR requirement of
9%. It is proposed to hike the JAR to 12% by 2004 based on the Basle Jommittee
recommendations. Thus it is expected that the JAR requirement may be hiked in the
current budget. Housing finance companies have to maintain the JAR of 12%.
Y| The foreign bank can hold by to 49% in a private sector bank, while for public sector the
same is at 20%.
Y| No shareholders can exercise voting rights on poll in excess of 10% of the total voting
rights of all the shareholders for private banks and State Bank of India [ Get Quote ],
while for other xSU banks the same is just 1%.
Y| The RBI has stipulated certain ceiling relating to advances and interest rates which banks
have to adhere to which carrying out their lending operations. Some of them are as
follows:

Y Exposure to a single borrower should not exceed 15 % of advances.

Y Exposure to a business group should not exceed 40 %
Y Exposure to stock market should not exceed 5 % of total advances as at the end of previous
year.

Y| 5% of profits earned through investments to be set aside as Investment Fluctuation

Reserve' for a period of five years beginning financial year 2001-02.
Y| Foreign banks can either operate as branches of their parent banks or to set up
subsidiaries.
Y| According to RBI guidelines unsecured portion of NxAs has to be fully provided for in
18 months, and the secured portion has to be provisioned over five and a half years.
Further they are been advised to gradually move to international best practice of 90 days
for classifying troubled assets from the current 180 days
Y| Banks are allowed to deduct upto 7.5% of their total income against provisions made by
them for bad and doubtful debts
Y| Setting up of Asset Reconstruction Jompanies (ARJs) for providing Banks and FIs to
tackle the problem of NxAs and develop market for securitised debt. However no ARJ
has commenced operations as yet.
Y| Most important long-term measure in containing the growth of NxAs is radically altering
the bankruptcy and recovery laws and procedures. The Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act 2002 on Banking Sector
Reforms has been passed by xarliament recently to strengthen creditor rights through
foreclosure and enforcement of securities by banks and financial institutions
 Y| Interest payable on housing loans for self-occupied houses even where such houses are
acquired or constructed after 31st March 2003 allowed for deduction. The maximum
amount eligible for deduction from income tax currently is Rs 1,50,000.
Y| National Housing Bank (NHB) commenced securitisation of housing loans and easier
foreclosure of mortgages. It will also launch a Mortgage Jredit Guarantee Scheme.

'+



Y| Exemption of dividend tax completely - neither the bank nor the recipient to be taxed.
Y| Higher tax break for provisioning of bad loans. Banks & Financial Institutions (FIs) are
suffering from NxAs as such it is retrospective, which has its assessment problems. So
long as provisioning of NxAs is according to RBI norms within the stipulated time frame,
or on an accelerated basis the amount provisioned should be treated as deductible for tax
purposes.
Y| Increase in FDI cap of 20% in xSU banks and exclusion of ADR/GDR holding from FII
limit, as more and more foreign banks have evinced interest to picking up stakes in Indian
banks. Also the Government intends to reduce its holding to 33% in banks.
Y| Removal of 10% voting right restriction for private banks.
Y| Abolition of 5% service tax.
Y| Reforms in co-operative banking systems.
Y| To allow to issuance of infrastructure bonds for long-term funding.
Y| xermission to Banks to raise Tier II capital overseas.
Y| Announcement of second round of VRS for banks.
Y| Sops for Jorporate Debt Restructuring (JDR) in Steel, Textiles and Jhemicals etc. to
reduce NxAs.
Y| Increase in exposure limits to capital markets from 5% of incremental deposits to 8-10%
to improve credit flow to capital of markets.
Y| Kelkar committee has recommended drastic reduction in tax exemption for interest
payable on housing loans from Rs 1,50,000 to Rs 50,000. This should be implemented
gradually over a period of time.

J

.


Top picks in this sector are State Bank of India, xunjab National Bank [ Get Quote ], Janara
Bank [ Get Quote ], Jorporation Bank [ Get Quote ], Bank of Baroda [ Get Quote ] & IJIJI
Bank [ Get Quote ].

!


The banking sector is poised to grow in line with growth in economy. Their balance sheets are
getting cleaned up faster than earlier. Also interest rates are likely to remain soft thus helping
banks to reduce cost of funds and earn higher treasury gains, recent fall in their prices
notwithstanding. Any reduction in corporate tax rates or surchargs will also benefit banks as they
are largest tax payers. Abolition of tax on dividend will also make banks more attractive as banks
in general offer higher dividend yields. Further move towards simplified FDI norms will improve
the valuations of xSU banks. We expect a bullish trend in bank stocks to continue, as valuations
remain attractive.