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Banking Sector and Opportunities in India

Banking Sector and Opportunities in India. March 2004. Agenda. Economic backdrop. Banking sector - overview & opportunities. In summary. Indian economy - Strong fundamentals. Forex reserves. US$ 90 billion. Exports. US$ 50 billion in FY2003. GDP growth. Ten year average of 6.0%.

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Banking Sector and Opportunities in India

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  1. Banking Sector and Opportunities in India March 2004

  2. Agenda Economic backdrop Banking sector - overview & opportunities In summary

  3. Indian economy - Strong fundamentals Forex reserves • US$ 90 billion Exports • US$ 50 billion in FY2003 GDP growth • Ten year average of 6.0%

  4. Indian economy - Strong fundamentals Interest rates • 6.5% decline in last five years Short term debt • 0.8% of GDP External debt • 20% of GDP

  5. Diversified composition, robust growth Sector Sectoral share of GDP Projected growth FY2004 (%) Services 56.1 7.3 Industry 21.8 5.0 Agriculture 22.1 10.7 GDP 7.4

  6. Strong growth drivers… • Information technology • Business process outsourcing • Financial services • Entertainment, media, travel & tourism Services • Strong domestic demand • Improving competitiveness – lower interest rates, increased productivity, better working capital management, deleveraging • Export thrust Industry • Favourable climatic conditions with good monsoon • Modernisation of agriculture – scale and farming methods Agriculture

  7. …underpinned by strong infrastructure growth… • Construction of Golden Quadrilateral and North-South, East-West corridors • 13,000 km long - world’s largest single highway project • Boosting demand for steel, cement, commercial vehicles Roads • Basic telephone subscriber base of 39.9 million, growing at an average rate of 23% over last 7 years • Cellular subscriber base of 11.7 million, growing at an average rate of 88% over last 6 years • Positive impact on efficiency of firms and services exports Industry

  8. …though certain areas require close attention • Certain mis-steps have constrained development in this sector • Now being corrected through policy initiatives • Electricity Act passed by Parliament • New focus on creating capacities as well as enhancing transmission and distribution efficiency Power • Need for urban rejuvenation – housing, roads, utilities • Local bodies in several cities taking initiatives in this area Urban infrastructure

  9. Changing demographic profile Source: Ministry of Home Affairs, Government of India …high proportion of younger, working population driving growth

  10. Household savings as a % of GDP 22.5% 10.1% 2001-02 Robust household savings pattern Source: Economic Survey 2002-2003, Ministry of Finance

  11. Large inflows of foreign currency Gross forex inflows (US$ billion) 95.23 79.44 67.13 58.25 25.60 ~ ~ Source: Economic Survey 2002-2003, Ministry of Finance; RBI

  12. Strong external position Forex reserves & external debt (US$ billion) ~ ~ Source: RBI

  13. Enhanced corporate competitiveness Return on Equity (PAT / Equity) Asset turnover (Revenue / Assets) Source: Deutsche Bank

  14. The above developments are the result of a decade of reform… • Focus on globalisation • Opening up of the economy • Thrust on export led growth • Deregulation to encourage technology & capital flows • Integration with international financial markets • Key reform measures • Lowering of tariff barriers and liberalised imports • Average tariff reduced from 53% to 18% in last 5 years • Full convertibility of the rupee on current account • Permitting domestic companies to access foreign capital markets • Substantial liberalisation of restrictions on foreign investment

  15. ..driving transformational change • Dramatic growth of services sector • Over 50% of GDP • Significant contributor to exports • Restructuring of manufacturing sector over the past decade • Early 1990s: capitalising on domestic demand • Mid- to late 1990s: restructuring to achieve world-class efficiency • 2000: Articulation of international competitiveness

  16. The underlying fundamentals are based on a deep structural change in the economy and provide a sustainable platform for continued growth. The opportunities in the banking sector have to be viewed in this context.

  17. Agenda Economic backdrop Banking sector - overview & opportunities In summary

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

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

  20. Sector snapshot • Total assets of US$ 335 billion • Total deposits of US$ 279 billion Size • Over 290 scheduled banks • Public sector: 27 • Private sector: new – 9; old – 24 • Foreign: 37 • Over 190 regional rural banks Number of banks • Over 66,000 branches • Public sector: 46,000 • Private sector: 5,500 • Foreign: 190 • Regional rural: 14,400 Branch network

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

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

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

  24. A new orientation among banks… Traditional/ public sector New/ private sector • Sell products • Product research: what will sell? • Product sales and profitability targets • Product specialist groups • Introduce new offerings every few years/months • “Branch banking” • Focus - customer acquisition • Meet customers’ needs • Customer research: what does the customer want? • Customer segment sales and profitability targets • Customer owners • Customer specific new offerings every week/day • Customer convenience • Deepen relationships

  25. Technology- the ICICI Bank experience Channel Share of transactions in March 2000 Share of transactions in July 2003 Branches 94% 28% ATMs 3% 51% Internet 2% 10% 1% Call centre 11%

  26. Retail credit opportunity… 60 % 36 27 14 Source: SSKI, CLSA ..penetration currently low, with growth driven by strong fundamentals…

  27. Retail credit drivers • Middle & high income households increased from 11.6 million in fiscal 1995 to 25.7 million in fiscal 2002 Changing demographic profile • Interest rates on residential mortgages have reduced by 7% over last 4 years Declining retail loan interest rates • Entry of banks has led to increased competition and coverage • Increasing use of technology further enhancing reach and accessibility Increasing availability

  28. Retail market size Annual disbursement (US$ billion) 16.5 CAGR of 31% 12.9 9.4 7.3

  29. Changing profile of corporate banking… • Change in corporate focus - improving efficiency • Better asset utilisation and financial management • Limited new capacity creation • Increasing disintermediation in top tier segment • However, several opportunities for banks • Technology-driven fee-based services • Treasury and risk management products • Facilitating resource raising by corporates through syndication, securitisation and market-making • New approach to SME lending • Sophisticated banking services • Scientific portfolio construction and management

  30. Financial services potential: insurance 14.2% Premium as a % of GDP 12.1% 9.0% 5.2% 2.9% 2.7% 2.2% Source: Swiss Re, Economic Research & Consulting (June 2002) …the opening up of the sector provides a major opportunity for financial services players

  31. The “international Indian” opportunity Area of large NRI population Areas of large PIO population Number of NRIs () Canada UK (0.42 mn) (0.72 mn) US (1.2 mn) GCC Nepal (4.1 mn) West Indies Zimbabwe/ Uganda Singapore/ Malaysia Fiji (0.14 mn NRIs) South Africa Australia and New Zealand (< 0.1 mn) …the Indian diaspora, the emergence of Indian multinationals and resultant economic flows have created a new opportunity

  32. Agenda Economic backdrop Banking sector - overview & opportunities In summary

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

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

  35. Thank you

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