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Doing Business in India The Big Picture A Banker’s Perspective

Doing Business in India The Big Picture A Banker’s Perspective US – India Business Summit November 29, 2006 Dr. Anil K Khandelwal Chairman & Managing Director Bank of Baroda One of the fastest growing in the world

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Doing Business in India The Big Picture A Banker’s Perspective

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  1. Doing Business in India The Big Picture A Banker’s Perspective US – India Business Summit November 29, 2006 Dr. Anil K Khandelwal Chairman & Managing Director Bank of Baroda US – India Business Summit, 2006

  2. One of the fastest growing in the world Consumption growth fuelling economic growth – consumption expenditure forming 78% of GDP Services sector contributing over 60% to GDP Emerging as a hub of manufacturing excellence. new growth engines of Indian economy include IT, ITes, pharmaceuticals, bio-technology, nano technology, agri. businesses Where forces of competition are at work Innovation driving enterprises Economic reforms well on course – entering second phase    Indian Economy – A Snapshot US – India Business Summit, 2006

  3. “Inclusive growth” occupying central place High untapped potential in rural / agri - economy Indian companies on acquiring spree and going global Indian companies pursuing global best practices and producing world-class managers Indian Economy – A Snapshot US – India Business Summit, 2006

  4. World Bank – IFC Report on Doing Business in India for 2007 has given a higher rank to India compared to last year because : - India has cut the time to start a business from 71 to 25 days Reduced the Corporate Income Tax rate from 36.59% to 33.66% Supreme Court’s decision has made enforcing collateral simpler – easing access to credit Reforms to Stock Exchange Regulations have toughened investor protection Improved Ranking on Business Front US – India Business Summit, 2006

  5. Robust financial system Well established institutions Strong supervisory system Progressive integration of financial markets - banking, insurance, mutual funds, securities, commodities High competition marked by innovation High technology absorption Rediscovery of the Indian customer 21st century customer driving innovations in banking Banking plus financial services becoming the new offerings The Indian Financial Sector US – India Business Summit, 2006

  6. Alternate e-delivery channels becoming popular with Indian customers Financial sector bracing to meet life cycle and life style needs of the great Indian middle class “Cradle to Grave” becoming the new spectrum of life cycle needs Banking graduating beyond traditional boundaries of vanilla banking Indian customer demandingTOTAL FINANCIAL SOLUTIONS Banking sector bracing itself to offer customized and structured products The Indian Financial Sector US – India Business Summit, 2006

  7. Banking sector entering newer areas like wealth management, private banking, doorstep banking, electronic banking, credit cards, investment advisory services, etc. Indian banks in a war game to acquire and retain customers Indian middle class being reached out and wooed by banks Indian middle class and financial sector beginning to dream together and weave a new bond of relationship Financial products like mutual funds, life policies, non-life policies competing with traditional banking products Banking sector fully geared for helping Indian middle class realize its dream Banking sector in good health – with low non-performing assets and prudential accounting standards in place Indian banking entering the phase of consolidation (2nd Phase of Reform) – on way to acquire global size The Indian Financial Sector US – India Business Summit, 2006

  8. A free & open banking sector where most businesses are now covered at the market-determined rates Full banking license system Highly Stable Sector despite a series of Exogenous Shocks like the Asian Crisis, Sanctions due to Nuclear Explosions, Record High Oil Prices and Large Corrections in Stock Markets Significant improvement in the Asset Quality: Net NPAs (%) have decreased from 8.1% at end-March 1997 to 2.0% at end-March 2006 despite tightening of prudential norms Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% at end-March 1997 to 12.8% at end-March 2006 Operating Expenses of SCBs have declined from 2.1% of Total Assets in 1992 to 1.8% in 2005 indicative of improved efficiency Intermediation costs of SCBs have declined from 2.9% in 1995-96 to 2.1% in 2005-06 Robust & Resilient Banking Sector US – India Business Summit, 2006

