A PROJECT REPORT

ON

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF THE DEGREE OF

Master of Business Administration

Under the Guidance of Submitted by

Mr. R. K. Mishra SHARMA Lecturer MIITM, Aligarh

BALMUKAND Reg. No. 204033071284

MASTERS INSTITUTE OF I.T. & MANAGEMENT ALIGARH, U.P.

5

(VINAYAKA MISSIONS UNIVERSITY) SALEM, TAMILNADU, INDIA

2009

29 July, 2009

Mr. R. K. Mishra Lecturer MIITM, Aligarh

This is to certify that the present Dissertation report titled. H.D.F.C. Bank is an original outcome of study undertaken by Mr. BALMUKAND SHARMA, MBA (2009) and has been conducted under my guidance and supervision. The present dissertation is the result of his own research work and to the best of my knowledge, no part of it has been submitted in part or full to this University or any other University for any Degree/Diploma or for any other purpose.

Mr. R.K. Mishra

(Supervisor)

Dedicated To My Parents & Teachers with love

DECLARATION

I hereby declare that this report is result of my intensive study of H.D.F.C. Bank. All the facts, figures and findings in this report are genuine, authentic & purely academic interest only for the case study of H.D.F.C. Bank.

BALMUKAND SHARMA

CONTENTS Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 Subject Covered Banking Structure in India Indian Banking Industries Upcoming Foreign Bank in India HDFC BANK Company Profile Technology used Product and Customer segments Business Strategy Inside Hdfc Bank Rupee Earned Rupee Spent Recent Development SWOT Analysis Project on Plastic Money Page No. 06-25 26-45 46-51 52-53 54-56 57-60 61-66 67-68 69-74 75-76 77-84 85-91 92-98

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BANKING STRUCTURE IN INDIA

India has a well developed banking system. Most of the banks in India were founded by Indian entrepreneurs and visionaries in the pre-independence era to provide financial assistance to traders, agriculturists and budding Indian industrialists. The origin of banking in India can be traced back to the last decades of the 18th century. The General Bank of India and the Bank of Hindustan, which started in 1786 were the first banks in India. Both the banks are now defunct. The oldest bank in existence in India at the moment is the State Bank of India. The State Bank of India came into existence in 1806. At that time it was known as the Bank of Calcutta. SBI is presently the largest commercial bank in the country. The role of central banking in India is looked by the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India. Reserve Bank was nationalized in 1947 and was given broader powers. In 1969, 14 largest commercial banks were nationalized followed by six next largest in 1980. But with adoption of economic liberalization in 1991, private banking was again allowed.

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The commercial banking structure in India consists of: Scheduled Commercial Banks and Unscheduled Banks. Scheduled commercial Banks constitute those banks, which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI includes only those banks in this schedule, which satisfy the criteria laid down vide section 42 (6) (a) of the Act. Indian banks can be broadly classified into public sector banks (those banks in which the Government of India holds a stake), private banks (government doe not have a stake in these banks; they may be publicly listed and traded on stock exchanges) and foreign banks. Bank Fixed Deposits Bank Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest. The rate of interest for Bank Fixed Deposits depends on the maturity period. It is higher in case of longer maturity period. There is great flexibility in maturity period and it ranges from 15days to 5 years. Current Account Current Account is primarily meant for businessmen, firms,

companies, public enterprises etc. that have numerous daily banking transactions. Current Accounts are cheque operated accounts meant neither for the purpose of earning interest nor for the purpose of
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savings but only for convenience of business hence they are noninterest bearing accounts. Demat Account Demat refers to a dematerialised account. Demat account is just like a bank account where actual money is replaced by shares. Just as a bank account is required if we want to save money or make cheque payments, we need to open a demat account in order to buy or sell shares. Recurring Bank Deposits Under a Recurring Deposit account (RD account), a specific amount is invested in bank on monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which the principal sum as well as the interest earned during that period is returned to the investor. Reserve Bank of India The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately owned, it was nationalized in 1949. Its central office is in Mumbai where the Governor of RBI sits. Savings Bank Account Savings Bank Accounts are meant to promote the habit of saving among the citizens while allowing them to use their funds when required. The main advantage of Savings Bank Account is its high liquidity and safety.

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Senior Citizen Saving Scheme 2004 The Senior Citizen Saving Scheme 2004 had been introduced by the Government of India for the benefit of senior citizens who have crossed the age of 60 years. However, under some circumstances the people above 55 years of age are also eligible to enjoy the benefits of this scheme. Foreign Banks in India Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India. Nationalised Banks Nationalised banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Private Banks in India Initially all the banks in India were private banks, which were founded in the pre-independence era to cater to the banking needs of the people. In 1921, three major banks i.e. Banks of Bengal, Bank of Bombay, and Bank of Madras, merged to form Imperial Bank of India.

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Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a governmentowned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Early history Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three

15

presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC
16

established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

The Bank of Bengal, which later became the State Bank of India. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."

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The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". From World War I to Independence The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

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Years

Number that failed 12 42 11 13 9 7

of

banks Authorised (Rs. Lakhs) 274 710 56 231 76 209

capital Paid-up (Rs. Lakhs) 35 109 5 4 25 1

Capital

1913 1914 1915 1916 1917 1918

Post-independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

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In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July, 1969. Nationalization By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described

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the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalised banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009. Liberalisation In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
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India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.

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With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. RECENT HISTORY OF INDIAN BANKING Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit

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support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks came into fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organized sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilization of resources. The scheme however, did not provide any remedy. Though a no. of

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branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalized which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee.

Meanwhile, established

during

1962

Deposit

Insurance

Corporation

was

to provide insurance cover to the depositors.

In the post-nationalization period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The Service Area Approach was introduced during 1989.
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While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalization of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organization and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalization of 14 major private banks during 1969.

Expansion phase It had begun in mid-60s but gained momentum after nationalization of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semiurban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors.

