INDIAN BANKING SYSTEM

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PHASE I:-The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal
Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras
(1843) as independent units and called it Presidency Banks. PHASE II:- Nationalisation of Imperial Bank of India
with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments
all over the country.Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,
1969, major process of nationalisation was carried out. 14 major commercial banks in the country was
nationalised. PHASE III:- This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimhama, a committee was set up by his name
which worked for the liberalisation of banking practices. HISTORY

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“ Bank is an institution which trades in money, an establishment for the deposits, custody and issue of money, as
also for making loans and discounts and facilitating the transmission of remittances from one place to another”.
Savings Bank : Running account for saving with restriction in number of withdrawal Current Account: Running
account without restriction on number of withdrawals Term Deposit : Deposit of an amount for a fixed period
where interest is paid monthly/Quarterly. Special Term Deposit : Deposit of an amount for a fixed period where
interest is compounded (Capitalized) and paid on maturity. Recurring Deposit : Regular (Monthly) deposit of a
fixed amount for a fixed period WHAT IS BANKING

A Decade of change and evolution… :

A Decade of change and evolution… Pre-reform Extensive regulation Focus on industrial sector The 1990s
Today Indian economy Financial sector ..financial sector mirroring macro-economic change Liberalisation
Globalisation Structural change – services Resilient industry Buoyant services sector Highly segmented Public
sector dominance Opening up of various sub-sectors Private sector participation Diversified financial groups
Globally benchmarked

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PRE-GLOBALIZED SCENARIO OF SERVICE CULTURE IN THE INDIAN BANKS

The Banking Sector Today :

6 The Banking Sector Today Depth Countrywide coverage Large number of players Increasingly sophisticated
financial markets Technology Increasing use of technology in operations Poised to expand and deepen technology
usage Diversification Emergence of integrated players Diversifying capital deployment Leveraging synergies
Regulation Robust regulatory system aligned to international standards Efficient monetary management

Sector Snapshot :

7 Sector Snapshot Size Total assets of US$ 335 billion Total deposits of US$ 279 billion Number of banks Over
290 scheduled banks Public sector: 27 Private sector: new – 9; old – 24 Foreign: 37 Over 190 regional rural banks
Branch network Over 66,000 branches Public sector: 46,000 Private sector: 5,500 Foreign: 190 Regional rural:
14,400
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8 A New orientation among banks… Sell products Product research: what will sell? Product sales and
profitability targets Product specialist groups Introduce new offerings every few years/months “Branch banking”
Focus - customer acquisition Meet customers’ needs Customer research: what does the customer want? Customer
segment sales and profitability targets Customer owners Customer specific new offerings every week/day
Customer convenience Deepen relationships Traditional/ public sector New/ private sector

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Flower of banking service Slide 10:

Technological Innovations in Banking sector. Slide 11:
Innovation In Banking Product. Slide 12:
Additional Banking Services Major drivers for Banking Sector, world wide :
Major drivers for Banking Sector, world wide

Technology- leads the Winning Combination :

Key Banking Technology Aspects Cost Cutting Cost through Integration Better Information Management Risk
Management Complexities Easier Risk Identification Easier to Assess Risks Customer Reaching Customers
Faster Managing Diverse Needs Competition Competitive Edge in its Strategic Group “The winners will be those
institutions that tie their technology to their strategies in order to meet their challenges.” Performance &
Evaluation Better Metrics to Benchmark Against Objective Evaluation Process Technology- leads the Winning
Combination

Importance of Core Banking Solution :

Importance of Core Banking Solution Benefits of CBS Faster Response to Customer Demands Allows Faster
New Product Developments CBS Architecture Allows for Existing Products to be Quickly Customized Online
Validation of Data – at the Time of Entry Independent from the Organization Structure and Supports the four
Primary Entities – Customer, Account, Product and Business Organization Runs in Real Time Update Mode

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History:- Become operational on April 1,1935 Nationalized in the year 1949 Major objectives:- Regulate the issue
of banknote Maintain reserve with a view to securing monetary stability To operate the credit and currency
system of the country to its advantage Functions of RBI The function are classified into three heads;- Traditional
functions Promotional functions Supervisory functions How it controls banks & economy :- Tools-(as on 28th
nov,2009) CRR- 5.00% REPO RATE- 4.75% REVERSE REPO RATE- 3.25% STATUTORY LIQUIDITY
RATIO(SLR)- 25%BANK RATE- 6.00% REGULATORY AUTHORITY-RBI

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Government equity in banks has been reduced and strong banks have been allowed to access the capital market
raising additional capital. Bank now enjoying the operational freedom in terms of opening of new branches and
bank having good track record of profitability given flexibility in recruitment. New private sector banks have
been set up and foreign banks are allowed to expand their function in India including through subsidiaries. Banks
are also allowed to set up off shore banking units in SEZ. New instrument have been introduced for better
flexibility and better risk management like interest rate exchange, cross currency forward contract. MAJOR
REFORM IN BANKING SECTOR