  9. Indian Banks – in good health… • Strong Regulatory & Supervisory system • RBI has strengthened prudential norms with respect to income recognition, disclosures and capital adequacy • India complies with BIS 26 norms of best practices of supervisory criteria, country risk & convertibility • Indian banks are well on road towards BASEL II compliance • Credit Deposit Ratio is increasing – PSB : 66.2%, Pvt. Banks : 76.3% • Bank credit is growing by about 30% • Indian banks compare favourably with its Asian peers in asset quality • Indian banking sector grew by 6 times in the last decade – from Rs. 5,984 bn in 1995 to Rs. 36,105 bn. • KYC norms and Anti Money Laundering regulations in force • Indian banks are serving the “Two Faces” of India – the Underprivileged, the Progressive & the Opulent – with equal aplomb US – India Business Summit, 2006

  10. Indian Banks – in good health… • About 70000 strong branch network – More than 60% presence in Rural areas • Consistent growth in profitability – Spread is getting healthier – from 3.1% in 2004-05 to 3.2% in 2005-06 • NPL Ratios compare favourably with global trends • Consistently out-performing stock indices – Total Return to Shareholders continues to be attractive • PSBs : 72% • Pr.Bks : 19% • Fgn. Bks.: 7% • Others include UCBs, RRBs, LABs & NBFCs • Spread : 3.2% • CAR : 12.0% • ROA : 1.0%+ • Gross NPA : 3.34% • Net NPA : 2.00% TRS Apr 01 – Apr 05 • PSU Banks : 61.2% • India Banking : 51.3% • Old Private : 40.0% • New Private : 33.9% US – India Business Summit, 2006

  11. India has one of the strongest financial sector with low systemic risk Upturn in economic activity is mirrored in the sustained growth in “Demand for Bank Credit” Bank credit has increased sharply from 30% of GDP at end-March 2000 to 48% at end-March 2006 Non-food credit by SCBs increased by an average of 26.1% between 2002-2006 versus its long-term average of 17.8% from 1970 to 2006 Deployment of credit is quite broad-based with increasing flows going to infrastructure , SMEs, agriculture and retail sector (especially residential mortgages) during the past three years Banks – Major Financiers of Growth US – India Business Summit, 2006

  12. According to Moody’s Investor Services Analysis : Indian lenders have highest Return on Equity (ROE) in Asia (20.38%), followed by Indonesia (20.19%), New Zealand (18.83%), Japan (-6.42%) Average gross bad loans as share of total loans – India (8.18%), Philippines (15.05%), Thailand (13.08%), China (11.80%) and Malaysia (9.73%) Cost to Income Ratio in India at 44.56% is in line with the best regulated Asian countries like Singapore (44.15%), Taiwan (42.61%) and Hong Kong (40.05%) Indian Banks in the Best of the League of Asian Peers US – India Business Summit, 2006

  13. Banking Regulations Credit & Recovery Payment Systems Communications & Infrastructure Financial Sector Reforms – Going Ahead Requirements Fulfillments • Deregulated Interest rate • Greater freedom to banks • Significant steps towards Full capital • Account Convertibility • SARFAESI Act 2002 • Debt Recovery Tribunal (DRT) • Real Time Gross Settlements(RTGS) • Electronic Clearing System (ECS) • Electronic Fund Transfer (EFT) • Cheque Truncation - in the pipeline • Internet Banking, E-Banking, On-line • Tax Payment / Utility Payments, • ATM, Mobile Banking US – India Business Summit, 2006

  14. Capital Norms Credit Information Financial Track record Other Regulatory Initiatives Significant Steps for Improvement… Area Status - Min. Capital @ 9% as against 8% by BIS • Indian Banks are ahead in Basel II readiness – implementation road-map targets March 2009 • Min. Capital requirement for entry set @ Rs. 3 bn. for all banks in private sector • Credit Information Bureau of India Ltd • List of defaulters on RBI website - No financial crisis – escaped contagion effect of South East Asian meltdown - Strong Regulatory Practice & Prudence in place for “Managing Affluence” • Regulatory provisions to bring NBFCs & UCBs under uniform prudential norms US – India Business Summit, 2006

  15. Indian Banks are on a high growth track… • Overall banking sector is growing by – 18% • Retail Sector (CAGR – 5 years) • - Housing Loan : 50.% • - Consumer Durables : 16% • - Credit Card : 45% • - Two Wheeler Loan : 31% • - Car Loans : 26% • - Other Personal Loans : 38% More than 25% of the Bank Loan Assets are in Retail sector ensuring high returns - likely to cross Rs. 5700 bn by 2010 US – India Business Summit, 2006