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However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at a low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.

BANK NATIONALISATION & PUBLIC SECTOR BANKING Organized banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the

27

funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

Move

towards

State

ownership

of

banks

started

with

the

nationalization of RBI and passing of Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI during 1959 took place. During 1968 the scheme of social control was introduced, which was closely followed by nationalization of 14 major banks in 1969 and another six in 1980. Keeping in view the objectives of nationalization, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast network of public sector banks. The PSBs including RRBs, acount for 93% of bank offices and 87% of banking system deposits.

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Scheduled Banks in India

(A) Scheduled Commercial Banks

Public Banks

sector Private sector Foreign Banks (27) Old Private Banks Private Banks Banks India (29)

Regional in Bank (102)

Rural

(28) Nationalized Bank Sector Banks (IDBI) SBI and its Associates

Other Public New

(B) Scheduled Cooperative Banks

Scheduled Urban Cooperative Banks (55)

Scheduled State Cooperative Banks (31)

Here we more concerned about private sector banks and competition among them. Today, there are 27 private sector banks in the banking

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sector: 19 old private sector banks and 8 new private sector banks. These new banks have brought in state-of-the-art technology and Aggressively marketed their products. The Public sector banks are Facing a stiff competition from the new private sector banks. The banks which have been setup in the 1990s under the guidelines of the Narasimham Committee are referred to as NEW PRIVATE SECTOR BANKS.

New Private Sector Banks

Superior Financial Services Designed Innovative Products Tapped new markets Accessed Low cost NRI funds Greater efficiency

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INDIAN BANKING INDUSTRIES

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase.

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The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry. In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.

Pharmaceutical Industry Standard Chartered Bank

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the cooperative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks

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(the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. After the second phase of financial sector reforms and

liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services. During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for
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53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign banks (numbering 42), regional rural banks and other scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.

Current Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (Npas) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

34

The private players however cannot match the PSBs great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, Hdfc Banks merger with Times Bank Icici Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandoras box and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the W To agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 has also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners.
35

Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation, invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation.

Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded annual average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded at a Cagr of 16.3 percent per annum. Banks investments in government and other approved securities recorded a Cagr of 18.8 percent per annum during the same period. In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0 percent as against the previous years 6.4 percent. The WPI Index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago. The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in FY01 percent was lower than that of 19.3

36

percent in the previous year, while the growth in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago. The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000-2001. On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a percentage of the risk-weighted assets is maintained at the stipulated rate. While the IPO route was a muchfancied one in the early 90s, the current scenario doesnt look too attractive for bank majors. Consequently, banks have been forced to explore other avenues to shore up their capital base. While some are wooing foreign partners to add to the capital others are employing the M& A route. Many are also going in for right issues at prices considerably lower than the market prices to woo the investors.

37

Interest Rate Scene

The two years, post the East Asian crises in 1997-98 saw a climb in the global interest rates. It was only in the later half of FY01 that the US Fed cut interest rates. India has however remained more or less insulated. The past 2 years in our country was characterized by a mounting intention of the Reserve Bank Of India (RBI) to steadily reduce interest rates resulting in a narrowing differential between global and domestic rates. The RBI has been affecting bank rate and CRR cuts at regular intervals to improve liquidity and reduce rates. The only exception was in July 2000 when the RBI increased the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady fall in the interest rates resulted in squeezed margins for the banks in general.

Governmental Policy
After the first phase and second phase of financial reforms, in the 1980s commercial banks began to function in a highly regulated environment, with administered interest rate structure, quantitative restrictions on credit flows, high reserve requirements and reservation of a significant proportion of lendable resources for the priority and the government sectors. The restrictive regulatory norms led to the credit rationing for the private sector and the interest rate controls led to the unproductive use of credit and low

38

levels

of

investment led

and

growth. to

The

resultant decline

financial in

repression

productivity and efficiency and erosion of profitability of the banking sector in general. This was when the need to develop a sound commercial banking system was felt. This was worked out mainly with the help of the recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction in reserve requirements, and a number of structural measures. Interest rates have thus been steadily deregulated in the past few years with banks being free to fix their Prime Lending Rates(PLRs) and deposit rates for most banking products. Credit market reforms included introduction of new instruments of credit, changes in the credit delivery system and integration of functional roles of diverse players, such as, banks, financial institutions and non-banking financial companies (Nbfcs). Domestic Private Sector Banks were allowed to be set up, PSBs were allowed to access the markets to shore up their Cars.

Implications Of Some Recent Policy Measures

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater autonomy to the industry. In order to lend more depth to the capital markets the RBI had in November 2000 also changed the capital market exposure norms from 5 percent of banks incremental deposits of the previous year to 5
39

percent of the banks total domestic credit in the previous year. But this move did not have the desired effect, as in, while most banks kept away almost completely from the capital markets, a few private sector banks went overboard and exceeded limits and indulged in dubious stock market deals. The chances of seeing banks making a comeback to the stock markets are therefore quite unlikely in the near future. The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of networth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment.

The abolishment of interest tax of 2.0 percent in budget 2001-02 will help banks pass on the benefit to the borrowers on new loans leading to reduced costs and easier lending rates. Banks will also benefit on the existing loans wherever the interest tax cost element has already been built into the terms of the loan. The reduction of interest rates on various small savings schemes from 11 percent to 9.5 percent in Budget 2001-02 was a much awaited move for the banking industry and in keeping with the reducing interest rate scenario, however the small investor is not very happy with the move.
40

Some of the not so good measures however like reducing the limit for tax deducted at source (TDS) on interest income from deposits to Rs 2,500 from the earlier level of Rs 10,000, in Budget 2001-02, had met with disapproval from the banking fraternity who feared that the move would prove counterproductive and lead to increased fragmentation of deposits, increased volumes and transaction costs. The limit was thankfully partially restored to Rs 5000 at the time of passing the Finance Bill in the Parliament.

