Banking Industry YakeenAgarwala

8/13/2019 Banking Industry YakeenAgarwala

1/6

BANKING INDUSTRY Industry Analysis

Submitted By

Yakeen Agarwala

Sec-A

Roll-72


2/6

1 | P a g e

INDUSTRY OVERVIEW

The banking system, largely, comprises of scheduled banks (banks that are listed under the Second Schedule of

the RBI Act, 1934). Unscheduled banks form a very small component (function in the form of Local Area Bank).

Scheduled banks are further classified into commercial and cooperative banks, with the basic difference in their

holding pattern. Cooperative banks are cooperative credit institutions that are registered under the

Cooperative Societies Act and work according to the cooperative principles of mutual assistance. Public Sector

Banks (SBI and associates + Nationalised banks) control more than 74-75% of the total credit and deposits

businesses in India whereas Private Sector Banks around 17-18%.

Demand Drivers

The performance of the Indian economy is one of the strongest drivers for the banking industrys growth and

vice versa (also shown in Figure 1), and the average GDP growth of 8.1 per cent expected over 201116 will

facilitate the expansion of the banking sector27. The government policies bringing in monetary stability will

also benefit and shield the industry from global economic or political turmoil. However, a keen observation

reveals that the banking sector has outperformed the market 2010 onwards. A boost in the banking industry is

also expected from the rising per capita income in India, which along with a growth in the earning population of

the country will lead to a higher number of people utilising banking services27. The per capita income growthis expected to be a major driver, as the Indian population primarily comprises of conservative spenders who

invest in property and other necessities. Higher disposable income will increase the retail credit, with

consumers investing

in a wide range of products.

MAJOR PLAYERS

Company Name NoCFull Year Data (Rs. Cr) Year ended - 2013-Mar

Equity Sales Sales MCAP NP Eq MCAP

Banks - Public

Sector 28 16006.57 629062.01 72.18% 52969.66 243336.46

Bank of Baroda 423.99 38827.28 4.17% 4481.37 22,081.40

Bank of India 595.90 35.674.97 4.12% 2749.35 9,939.61

Canara Bank 443 37230.94 4.36% 2871.38 9,847.89

Central Bank 1044.58 23527.98 2.79% 1015.46 5,980.22

IDBI Bank 1332.77 28283.81 3.50% 1882.08 7,956.64

PunjabNatl.Bank 353.47 46,109.25 5.17% 4,745.78 17,558.62

St Bk of India 684.03 135,691.94 16.44% 14,127.9 115,525.80


3/6

2 | P a g e

Banks -

Private Sector 117 39008.43 266083.92 27.82% 41835.98 444006.46

Axis Bank 469.14 33,733.68 3.35% 5,182.29 48,335.49

HDFC Bank 478.07 41919.49 4.10% 6726.98 154,380.80

ICICI Bank 1154.30 48421.30 5.51% 6726.98 111,874.80

Source - http://www.capitaline.com

The HHI has been calculated using the sales of the banks over the last year.The top 10 banks in the country have a HHI of 429 compared to the overall industry value of 495. This shows

that the industry is likely to be oligopolistic in nature

The market share held by the Big Four

The biggest 4 banks in India as mentioned above hold nearly a quarter of the entire available market share.

This is significant considering the fact that the entire industry features 145 players vying for places.

FINANCIAL SECTOR REFORMS IN INDIA

First, reform measures were initiated and sequenced to create an enabling environment for banks to overcome

the external constraints - these were related to administered structure of interest rates, high levels of pre-

emption in the form of reserve requirements, and credit allocation to certain sectors.

Sequencing of interest rate deregulation has been an important component of the reform process, which has

imparted greater efficiency to resource allocation. The process has been gradual and predicated upon the

institution of prudential regulation for the banking system, market behavior, financial opening and, above all,

the underlying macroeconomic conditions. The interest rates in the banking system have been largely

deregulated except for certain specific classes; these are: savings deposit accounts, non-resident Indian (NRI)

deposits, small loans up to Rs.2 lakh and export credit. The need for continuance of these prescriptions as well

as those relating to priority sector lending have been flagged for wider debate in the latest annual policy ofthe

RBI. However, administered interest rates still prevail in small savings schemes of the Government.