  16. Indian Banks are on a high growth track… Online Banking in India . . . Growth of e-Commerce Transactions • Estimated 4.6* million Indian Internet users are Banking Online today • Indians paying bills online is expected to increase from the current 0.3 million in 2005-06 to 1.8 million by 2007-2008. • E-commerce transactions will cross the Rs 2000 crore mark (2006-2007) which translates into an increase of over 300% from financial year 2004-05. US – India Business Summit, 2006

  17. Doing Business in India … • Is there any Untapped Potential in Indian Financial Market ? • What is the ‘Big Picture’ ? US – India Business Summit, 2006

  18. The Big Picture… Consumption boom in India Mortgages / GDP(%) Consumer Loans / GDP(%) Credit Cards / GDP (%) Other Retail Loans / GDP (%) In each of the area, huge untapped potential left US – India Business Summit, 2006

  19. The Big Picture… Mutual Funds – Global Perspective Mutual Funds as a % of GDP Global Investment Fund Asset Pool Low Penetration – Indian industry still in early stages US – India Business Summit, 2006 Source : CLSA Asia Pacific Markets

  20. The Big Picture… Insurance Penetration – Global Landscape Life premium/ GDP (%) Insurance density (US$ premiums per capita) Non Life premium/ GDP (%) Low Penetration – A large potential still untapped US – India Business Summit, 2006 Source : Swiss Re Report 2005

  21. The Big Picture… Growth of Card Spending in India . . . Growth of Credit and Debit Cards in India • Increasing trend of Plastic Spend • High Technology Banking Products • Need for value added services on card products Growth of ATMs in India • Larger Number of Access Points for Customers • Convenience to customer is the key • Shared network is the future US – India Business Summit, 2006

  22. Wealth Management & Private Banking – New Growth Opportunities… • India - one of 10 fastest-growing population of HNWIs globally • There are at least 23 Indian citizens amongst the richest people on the planet • Non Resident Indians can invest in all Indian Asset Classes • No. of HNWIs in India – 100,000 (19.3% growth in 2005) • Salary increases in India – 13.9% is the highest in the world • Increasing Investment avenues – Art, Realty Funds, Commodities • Penetration level of wealth management services in India - 10% in comparison to European markets (60-90%) • The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE. • Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone. US – India Business Summit, 2006

  23. The Big Picture… India is fast emerging as the “Back Office” of the World & the “Global Knowledge Hub” • 100 Global Companies outsource from India • Top Global Banks are present in India • Largest talent pool • World class educational / professional institutions • Increasing Trade activities • Cost of operations – low US – India Business Summit, 2006

  24. The Story Continues… • Savings Rate @ 29% is low – Offers high potential from an increasingly affluent community • Less than 40% of Indian household has a bank account • Bulging Middle Class – likely to exceed 300 mn • Only 2% of the Indian population have insurance cover • Less than 1% of the population is actively participating in the Stock market • Number of high net worth households (> Rs. 500,000) is likely to grow from 200,000 to 400,000 by 2010 • Consumer Finance stands at about 2% to 3% of GDP as compared to 25% in European market • Real Estate Market is projected to touch USD 50 bn by 2008 • SME Sector is catching up fast creating huge prospect of growth US – India Business Summit, 2006

  25. Challenges Ahead…. • Capital Requirements – to compete with Foreign banks in the post 2009 phase • Financial Inclusion – to remove imbalances in economic growth • Banking Sector Consolidation – for improving competitiveness – need for a clear road-map for “Managed Consolidation” • HR Challenges – Changing working conditions, re-skilling, compensation etc. • Coping with the massive technology adoption programme – change management – from employees’ as well as customers’ perspectives US – India Business Summit, 2006

  26. Challenges Ahead…. • High intermediation costs • Low Productivity • Better Corporate Governance – higher level of accountability • Improvement in productivity and efficiency in line with advanced markets • Transformation from Plain Vanilla banking’ to “multi-specialist” banking US – India Business Summit, 2006

  27. Thank You US – India Business Summit, 2006

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