April 2001-Credit Policy Implications

The rationalization of export credit norms in will bestow greater operational flexibility on banks, and also reduce the borrowing costs for exporters. Thus this move could trigger exports growth in the future. Banks can also hope to earn increased revenue with the interest paid by RBI on CRR balances being increased from 4.0 percent to 6.0 percent. The stock market scam brought out the unholy nexus between the Cooperative banks and stockbrokers. In order to usher in greater prudence in their operations, the RBI has barred Urban Cooperative Banks from financing the stock market operations and is also in the process of setting up of a new apex supervisory body for them. Meanwhile the foreign banks have a bone to pick with the RBI. The RBI had announced that forex loans are not to be calculated as a part of Tier-1 Capital for drawing up exposure limits to companies effective 1 April 2002. This will force foreign banks either to infuse fresh capital to maintain the capital
41

adequacy ratio (CAR) or pare their asset base. Further, the RBI has also sought to keep foreign competition away from the nascent net banking segment in India by allowing only Indian banks with a local physical presence, to offer Internet banking.

Crystal Gazing
On the macro economic front, GDP is expected to grow by 6.0 to 6.5 percent while the projected expansion in broad money (M3) for 2001-02 is about 14.5 percent. Credit and deposits are both expected to grow by 15-16 percent in FY02. India's foreign exchange reserves should reach US$50.0 billion in FY02 and the Indian rupee should hold steady. The interest rates are likely to remain stable this fiscal based on an expected downward trend in inflation rate, sluggish pace of non-oil imports and likelihood of declining global interest rates. The domestic banking industry is forecasted to witness a higher degree of mergers and acquisitions in the future. Banks are likely to opt for the universal banking approach with a stronger retail approach. Technology and superior customer service will continue to be the imperatives for success in this industry.

Public Sector banks that imbibe new concepts in banking, turn tech savvy, leaner and meaner post VRS and obtain more autonomy by keeping governmental stake to the minimum can succeed in effectively taking on the private sector banks by virtue of their sheer size. Weaker PSU banks are unlikely to survive in
42

the long run. Consequently, they are likely to be either acquired by stronger players or will be forced to look out for other strategies to infuse operations. Foreign banks are likely to succeed in their niche markets and be the innovators in terms of technology introduction in the domestic scenario. The outlook for the private sector banks indeed looks to be more promising vis--vis other banks. While their focused operations, lower but more productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely give them the much needed scale of operations and access to lower cost of funds. These banks will continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also, they have been amongst the first movers in the lucrative insurance segment. Already, banks such as Icici Bank and Hdfc Bank have forged alliances with Prudential Life and Standard Life respectively. This is one segment that is likely to witness a greater deal of action in the future. In the near term, the low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater focus on better asset-liability management procedures. Consequently, only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future. greater capital and optimize their

43

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Improved performance of the banking industry in India has helped the economy to bounce back to a positive growth level. According to the Reserve Bank of India (RBI), the banking sector in India is sound, adequately capitalised and well-regulated. Indian financial and economic conditions are much better than in many other countries of
44

the world. Credit, market and liquidity risk studies show that Indian banks are generally resilient and have withstood the global downturn well. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: March 2009', nationalised banks, as a group, accounted for 49.5 per cent of the aggregate deposits, while State Bank of India and its Associates accounted for 24.1 per cent. The shares of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 18.2 per cent, 5.2 per cent and 3.0 per cent, respectively. Nationalized banks held the highest share of 50.5 per cent in the total bank credit followed by State Bank of India and its associates at 23.1 per cent and other scheduled commercial banks at 18.2 per cent. Foreign banks and regional rural banks had slightly lower share in the total bank credit at 5.9 per cent and 2.3 per cent, respectively. According to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the number of Non-Scheduled Commercial Banks including Local Area Banks stood at 5. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all automated teller machines (ATMs).

45

Also, growth of aggregate deposits of all Scheduled Commercial Banks (SCBs) including Regional Rural Banks (RRBs) up to March 27, 2009 stood at 19.8 per cent while overall nationalized banks was at 24.7 per cent, foreign banks at 7.8 per cent and private sector banks about 8.0 per cent. According to the RBI, gross bank credit offered by all Scheduled Commercial Banks (SCBs) including Regional Rural Banks (RRBs) grew by 17.3 per cent up to March 2009. Public sector banks' credit grew by 20.4 per cent, foreign banks' credit by 4 per cent and private sector banks about 10.9 per cent. Deposits with scheduled commercial banks (SCBs) surged by US$ 13.41 billion in the fortnight ended July 3, as against an accumulation of US$ 1.29 billion in the previous fortnight. In the said fortnight, time and demand deposits jumped by US$ 8.92 billion and US$ 4.49 billion, respectively. Credit offtake from the SCBs was up by US$ 5.8 billion. Corporates, MSMEs, agriculture, and the retail sector have been borrowing strongly, according to major bankers in the country. The government's huge borrowing programme, investments by banks, predominantly in government securities, were higher at US$ 9 billion in the July 3 ended fortnight as against an investment of US$ 4 billion in the preceding fortnight. Non-resident Indians (NRIs) have cumulatively placed US$ 1.167 billion as deposits with banks in the April-May 2009-10 period as against US$ 452 million in the corresponding period last year. NRIs