Second, as regards the policy environment of public ownership, it must be recognized that the lion's share of

financial intermediation was accounted for by the public sector during the pre-reform period. As part of thereforms programme, initially, there was infusion of capital by the Government in public sector banks, which

was followed by expanding the capital base with equity participation by the private investors.The share of the

ICICI

4%

HDFC

3%

SBI

13%

PNB

4%

OTHERS

76%

Market Share


4/6

3 | P a g e

public sector banks in the aggregate assets of the banking sector has come down from 90 per cent in 1991 to

around 75 per cent in 2004.

The share of wholly Government-owned public sector banks (i.e., where no diversification of ownership has

taken place) sharply declined from about 90 per cent to 10 per cent of aggregate assets of all scheduled

commercial banks during the same period. Diversification of ownership has led to greater market

accountability and improved efficiency. Since the initiation of reforms, infusion of funds by the Government

into the public sector banks for the purpose of recapitalization amounted, on a cumulative basis, to less than

one per cent of India's GDP, a figure much lower than that for many other countries. Even after accounting forthe reduction in the Government's shareholding on account of losses set off, the current market value of the

share capital of theGovernment in public sector banks has increased manifold and as such what was perceived

to be a bail-out of public sector banks by Government seems to be turning out to be a profitable investment for

the Government.

Third, one of the major objectives of banking sector reforms has been to enhance efficiency and productivity

through competition. Guidelines have been laid down for establishment of new banks in the private sector and

the foreign banks have been allowed more liberal entry. Since 1993, twelve new private sector banks have been

set up. As already mentioned, an element of private shareholding in public sector banks has been injected by

enabling a reduction in the Government shareholding in public sector banks to 51 per cent. As a major step

towards enhancing competition in the banking sector, foreign direct investment in the private sector banks is

now allowed up to 74 per cent, subject to conformity with the guidelines issued from time to time.

Ratios

Credit to deposit ratio: This ratio indicates how much of the advances lent by banks is done through deposits.

It is the proportion of loan-assets created by banks from the deposits received. The higher the ratio, the higher

the loan-assets created from deposits. Deposits would be in the form of current and saving account as well as

term deposits. The outcome of this ratio reflects the ability of the bank to make optimal use of the available

resources.

Capital adequacy ratio: A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted)

assets. The RBI has set the minimum capital adequacy ratio at 9% for all banks. A ratio below the minimum

indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank

do not expand their business without having adequate capital.It must be noted that it would be difficult for an

investor to calculate this ratio as banks do not disclose the details required for calculating the denominator

(risk weighted average) of this ratio in detail. As such, banks provide their CAR from time to time.

Non-performing asset ratio: The net NPA to loans (advances) ratio is used as a measure of the overall quality

of the bank's loan book. An NPA are those assets for which interest is overdue for more than 90 days (or 3

months). Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end

from gross NPAs. Higher ratio reflects rising bad quality of loans.

The NPA ratio is one of the most important ratios in thebanking sector.It helps identify the quality of assetsthat a bank possesses.

Provision coverage ratio:The key relationship in analysing asset quality of the bank is between the

cumulative provision balances of the bank as on a particular date to gross NPAs. It is a measure that indicates

the extent to which the bank has provided against the troubled part of its loan portfolio. A high ratio suggests

that additional provisions to be made by the bank in the coming years would be relatively low (if gross non-

performing assets do not rise at a faster clip).

Return on assets ratio:Returns on asset (ROA) ratio is the net income (profits) generated by the bank on its

total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be

the resulting returns on total assets
http://www.equitymaster.com/stockquotes/sector.asp?sector=0%2CBANKPVThttp://www.equitymaster.com/stockquotes/sector.asp?sector=0%2CBANKPVT


5/6

4 | P a g e

Basel Norms

Basel I

In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1. It

focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. The minimum

capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different risk

profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans,

which have no collateral. India adopted Basel 1 guidelines in 1999.

Basel II

In June 04, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed

versions of Basel I accord. The guidelines were based on three parameters, which the committee calls it as

pillars. - Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of

8% of risk assets - Supervisory Review: According to this, banks were needed to develop and use better risk

management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit,

market and operational risks - Market Discipline: This need increased disclosure requirements. Banks need to

mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are

yet to be fully implemented.

Future Trends

Mobile banking to see huge growth and will redefine transaction banking paradigm:

Comparing with usage pattern in US, the significant potential in online and phone channels is apparent.

However, India may evolve differently. The penetration of internet and broad band access in India has been low

so far. However, with the advent of mobile banking, the access to banking facilities could completely get

revolutionized over the next decade.

