Opportunities and challenges for Indian banks

July 5, 2006 FICCI Banking Conclave

Opportunity spectrum for Indian banks

Consumer finance Robust industrial investment outlook Increasing internationalisation of India Rural banking

Indias economic momentum driving banking sector growth

2

Consumer finance growth drivers

Changing structure of the economy

Access to finance

Consumer finance growth

Upward migration of income

Demographic patterns

Changing structure of the economy

FY1991 Services Industry 43% 25% FY2006 61% 19%

Agriculture

32%

20%

Rapid growth of services sector Leveraging high quality education and vast talent pool Sublimating Indias knowledge capital to create economic value

Upward migration of incomes

(households in million)

FY1996 Middle income High income

FY2002 50 3

FY2010 Estimate 98 10

33 1

Rising affluence and growth of the consuming class NCAER data for top 24 cities in India shows migration to higher income levels growing at over 40% per annum

Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 per household p.a.
5

across rural and urban India

(households in million)

FY1996 Urban Middle income High income

FY2002 Urban 27 1.8 Rural 23 0.7

FY2005E

Rural 16 0.3

Urban
35 3.6

Rural
28 1.2

17 0.7

43% of households in middle and high income groups from rural India in 2005 Their number has grown by 79% from 1996-2005
Figures for 2005 are estimated Middle income Rs. 90,000-5,00,000 per household p.a. High income > Rs. 5,00,000 per household p.a.

Demographic advantage - BRICS

India
(Age group)

Russi (percentage of population) a

10 23

China

Brazil
8

>60 35-59 15-34 0-14

23

30

36

26

35

35

26

37

35

25

16

29

58% of the population is in the working age group of 15-59 years

Increased access to finance

Rapid growth in availability of credit

Spread from large cities to second and third tier urban centres

Credit providers focusing on customer convenience

Delivery at customers doorstep or at point-of-sale of the asset financed

Increasing affordability

Decline in interest rates and rising incomes have allowed younger to take loans for acquiring assets

Drop in average age of home buyers

Drivers for corporate banking

2000 onwards
Mid to late 1990s Early 1990s Restructuring to achieve worldclass efficiency Articulation of international competitiveness

Capitalising on domestic demand

Key transformational trends Increased deployment of technology De - leveraging & organic capital generation Constantly improving quality standards

Corporate investment plans of over US$ 50 bn

9

Opportunities in corporate banking

Renewed investment cycle Markets and transaction banking

Domestic capital expenditure in infrastructure and manufacturing

Forex increasing integration with global markets

Growing use of derivatives for risk management

Demand for efficient transaction banking

Global expansion organic and inorganic

10

Opportunities in global banking

Vast Indian diaspora spanning the globe

Inward remittances of about US$ 22 bn Seeks strong India linkage and ethnic familiarity Demands world class service Potential for credit and liability products and transaction services

For personal as well as business requirements

Expansion of Indian industry to global markets

Growing export orientation 25% growth in FY2006 Setting up international marketing and distribution networks Acquiring/ creating production capacities overseas Potential for acquisition/ project financing and trade finance

11

Rural banking: A new growth opportunity for growth Opportunities

Though

agriculture constitutes only 20% of Indias GDP, rural economy (agri + non-agri) constitutes about 50% of GDP1 population of about 780 million2 with limited access to financial services
Population per bank branch: 22,793 Informal credit in India amounts to US$ 82bn3 A high proportion of agricultural lending is from informal sources3

Rural

1. Source: CERG (Consumer & Economic Research Group) 2. Source: Tata Statistical Outline 3. Source: Mckinsey Global Institute May 2006
12

However, banking in rural India is challenging

Special needs

Doorstep banking Flexibility in timings Low value and high volume of transactions Limited background information and proof of income Require simple processes with minimum documentation

Conventional banking not suited to meet these demands

High costs of delivery through traditional channels High transaction costs Dependence on documentation and financial history Inflexible procedures
13

and requires a comprehensive approach

Multiple products

Low-income customers require full range of services: credit, transaction banking, investment and risk mitigation

Multiple channels

Branches at selected locations Franchisees, internet kiosks, MFI partners

Deep penetration of the market

Using a combination of channels to completely cover selected areas To reduce average operating costs

Rapid-scale up

14

Example: ICICI Banks channel strategy

District cluster branch Crop cluster branch ATM Franchisee Kiosk (every circle represents 8 kiosks) MFI Branch Post Office Channel
15

Challenges faced by Indian banks

Lack of product expertise

Traditionally focused on limited range of products

Primarily for corporate clients Retail, structured finance

Need for acquiring skills in

Lack of distribution expertise

Reliance on branch channel and human intervention Relatively high unit cost of delivery given small transaction sizes

Limited use of technology

Across both customer-facing and internal functions

16

Inefficient capital allocation

To tap opportunities, banks must first build a robust platform

Acquire product knowledge and comprehensive product suite Build distribution expertise

Look beyond branch coverage Focus on efficiency and cost-to-serve

Improve risk management and capital allocation

Manage new products and associated risks Operate in increasingly complex environment

Deploy technology effectively to ensure return on investment Develop a flexible model that allows for rapid scale-up at optimal cost

17

In summary

India: strong growth prospects Banking has vast growth opportunities

Driven by consumer finance, demographics, industrial resurgence, increasing internationalisation and deeper penetration of financial services

This requires a transformation of the traditional banking model

New channel architecture Building partner relationships for outreach Full suite of products and services

A successful mass banking model

Is essential to meet the larger objective of supporting economic growth Builds a new engine for stakeholder value creation
18

Thank you

19