46

are finding it remunerative to park their money with Indian banks, which are offering higher interest rates. In the April-May 2009 period, NRIs deposited almost US$ 543 million in Foreign Currency NonResident (Banks) deposits. In the corresponding period last year, they had pulled out US$ 291 million from the FCNR (B) deposits. The new borrowing level for April-September 2009 has been set at US$ 62.85 billionnearly 25 per cent more than the March 2009 projection of US$ 50.66 billionjointly by the Finance Ministry and the Reserve Bank of India (RBI). During 2008-09, non-food bank credit (year-on-year basis) stood at 17.5 per cent by March 2009. India's foreign exchange reserves were US$ 252.0 billion as at endMarch 2009 which increased to US$ 253.0 billion by April 10, 2009. The country's largest bank the State Bank of India's (SBI) branch network, increased by 470 to over 11,900 branches. Based on March-end 2009 figures, SBI's deposits increased by US$ 6 billion to US$ 152.32 billion and advances by US$ 4.57 billion to US$ 120 billion. Boosted by gains from gilts, corporate debt and equity, Axis Bank and HDFC Bank have posted healthy net profit growth of 70 per cent and 30 per cent respectively, for the quarter ended June 30, 2009. Public sector banks too are now being approached by more customers owing to low interest rates and better-managed and

47

transparent operations. An analysis by Crisil Research reveals that the increasing customer preference for public sector banks is evident by the rise in their market share by more than 10 per cent over the last one year. The share of the PSBs has in fact risen to 40 per cent of the total vehicle finance portfolio as against 25-30 per cent earlier. Private banks have retained their share at 50 per cent. ICICI Bank has organised road shows in Asia, Europe and the US, jointly with the Union Ministry of Road Transport and Highways to attract investments for highways and roads. To begin with, the bank organised a meeting between potential investors and the Union Minister of Road Transport and Highways, Mr Kamal Nath. HDFC Bank has signed an agreement with Guruvayoor Devaswom for offering e-collection through HDFC Bank Payment Gateway.

Government Initiatives
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 Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of NECS. NECS was introduced in September 2008 for centralised processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS. The reduction in the Reserve Bank's policy rates and easy liquidity conditions in the market have helped all public sector banks, most private sector banks and some foreign banks reduce their deposit
48

and lending rates. Term deposit rates between October 2008-April 18, 2009 have been reduced by a range of 125-250 basis points by public sector banks, 75-200 basis points by private sector banks and 100-200 basis points by five major foreign banks. The reduction in the range of BPLRs was 125-225 basis points by public sector banks, followed by 100-125 basis points by private sector banks and 100 basis points by five major foreign banks. Since mid-September 2008 till date, the Reserve Bank has cut the repo rate by 400 basis points to 5 per cent and the reverse repo rate by 250 basis points to 3.5 per cent. The CRR was also reduced by 400 basis points of NDTL of banks and stood at 5 per cent. Apart from the bank rate cuts announced in the stimulus packages, cash withdrawals from bank will not attract tax from April 1, 2009 following abolition of the banking cash transaction tax (BCTT) in the Union Budget 2008-09. Also, inter-ATM usage transaction became free of charges effective April 1, 2009. Exchange rate used: 1 USD = 47.57 INR (as on June 2009). The Indian banking market is growing at an astonishing rate, with Assets expected to reach US$1 trillion by 2010. An expanding economy, middle class, and technological innovations are all contributing to this growth. The countrys middle class accounts for over 320 million people. In correlation with the growth of the economy, rising income levels,

49

increased standard of living, and affordability of banking products are promising factors for continued expansion.

The Indian banking Industry is in the middle of an IT revolution, Focusing on the expansion of retail and rural banking. Players are becoming increasingly customer - centric in their

approach, which has resulted in innovative methods of offering new banking products and services. Banks are now realizing the

importance of being a big player and are beginning to focus their attention on mergers and acquisitions to take advantage of regulation.

economies of scale and/or comply with Basel II

Indian banking industry assets are expected to reach US$1 trillion by 2010 and are poised to receive a greater infusion of foreign capital, says Prathima Rajan, analyst in Celent's banking group and author of the report. The banking industry should focus on having a small

number of large players that can compete globally rather than having a large number of fragmented players."
50

UPCOMING FOREIGN BANKS IN INDIA

Foreign Banks In India

Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative. New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allows them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list of Foreign banks in India till date.

51

List of Foreign Banks in India

ABN-AMRO Bank Abu Dhabi Commercial Bank Bank of Ceylon BNP Paribas Bank Citi Bank China Trust Commercial Bank Deutsche Bank HSBC JPMorgan Chase Bank Standard Chartered Bank Scotia Bank Taib Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as number of foreign banks are still waiting with baggage to start business in India. Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India. The road map has two phases. During the first phase between March 2005 and March 2009, foreign banks may establish a presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS. The second phase will commence in
52

April 2009 after a review of the experience gained after due consultation with all the stake holders in the banking sector. The review would examine issues concerning extension of national treatment bank. to WOS, dilution of stake and permitting mergers/acquisitions of any private sector banks in India by a foreign

Major foreign banks in India are:

ABN-AMRO Bank The history of ABN Amro Bank dates back to the year 1924, when King Williem I issued a Royal Decree declaring the establishment of the Nederlandsche Handel-Maatschappij (Netherlands Trading Society, NTS). The NTS had been established with an aim to promote the trade between the Netherlands and the Dutch East Indies. Abu Dhabi Commercial Bank Ltd. Abu Dhabi Commercial Bank (ADCB) is one of the most prominent nationalized banks of the United Arab Emirates (UAE). Three different banks viz. the Khalij Commercial Bank, the Emirates Commercial Bank and the Federal Commercial Bank merged in the month of July 1985, leading to the incorporation of the Abu Dhabi Commercial Bank.

53

American Express Bank Ltd With its headquarters located in New York, U.S., American Express company is a global financial services provider, also known as AmEx in short. American Express had been established in the year 1850, and is well known all around the world for its dedicated Credit Card, Travelers Cheque and Charge Card services.