Wealth management will be big business with 10X growth:

Going forward, wealth is expected to get further concentrated in the hands of a few. The top band of income

distribution is expected to grow most rapidly over the next decade.

New models to serve the Small and Medium Enterprises (SME):

Due to higher risk and lower ticket size, the SME typically get less attention. Banks are yet to create innovative

models to serve SMEs with sufficient and timely credit at the right price. In general, the level of dissatisfaction

is higher on pricing and product range.

Untapped Business Opportunities:

The banks need to harness resources and fortune at the bottom of the pyramid.

Recent Events

Basel 3 ReformsBasel 3 is the global regulatory standard on the bank adequacy, stress testing, and market liquidity risk. These

norms, are implemented by the RBI, with effect from January 1,2013. Basel III proposes many new capital,

leverage, and liquidity standards to strengthen regulation, supervision and risk

management of the banking sector. These norms will have the following impact on the banking sector:

Requirements Under Basel 2 Under Basel 3

Minimum ratio of Total Capital to RWAs 8% 11.5%(9+2.5%)

Tier 1 Capital to RWAs 4% 6

Minimum Liquidity Coverage Ratio None Declare in 2015

Minimum Ratio of Common Equity to RWAs 2% 4.5% to 7%

(Source:http://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-Norms.shtml)

Impact of Basel 3 Reforms
http://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-Norms.shtmlhttp://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-Norms.shtmlhttp://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-Norms.shtmlhttp://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-Norms.shtml


6/6

5 | P a g e

1. Banks Will Need To Raise an additional Rs 2.7 Trillion Of Tier 1 Capital Over The Next 5 Years ToMeet The New Norms. While they are poised to meet the proposed capital adequacy norms in the

near term, they would be required to raise huge capital by March 2017 to meet the suggested

norms, without compromising growth. Of this capital to be raised, 90% will be required to be raised

by the PSBs, for which they will depend on capital infusion by Government of India.

2. The expansion of the equity capital needed to meet the capital adequacy norms, and the expectedincrease in the cost of non-equity capital following the inclusion of write-off clause would affect the

returns of the PSBs over the long term, it is expected to fall by 300 to 400 bps by 2016-17.

3. Banks will not be able to distribute dividends or bonus shares, if the capital conservation buffer of2.5% over the stipulated common equity tier 1 capital of 9% is not met.Impact of Budget 2013

1. Public Sector Banks (PSBs) are expected to receive capital infusion of Rs 14000 crore in FY2014 to meetthe capital requirements in accordance with the Basel III guidelines.

2. The interest subvention scheme for short-term crop loans will be continued and farmers who repayloans on time will be able to get credit at 4% p. a.

3. The net market borrowing for FY2014 is estimated at Rs 484000 crore, which will help to finance theeconomy.

4. The move to increase the surcharge on taxable income exceeding Rs 10 crore from 5% to 10% wouldimpact banks (Source : http://www.dsij.in/article-details/articleid/6735/budget-2013-banking-

sector-to-take-a-further-beating.aspx)

Thus, the banks would be feeling a disappointment on account of lower than expected capital infusion

target, and by the one-ATM-per branch target.

Effect of government/ RBI measures affecting the banking Industry:

Increase in FDI limit is a major boost to the private sector bank by raising the foreign direct investment (FDI)

limit from 49% to 74%, for facilitating the setting up of subsidiaries by foreign banks, as well as for inviting

investment in private banks. Extension of the benefit of Sec. 72A of Income Tax Act to nationalized banks by

allowing any banking company to merge with a nationalized bank with consequential tax benefit will enable the

public sector banks to embark on mergers and acquisitions in order to consolidate their operations andimprove efficiency. Few PSU banks having high CAR are already open for such inorganic growth. With the

enactment of The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

Act 2002 (The Securitization Act) in Nov. 2002, banks have been empowered to attach assets of the defaulters

without intervention of lengthy and time consuming court procedures. This has suddenly turned the tables in

favor of banks as it will help the banks in recovering its NPAs more effectively. This improvement in lending

environment will also facilitate increased interest of foreign banks in Indian banking sector.

Predictions by CRISIL Research

Loan offtake to remain sluggish in 2013-14

Growth of 14-15 per cent likely in 2013-14

Gross NPA to reach 4.0 per cent by March 2014

Lending rates to stay elevated; NIMs under pressure

Documents

Banking Industry YakeenAgarwala