Private Sector Banks :

Private Sector Banks Investment rationale Private sector banks are better capitalized compared to PSU Banks in
case of rising NPLs More seasoned loan book resulting in less incremental NPLs NIM are stable as the PLR cut is
not much compared to PSU banks Pvt Sector banks to improve margins due to steep decline in deposit cost
(decline in wholesale deposit cost by 400-500 bps point) Top 3 pvt banks has a significant portion of their
revenue coming from capital market linked business. While the capital markets are expected do well in the near
future it bodes well for the private sector banks Majority of the top private banks (except AXIS bank) are in a
process to consolidate their balance sheet, to restructure their balance sheet, reduced NPLs, restructured loans and
slippages which is good in the long term Increased thrust on the CASA deposit i.e., primarily focusing on the low
cost deposit Private banks have been historically innovative and technologically superior Best Picks: Axis Bank,
HDFC Bank, Yes Bank, Jammu and Kashmir Bank

Private Sector Banks :

Private Sector Banks Things to watch for: Private sector banks have been conservative in last few quarters,
restructuring there balance sheet which will have a negative impact on the NIMs, profitability, ROE in the coming
quarters Private sector banks have relied heavily on capital market linked activity, approximately 30-40% of their
revenue and net worth is relied on third party distribution products. Any downfall in the capital market will have a
significant impact on the bottom line of the company Private sector banks trades at a lower ROE (13-14%)
compared to public sector banks (17-18%) Cost of funding at 6.5% is higher in comparison to Public sector banks
(6%) Private sector banks might need to account for MTM losses, provisions etc due to its presence in uncertain
international markets

Public Sector Banks :

Public Sector Banks Investment Rationale Despite higher ROE, PSU banks are trading at a lower P/BV Strong
operating performance and profitability Strong Earnings growth Improving Quality of earnings No MTM losses
Banks have significant franchise value Improving quality of earnings PSU banks have been more aggressive in
lending which will help it to increase its profitability, NIMs, ROE Increased focus on low cost deposit by rapidly
increasing the branches leading to a decline in the funding cost Improved focus on non-banking revenues (Asset
Management, Private Equity, IB etc), leveraging on its existing branch network Best Picks: BOB, Corporation
Bank

Public Sector Banks :

Public Sector Banks Things to watch for: PSU Banks are likely to face more margin pressure compared to private
sector banks: Lending rates have been cut much more then private sector banks Lending in a weak corporate
environment High cost deposit mobilized during the second half of 2009 Excess investment in government
securities and parking of excess funds with RBI carry's a negative yield on investment portfolio PSU banks are
more likely to be persuaded by Government to reduce the lending rates Operating expenses for the PSU banks are
likely to go up due to higher wage increase and transfer from PF to pensions Restructuring has been high in PSU
banks resulting in a increase in NPLs Cautious on fundamentals due to slowing loan growth, declining margins
(NIMs) and rising credit costs Employee productivity and profit per branch have always been a concern in
compare to private sector banks Traditionally, PSU banks have been laggard in technology Asset quality will be a
concern in a long run due to aggressive lending in a weak corporate environment Yield on advances at 9.5% is
lower compared to private banks (11%)

Public Sector v/s Private sector Banks :

Public Sector v/s Private sector Banks C/D Inv/Dep Asset/Equity Cost of Dep Yield on Dep Yield on Inv NIM
NII/Total Inc RoE RoA 73% 33% 17.3 6.0 7.4 9.5 2.4 67.1 17.2 1.0 77% 41% 10.3 6.5 7.3 11 2.7 57.3 13.4 1.0
Pvt Banks Public Banks

Future Outlook :
Future Outlook Strong re-bound in the economic activity should drive a significant loan growth in the second half
of the fiscal Historically, loan growth to real GDP multiplier has been 3.3x in the past 25 years. Based on the
GDP projection of 6%+, I except loan growth at 20%+ for the entire fiscal Decline in the cost of funding as the
high cost term deposit mobilized in Q3 and Q4 of FY09 is likely to mature in the coming quarters The deposit
rate is unlikely to fall below 7.5% in the recent time as the small saving scheme offers 8% interest rate. A fall
below 7.5% interest rates is unlikely as it will disturb banking system Interest rates are likely to go up in Q4FY10
due to high fiscal deficit and monsoon failure Increase in the interest rates has a inverse relationship with the
banking stock Bond yields are expected to harden up in the coming quarters due to high government borrowings
which will lead to a increase in MTM provisions in the bank portfolio, having an negative impact on the bottom
line

Future Outlook…Cont :