BNP Paribas BNP Paribas is one of the oldest banks in the continent of Europe, and the largest bank in the Eurozone (consortium of countries having adopted Euro as their primary currency), as reported by The Banker magazine. The bank is present in 87 countries with a 162,700-strong workforce offering its services to the bank. Citibank Citibank is one of the largest banks in the U.S., and is a part of the financial services company Citigroup. Citibank had been founded in the year 1812. Initially its name was City Bank of New York, which was later changed to First National City Bank of New York. DBS Bank Ltd DBS Bank is a Singapore-based bank, and is known to be one of the largest banks to exist in South East Asian region by asset value. The government of Singapore established the DBS Bank in the year 1968, and it was primarily aimed at providing development oriented financial services.
54

Deutsche Bank Deutsche Bank, headquartered at Frankfurt in Germany, ranks among the global leaders in corporate banking and securities, transaction banking, asset management, and private wealth management. It is one the world's leading international financial service providers with roughly EURO 2.2 trillion in assets and approximately 80,000 employees. HSBC Ltd HSBC Bank is a subsidiary of HSBC Holdings plc, a London based banking giant which, according to the Forbes magazine, is the largest banking group in the world, and the 6th largest company in the world as of April 2009. Standard Chartered Bank Standard Chartered Bank is a London based bank, currently operational within over 70 nations with more than 1,700 branches and 73,000 strong workforce as of April 2009. Although the bank is located in Britain, still a huge chunk of its revenues originate from the continents of Asia, Africa and Middle East. Barclays Bank Barclays GRCB India is led by Samir Bhatia as its Managing Director. In a short period of just two and a half years, Barclays GRCB India has placed itself amongst the most respected foreign banks in the country that is serving more than 830,000 clients.
55

By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign banks in India

greater freedom in India. Among them is the world's best private bank by EuroMoney magazine, Switzerland's UBS.

The following are the list of foreign banks going to set up business in India :

Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of China

56

WE UNDERSTAND YOUR WORLD

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in

retail mortgage loans to different market segments and also has a

57

large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market

reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. HDFC Bank began operations in 1995 with a simple mission : to be a World Class Indian Bank. We realized that only a single minded focus on product quality and service excellence would help us get there. Today, we are proud to say that we are well on our way towards that goal.

58

COMPANY PROFILE

STRONG NATIONAL NETWORK

HDFC BANK

59

March 2006 Citied Branches ATMs 228 535 1323

March 2007 316 684 1605

March 2008 327 761 1977

As of March 31, 2008, the Banks distribution network was at 761 Branches and 1977 ATMs in 327 cities as against 684 branches and 1,605 ATMs in 320 cities as of March 31, 2007. Against the regulatory approvals for new branches in hand, the Bank expects to further expand the branch network by around 150 branches by June 30, 2008. During the year, the Bank stepped up retail customer acquisition with deposit accounts increasing from 6.2 million to 8.7 million and total cards issued (debit and credit cards) increasing from 7 million to 9.2 million. Whilst credit growth in the banking system slowed down to about 22% for the year ended 2007-08, the Banks net advances grew by 35.1% with retail advances growing by 38.6% and wholesale advances growing by 30%, implying a higher market share in both segments.
60

The transactional banking business also registered healthy growth With cash management volumes increased by around 80% and trade services volumes by around 40% over the previous year.

Portfolio quality as of March 31, 2008 remained healthy with gross nonperforming assets at 1.3% and net non-performing assets at 0.4% of total customer assets. The Banks provisioning policies for specific loan loss provisions remained higher than regulatory requirements.

61

TECHNOLOGY USED IN HDFC BANK

In the era of globalization each and every sector faced the stiff competition from their rivals. And world also converted into the flat from the globe. After the policy of liberalization and RBI initiatives to take the step for the private sector banks, more and more changes are taking the part into it. And there are create competition between the private sector banks and public sector bank. Private sector banks are today used the latest technology for the different transaction of day to day banking life. As we know that Information Technology plays the vital role in the each and every industries and gives the optimum return from the limited resources. Banks are service industries and today IT gives the innovative Technology application to Banking industries. HDFC BANK is the leader in the industries and today IT and HDFC BANK together combined they reached the sky. New technology changed the mind of

62

the customers and changed the queue concept from the history banking transaction. Today there are different channels are available for the banking transactions. We can see that the how technology gives the best results in the below diagram. There are drastically changes seen in the use of Internet banking, in a year 2001 (2%) and in the year 2008 ( 25%). These type of technology gives the freedom to retail customers.

Centralized Processing Units Electronic Processing Data Warehousing , CRM Innovative Application Technology Straight Through

Derived

Economies

of

Scale Reduced Transaction Cost

Improve

cost

efficiency,

Cross sell Provide new or superior products

HDFC BANK is the very consistent player in the New private sector banks. New private sector banks to withstand the competition from public sector banks came up with innovative products and superior service.

63

2001

Branches 43% ATM 40% Phone Banking 14% Internet 2% Mobile 1%

64

2005

Branches 17% ATM 45% Phone Banking 12% Internet 25% Mobile 1%

( % customer initiated Transaction by Channel )

65

HDFC BANK SEGMENTS

PRODUCT

AND

CUSTOMER

PERSONAL BANKING

Loan Product

Deposit Product

Investment & Insurance

Auto Loan Loan Security Loan Property Personal loan Credit card 2-wheeler loan Commercial vehicles finance Home loans Retail banking Tractor loan business Against Against

Saving a/c Current a/c Fixed deposit Demat a/c Safe Lockers Deposit

Mutual Fund Bonds Knowledge Centre Insurance General and Health Insurance Equity Derivatives Mudra Gold Bar and

66

 Working Capital Finance Construction Equipment Finance Health Finance Education Loan Gold Loan Cards Payment Services Access To Bank Care

Credit Card Debit Card Prepaid Card

NetSafe Merchant Prepaid Refill Billpay Visa Billpay InstaPay

NetBanking OneView InstaAlert MobileBanking ATM Phone Banking Email Statements Branch Network

---------------------------Forex Services --------------------------- Product Services Trade Services Forex service Branch Locater &

DirectPay

VisaMoney Transfer eMonies Electronic Funds Transfer

Online Payment

67

 RBI Guidelines

of Direct Tax

WHOLESALE BANKING

Corporate

Small and Medium Financial Enterprises and Trusts

Institutions

Funded Services Non Funded Services Value Added Services Internet Banking

Funded Services Non Services Specialized Services Value services Internet Banking

BANKS Sub Membership RTGS submembership

Funded Clearing

added Fund Transfer ATM Tie-ups Corporate Salary a/c Tax Collection Financial Institutions

Mutual Funds Stock Brokers Insurance Companies

68

Commodities Business Trusts

69

BUSINESS MIX

Total Deposits

Gross Advances

Net Revenue

Retail

Wholesale

HDFC Bank is a consistent player in the private sector bank and have a well balanced product and business mix in the Indian as well as overseas markets. Customer segments (retail & wholesale) account for 84% of Net revenues ( FY 2008) Higher retail revenues partly offset by higher operating and credit costs.

Equally well positioned to grow both segments.

70

NRI SERVICES
Accounts & Deposits Rupee Saving a/c Rupee Current a/c Rupee Fixed Deposits Foreign Currency Deposits Accounts for Returning Indians Remittances North America UK Europe South East Asia Middle East Africa Others Quick remit IndiaLink Cheque LockBox Telegraphic/ Wire Transfer Funds Transfer Cheques/DDs/TCs Loans Home Loans Loans Against Securities Loans Against Deposits Gold Credit Card

Investment & Insurances Mutual Funds Insurance Private Banking Portfolio Investment Scheme

Payment Services NetSafe BillPay InstaPay DirectPay Visa Money Online Donation

Access To Bank NetBanking OneView InstaAlert ATM PhoneBanking Email Statements Branch Network

71

BUSINESS STRETEGY

HDFC BANK mission is to be

"a World Class Indian Bank",

benchmarking themselves against international standards and best practices in terms of product offerings, technology, service levels, risk management and audit & compliance. The objective is to build sound customer franchises across distinct businesses so as to be a preferred provider of banking services for target retail and wholesale customer segments, and to achieve a healthy growth in profitability, consistent with the Bank's risk appetite. Bank is committed to do this while ensuring the highest levels of ethical standards, professional integrity, corporate governance and regulatory compliance. Continue to develop new product and technology is the main business strategy of the bank. Maintain good relation with the customers is the main and prime objective of the bank.

HDFC BANK business strategy emphasizes the following:

72

Increase market share in Indias expanding banking

and

Financial Services Industry by following a disciplined growth strategy focusing on quality and not on quantity and delivering high quality customer service. Leverage our technology platform and open scaleable systems to deliver more products to more customers and to control operating costs.

Maintain current high standards for asset quality through disciplined credit risk management.

Develop innovative products and services that attract the targeted customers and address inefficiencies in the Indian financial sector.

Continue to develop products and services that reduce banks cost of funds.

Focus on high earnings growth with low volatility.

73

INSIDE HDFC BANK

FIVE S , PART OF KAIZEN

WORK PLACE TRANSFORMATION Focus on effective work place organization Believe in Small changes lead to large improvement Every successful organization have their own strategy to win the race in the competitive market. They use some technique and methodology for smooth running of business. HDFC BANK also acquired the Japanese technique for smooth running of work and effective work place organization.

Five S Part of Kaizen is the technique which is used in the bank For easy and systematic work place and eliminating unnecessary things from the work place. BENEFIT OF FIVE S

74

It can be started immediately. Every one has to participate. Five S is an entirely people driven initiatives. Brings in concept of ownership. All wastage are made visible.

FIVE S Means :S-1 S-2 S-3 S-4 S-5 SORT SYSTEMATIZE SPIC-N-SPAN STANDARDIZE SUSTAIN SEIRI SEITON SEIRO SEIKETSU SHITSUKE

(1) SORT :It focus on eliminating unnecessary items from the work place. It is excellent way to free up valuable floor space. It segregate items as per require and wanted.

Frequently Required

Wanted but not Required

Remove everything from workplace

Junk

Less Frequently Required

Junk

(2) SYSTEMATIZE :-

75

Systematize is focus on efficient and effective Storage method. That means it identify, organize and arrange retrieval. It largely focus on good labeling and identification practices. Objective :- A place for everything and everything in its place. (3) SPIC- n - SPAN :Spic-n-Span focuses on regular clearing and self inspection. It brings in the sense of ownership. (4) STANDERDIZE :It focus on simplification and standardization. It involve standard rules and policies. It establish checklist to facilitates autonomous maintenance of workplace. It assign responsibility for doing various jobs and decide on Five S frequency. (5) SUSTAIN:It focuses on defining a new status and standard of organized work place. Sustain means regular training to maintain standards developed under S-4. It brings in self- discipline and commitment towards workplace organization.

76

LABELLING ON FILE

FILE NUMBER SUBJECT FROM DATE TO DATE OWNER

BOX LABEL For Example

1/3/A/6
1 Work Station (1) 3 Drawer (3) A - Shelf (A) 6 File Number ( 6)

77

COLOUR CODING OF FILES

DEPARTMENT

Welcome Desk

Personal Banker Teller Relationship Manager Branch Manager Demat Others

In the HDFC BANK each department has their different color coding apply on the different file. Due to this everyone aware about their particular color file which is coding on it and they save their valuable time. It is a part of Kaizen and also included in the system of the Five
78

S. Logic behind it that , the color coding are always differentiate the things from the similar one.

HUMAN RESOURCES
The Banks staffing needs continued to increase during the year particularly in the retail banking businesses in line with the business growth. Total number of employees increased from 14878 as of March31,2006 to 21477 as of March 31, 2007. The Bank continues to focus on training its employees on a continuing basis, both on the job and through training programs conducted by internal and external faculty. The Bank has consistently believed that broader employee ownership of its shares has a positive impact on its performance and employee motivation. The Banks employee stock option scheme so far covers around 9000 employees.