Future Outlook…Cont PSU banks to remain under pressure as they can be pressurized by the government to
lower their lending rates Gross NPLs and restructured loans are likely to stable or go down as they are most likely
to get peaked in 2Q2010 and due to lower provisions on account of improving loan growth and economic activity
Non Interest revenue is likely to be the flavor of the time in the near future. Improved economic and capital
market activity should drive a rebound in non-interest revenue CASA ratio is likely to improve due to narrowing
of the differences between term deposits and saving deposits. Also, managements across the board have placed
more emphasis on low cost deposit PSU banks are expected to get more aggressive in loan growth to spurt growth
in the economy and private banks are more likely to consolidate their balance sheet in the near term Trading
income is likely to come down due to hardening of bold yields NIM is likely to go up in the second half of the
fiscal due to decline in the funding cost, increase in credit off take, strong domestic demand

Important numbers :

Important numbers Highest credit Growth PSU Banks: PNB(38%) Pvt Banks: Axis(28%) Highest Deposit
Growth PSU Banks: SBI(36%) Pvt Banks: Axis(24%) NIM PSU Banks: PNB(3.4%) Kotak Mahindra Bank(6%),
HDFC BK(4.1%) CASA PSU Banks: PNB(38%), SBI(38%) Pvt Banks: HDFC BK(45%), Axis Bank (40%)
Provision PSU Banks: PNB(89%), BoB(81%) Pvt Banks: HDFC Bk(71%), Axis Bank(59%) Credit Spread PSU
Banks: PNB(4.9) Pvt Banks: Yes Bank(4.4)

NEW INITIATIVES TAKEN BY PSBs :

NEW INITIATIVES TAKEN BY PSBs Technology savvy: SBG daily 11 lakh ATM transactions amounting to
Rs 140 crore per day Specialized branches♣ New products targeted at specific groups♣ Change in structure,
systems and procedures involving quick♣ turnaround time to meet world standards Marketing orientation♣
Change in ambience♣ Recruitment of specialists♣ Tie-ups, sharing networks, and strategic alliances♣

Structural Issues :

Structural Issues Non-performing assets Legacy systems Low levels of technology Seller’s market mindset Low
level of innovation in products and services Limited responsiveness to customers’ needs The Indian banking
sector has responded to these structural issues by adopting certain strategic imperatives

Legacy Issues addressed… :

Legacy Issues addressed… Challenges of a changing competitive environment Small and unviable pre-
liberalization units Large investments post-liberalization impacted by global commodity cycles and high interest
rates Supportive legal and regulatory changes Setting up of Debt Recovery Tribunals and enactment of
SARFAESI Act, reducing delays in enforcement of security and creating effective legal deterrent Corporate Debt
Restructuring Forum for restructuring viable companies Enabling framework for asset reconstruction companies
Proactive approach to resolution and increase in provisioning levels in the system

With significant success in resolution :

With significant success in resolution Position much stronger than other Asian economies Net NPL accretion
tapering off with progress in asset resolution and increase in provisioning levels Source: E&Y, RBI US$ bn Net
NPAs of banks & FIs Gross NPAs as % of GDP

Bank Lending as percentage of Deposits (2004) :

Bank Lending as percentage of Deposits (2004)

Raghuram Rajan on Rewriting the Rules for India's Banks :

Raghuram Rajan on Rewriting the Rules for India's Banks Rajan said he sees the challenges facing India's
banking industry against the backdrop of three forces, or "tensions," in its socio-economic setting. The first
tension is between the "haves" and the "have-nots." This is not so much an urban-rural divide, he noted, but one
that plays out as high income vs. low income; well managed states vs. poorly managed states; good institutions
vs. bad institutions; and upper castes vs. lower castes. "There are lots of cleavages which reflect this [tension], but
fundamentally it's an economic divide," he said.

Continued :

Continued The second tension "is between the private sector and the public sector, or between the markets and the
state," Rajan continued. He pointed out that a common reading of this "clash" is that it represents the rich-poor
divide, where the markets are seen as favoring the rich and the state as fighting on behalf of the poor. "This is
where the wires get crossed in India," he said. "It is not necessarily [true] that currently or going forward, the state
is doing the right thing by the poor. In fact, what is happening is the state is treating the poor miserably."

Continued :

Continued Rajan said the third clash is one "between the foreign and the domestic sectors," and that this is
compounded by the first two tensions. “

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Summary The reform and liberalization process has transformed the Indian economy Structural shift with service
sector growth Immense potential to leverage technology and knowledge capital Improved competitiveness in
manufacturing after intermediate period of restructuring & rationalization Growing international linkages
Exports, manufacturing and distribution overseas India as a manufacturing base Globally benchmarked
businesses, capable of competing internationally

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Summary (contd). The banking sector has achieved significant success in addressing legacy concerns Resolution
of asset quality concerns through recovery, restructuring and provisioning Focus on technology and customer
orientation The economic transformation provides major opportunities for the banking sector Retail finance –
credit and banking services Corporate finance - banking services and structured finance The sector is poised to
capitalize on these opportunities