RUPEE EARNED - RUPEE SPENT

79

It is more important for every organization to know about from where and where to spent money. And balanced between these two things rupee earned and rupee spent are required for smooth running of business and financial soundness. This type of watch can control and eliminate the unnecessary spending of business. In this diagram it include both things from where Bank earned Rupee and where to spent.

HDFC BANK earned from the Interest from Advances 51.14 % , Interest from Investment 27.12 %, bank earned commission exchange and brokerage of 15.25 %. These are the major earning
80

sources of the bank. Bank also earned from the Forex and Derivatives and some other Interest Income. Bank spent 39.75 % on Interest Expense, 30.27 % on Operating Expense and 14.58 % on Provision. Bank also spent Dividend and Tax on dividend, Loss on Investment , Tax. As we discuss above that balancing is must between these two for every organization especially in the era of globalization where there are stiff competition among various market players.

81

RECENT DEVELOPMENT

The Reserve Bank of India has approved the scheme of amalgamation of Centurion Bank of Punjab Ltd. with HDFC Bank Ltd. with effect from May 23, 2008.

All the branches of Centurion Bank of Punjab will function as branches of HDFC Bank with effect from May 23, 2008. With RBIs approval, all requisite statutory and regulatory approvals for the merger have been obtained.

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The combined entity would have a nationwide network of 1167 branches; a strong deposit base of around Rs.1,22,000 crores and net advances of around Rs.89,000 crores. The balance sheet size of the combined entity would be over Rs.1,63,000 crores.

Merger with Centurion Bank of Punjab Limited

On March 27, 2008, the shareholders of the Bank accorded their consent to a scheme of amalgamation of Centurion Bank of Punjab Limited with HDFC Bank Limited. The shareholders of the Bank approved the issuance of one equity share of Rs.10/- each of HDFC Bank Limited for every 29 equity shares of Re. 1/- each held in Centurion Bank of Punjab Limited.
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This is subject to receipt of

Approvals from the Reserve Bank of India, stock Other requisite shareholders statutory and regulatory

exchanges and authorities. The

Also accorded their consent to issue equity shares and/or warrants convertible into equity shares at the rate of Rs.1,530.13 each to HDFC Limited and/or other promoter group companies on preferential basis, subject to final regulatory approvals in this regard. The

Shareholders of the Bank have also approved an increase in the authorized capital from Rs.450 crores to Rs.550 crores.

Promoted in 1995 by Housing Development Finance Corporation (HDFC), India's leading housing finance company, HDFC Bank is one of India's premier banks providing a wide range of financial products and services to its over 11 million customers across hundreds of Indian cities using multiple distribution channels including a pan-India network of branches, ATMs, phone banking, net banking and mobile banking. Within a relatively short span of time, the bank has emerged

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as a leading player in retail banking, wholesale banking, and treasury operations, its three principal business segments.

The bank's competitive strength clearly lies in the use of technology and the ability to deliver world-class service with rapid response time. Over the last 13 years, the bank has successfully gained market share in its target customer franchises while maintaining healthy profitability and asset quality.

As on March 31, 2008, the Bank had a network of 761 branches and 1,977 ATMs in 327 cities. For the year ended March 31, 2008, the Bank reported a net profit of INR 15.90 billion (Rs.1590.2crore), up 39.3%, over the corresponding year ended As of March 31, 2007.

March 31, 2008 total deposits were INR 1007.69 billion,

(Rs.100,769 crore) up 47.5% over the corresponding year ended March 31, 2007. Total balance sheet size too grew by 46.0% to INR 1,331.77 billion (133177 crore). Leading Indian and international

Publications have recognized the bank for its performance and quality.

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Centurion Bank of Punjab is one of the leading new generation private sector banks in India. The bank serves individual consumers, small and medium businesses and large corporations with a full range of financial products and services for investing, lending and advice on financial planning. The bank offers its customers an array of wealth management products such as mutual funds, life and general insurance and has established a leadership 'position'. The bank is also a strong player in foreign exchange services, personal loans, mortgages and agricultural loans.

Additionally the bank offers a full suite of NRI banking products to Overseas Indians. On 29th August 2007, Centurion Bank of Punjab merged with Lord Krishna Bank (LKB), post obtaining all requisite statutory and regulatory approvals. This merger has further

strengthened the geographical reach of the Bank in major towns and cities across the country, especially in the State of Kerala, in addition
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to its existing dominance in the northern part of the country.

Centurion Bank of Punjab now operates on a strong nationwide franchise of 404 branches and 452 ATMs in 190 locations across the country, supported by employee base of over 7,500 employees. In addition to being listed on the major Indian stock exchanges, the Banks shares are also listed on the Exchange. Luxembourg Stock

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ACHIEVEMENT IN 2007

Business Monitor survey

TodayGroup One of India's "Most Innovative Companies"

Financial ExpressErnst Award & Young Best Bank Award in the Private Sector category

Global

HR 'Employer Brand of the Year 2007 -2008'

Excellence Awards Award - First Runner up, & many more - Asia Pacific HRM Congress: Business Today Dun & Bradstreet American Corporate Express Best

'Best Bank' Award

Bank Award 2007 The Bombay Stock Exchange and

'Corporate Best Bank' Award

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Nasscom Foundation's Business for Social Responsibility Awards 2007 Outlook Money & Best Bank Award in the Private sector category. NDTV Profit The Asian Banker Best Retail Bank in India Excellence in Retail Financial Awards Asian Banker HDFC BANK Managing Director Aditya Puri wins the Services

'Best

Corporate

Social

Responsibility

Practice' Award

Leadership Achievement Award for India

SWOT ANALYSIS

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STRENGTH
Right strategy for the right products. Superior customer

WEAKNESSES

Some gaps in range for certain sectors.

Customer service staff need training.

service vs. competitors. Great Brand Image Products have required accreditations. High degree of customer satisfaction. Good place to work Lower with response efficient time and

Processes and systems, etc Management insufficient. Sectoral growth is constrained by low unemployment levels and competition for staff cover

effective service.

Dedicated workforce aiming at making a long-term career in the field.

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Opportunities

Threats

Profit margins will be good. Could extend to overseas broadly.

Legislation could impact. Great risk involved Very high competition

New specialist applications. Could seek better customer deals.

prevailing in the industry. Vulnerable to reactive attack by major competitors

Fast-track development

career opportunities

Lack

of infrastructure

in

rural areas could constrain investment.

on an industry-wide basis.

An applied research centre to create opportunities for developing techniques to provide added-value services.

High volume/low cost market is intensely competitive.

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COMPETITIVE SWOT ANALYSIS WITH ICICI BANK

STRENGTHS O P P O R T U N I T I E S T H R E A T S S O Strategies Strength: Large Capital base. Opportunity: Market Expansion. WEAKNESSES W O Strategies Weakness: Workforce Responsiveness.

Opportunity: Outsourcing of Non Strategy: Deep Penetration into Core Business. Rural Market. Strategy: Outsource Customer Care & other E-Helps. W T Strategies Weakness: Not Equal to International Standards.

S T Strategies Strength: Low operating costs

Threat: Increased Competition Threat: Entry of many Foreign from others Pvt. Banks. Banks. Strategy: Steps to Ensure Loyalty by old Customers. Strategy: Consider additional benefits

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Detailed Analysis:
i. Strength - Opportunity Analysis.

Strength: It is well know that ICICI Bank has the largest Authorised Capital Base in the Banking System in India i.e. having a total capacity to raise Rs. 19,000,000,000 (Non Premium Value). Opportunity: Seeing the present financial & economic development of Indian Economy and also the tremendous growth of the Indian

Companies including the acquisition spree followed by them, it clearly states the expanding market for finance requirements and also the growth in surplus disposal income of Indian citizens has given a huge rise in savings deposits from the above point it is clear that there is a huge market expansion possible in banking sector in India. Strategy: From the analysis of Strength & Opportunity the simple and

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straight possible strategy for ICICI Bank could be - to penetrate into the rural sector of India for expanding its market share as well as leading all other Pvt. Banks from a great gap.

ii.

Strength - Threat Analysis.

Strength: ICICI Bank is not only known for large capital but also for having a low operations cost though having huge number of branches and services provided. Threat: After showing a significant growth overall, India is able to attract many international financial & banking institutes, which are known for their state of art working and keeping low operation costs. Strategy: To ensure that ICICI Bank keeps going on with low operation cost & have continuous business it should simply promote itself well & provide quality service so as to ensure customer loyalty, therefore guaranteeing continuous business.

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iii.

Weakness - Opportunity Analysis.

Weakness: It is well known that workforce responsiveness in banking sector is Very low in Indian banking sector, though ICICI Bank has better responsible staff but it still lacks behind its counterparts like HSBC, HDFC BANK, CITI BANK, YES BANK etc. Opportunity: In the present world, India is preferred one of the best places for out sourcing of business process works and many Strategy: As international companies are reaping huge benefits after outsourcing there customer care & BPOs, this same strategy should be implemented by ICICI Bank so as to have proper customer service without hindering customer expectations. more.

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iv.

Weakness - Threat Analysis.

Weakness: Though having a international presence, ICICI Bank has not been able to keep up the international standards in providing customer service as well as banking works. Threat: In recent times, India has witnessed entry of many international banks like CITI Bank, YES Bank etc which posses an external entrant threat to ICICI Bank as this Banks are known for their art of working and maintain high standards of customer Strategy: After having new entrants threat, ICICI Bank should come up with More additional benefits to its customer or may be even reduce some fees for any additional works of customers. service.

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PROJECT ON PLASTIC MONEY

PLAS TIC MONEY

I give the project on Plastic Money to bank.

The objective behind this

project is to increase the rich customers list in a bank. Plastic Money title itself says the use of Credit Card and Debit Card in day to day transaction of the business. I prepared the presentation on it and

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submitted to bank and Bank already started work on this project. Idea behind this project is to sale the bulk product. Target customer Of this project are two parties one is Wholesaler and second is Retailer. Due to this idea bank also sell their swipe machine to wholesaler and create brand image in the market.

The idea behind this, bank give the credit card swipe machine to wholesalers and retailers use the credit card of the bank. Bank gives the 50 days credit to their credit card holders. So here retailers can get benefit of long credit period and on the other side wholesalers can get the benefit of same day payment. As a result bank got the wide list of customers of wholesalers and retailers.

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POWERPOINT MONEY

PRESENTATION

ON

PLATIC

OBJE CT IVE

Use of Plastic Money T arget customers are Wholesalers and Retailers Bulk sales surely possible

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IDE A

We sale our product to wholesalers and Retailers and create group transactions. Credit CardndDebit Card a medium of and as a transaction. Both the parties get benefit from it . Bank got the new customers as a result.

Idea behind it, to convenience both the parties and create the group transaction between them so bank can got the maximum benefit from it. Each wholesaler has more than 15 to 20 retailers, so by this way bank sell the bulk products.

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H ow it works
Meet towholesalersirst first f Collect details of their Retailers Convince both the parties and showing them a benefits from it. Force to open a bank account in H DFC Bank to both the parties.

This power point slide shows the how idea works behind this project. Meet the wholesaler first and get the details about their retailers and convince both parties and shows the benefit of using this type of transaction by plastic money.

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Benefit to Bank

Bulkproduct selling Because wholesalers and retailers are in a group I ndirect way marketing to Indirect

Bank always find those customers which are more involve in the banking transaction. These type of group transaction between the wholesalers and retailers maintain the well account in a bank.

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M arketing Strategy

I t's show time and it's about one thing -communicating the benefits of your product or service in such a way that prospects or customers your solution to their want

problem...

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