CB Lecture I Section A

8/11/2019 CB Lecture I Section A

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Commercial Banking

LBS PGDM-GENSection A

Lecture 1

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Part I

Books/Other material forstudy/reference

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Books

Management of Banking and Financial Services,Pearson Education - 2ndEdition 2010

Authors: Padmalatha Suresh & Justin Paul

Management of Banking, Cengage Learning - 6thEdition 2006, Indian Reprint 2009

Authors: S Scott MacDonald & Timothy W Koch

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RBIs Annual Report on Trend and Progress of Banking in India

Ch 1: Indian banking sector

Ch 2: Global Banking Developments

Ch 3: Policy Environment Ch 4: Operations and performance of

commercial banks

Ch 5: Co-op banking

Ch 6: NBFCs

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Lecture I Part II

Some observations on the IndianBanking Industry

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Banking Industry in India: 1999-2009

During the above decade,

The number of banks declined from 297 in 2000 to 171 in 2008, mainlydue to closure/merger of weak rural banks

Number of branches rose from 65,412 in 2000 to 76,050 in 2008.

However, the break up shows greater focus of the banks in this regard on

metro and urban areas, as under:

Rural branches went down from 32,734 to 31,076 Urban branches went up from 10,052 to 14,392

Metro branches went up from 8,219 to 12,908

All Banks aggregated Loan book rose from Rs 4 trillion to Rs 29.41

trillion in 2009, with percentage of bank loans to GDP, going up from 19%

to around 52% as of now, and the credit deposit ratio going up from53.3% in 2000 to 70.34%

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A little historical perspective about

New Generation Private Sector Banks

The guidelines for licensing of new banks in the private sector were issued bythe Reserve Bank of India on January 22, 1993. Out of various applications

received, RBI had granted licences to 10 banks. After a review of the experience

gained on the functioning of the new banks in the private sector, in consultation

with the Government, it was decided to revise the licensing guidelines in

January 2001.

A few of the private sector banks set up during the past two decades got/were

merged

Global Trust Bank was merged with Oriental Bank of Commerce

Centurion Bank first took over Bank of Punjab and then merged with HDFC Bank

After almost a decade a couple of additional licenses were given to Yes Bankand Kotak Mahindra Bank

In August 2011, the Reserve Bank of India released fresh Draft Guidelines for

Licensing of New Banks in the Private Sector. Finally the guidelines were issued

and applications invited in 2013

During 2014, licenses have been issued to Bandhan Financial and IDFC 9


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CURRENT ISSUES AND FUTURE

CHALLENGES IN INDIA

Lecture IPart III

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Banking Industry in Indiathe road ahead

M & As

With mergers and amalgamations we might see emergence of 3/4 banks,

which are half or one third the size of SBI, depending on the initiatives of thegovernment. The issue however continues to be politically sensitive

FINANCIAL INCLUSION CHALLENGE

Only 40% of the Indian population has bank accounts, 13% debit cards and2% credit cards. Spread of banking at a faster pace in the rural areas,

through branches, banking correspondents and mobile telephony, at a fastpace is likely.

Banks are being compelled to reach out to rural India, but they areincreasingly appreciating the business opportunity in financial inclusion, asurban consumers suffer from loan fatigue and corporations find other waysof raising money

NPAs

The slowdown in the economy and other factors have led to a big rise inNPAs. The gross NPAs and net NPAs have risen and so have the restructuredAssets increasing the quantum of potentail NPAs

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NEW GLOBAL CHALLENGES The global financial crisis of 2007 has thrown up new

challenges for the financial system The key contributory factors for the crisis were:

Lower interest rates inducing higher risk taking, and leadingto an asset price bubble

Changing structure of the financial sector and rapid pace ofinnovation over the last two decades, and the failure of riskmanagement to match up to the new demands

Failure to adequately regulate highly leveraged financialinstitutions

The very foundation that a sound financial systemrequiresTRUST, crumbled during the crisis

Consequently, Banks that had liquidity hoarded it, andthe banks who did not have it, faced doomsday

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FINANCIAL REGULATION

There are two vital objectives of financial

regulation

Mitigation of systemic risk

Consumer protection

Financial regulation typically uses tools such as

Prudential regulation

Specialized tools such as deposit insurance Regulation of payment and settlement systems

Regulation of business entities

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FINANCIAL STABILITYTHE OVERARCHING AGENDA OF

FINANCIAL REGULATION FOR THE FUTURE

Financial stability has to be an explicit

objective of regulation

International co-operation key to resolving

systemic crises in the new world

Indias financial sector reasonably insulated

from crisis of 2007

Financial stability has now been made

explicit objective of RBI monetary policy

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The New Focus on Financial

Stability across the World

For a fairly long time the main focus of the

regulators used to be on Inflation and Growth

One major outcome of the G 20 deliberations

post the crisis was the establishment of a new

Financial Stability Board that includes all

large countries of the world, to be operated by

the IMF, with a strengthened mandate

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Challenges before regulators in the world Who takes the responsibility of ensuring financial

stability?

Where does risk management amount to

conservativeness?

What are the reforms required to create an efficientand effective regulatory architecture to ensure

financial stability?

How do we resolve the constant tension between

fiscal and monetary policies? Think about the needto keep rates low because of large government

borrowing programmes.

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COMMERCIAL BANKING SYSTEM IN

INDIA - AS OF 2009

Public sector banks [27]

Private sector banks [22]

Foreign banks [32] Regional rural banks [84]

[Figures in brackets show number of

institutions]

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Alternative Organisations for

Financial Conglomerates

Universal Bank ModelAll financial operations are

conducted within a single corporate entity

Operating Subsidiary ModelOperations areconducted as subsidiaries of a financial institution

Holding Company ModelFinancial operations are

carried out by distinct entities such as banks,

mutual funds, insurance companies, NBFC, HFC, etc.

(Current model used in India is the Operating

Subsidiary Model)

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CO-OPERATIVE CREDIT INSTITUTIONS

URBAN CO-OPERATIVE BANKS [1721]

Scheduled UCB [53]

Non scheduled UCB [1668]

RURAL CO-OPERATIVE CREDIT INSTITUTIONS [96061]

Short term [95344]

State co-operative banks

District central co-operative banks

Primary agriculture credit societies

Long term [717] SCARDBState Co-op and Rural Development Bank

PCARDBPrimary Co-op and Agriculure Rural

Development Bank

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Committee on Financial Sector

Assessment (CFSA) According to CFSA, dual regulatory control of RBI and

NABARD, is the single most important regulatory and

supervisory weakness in the co-operative banking

sector

Further, directors are appointed on political affiliation

CFSAs report points out that the sector is plagued by:

1. Low resource base

2. Inadequate business diversification and recoveries

3. High level of accumulated losses

4. Weak MIS and poor controls

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EVOLUTION OF INDIAN BANKINGThe period can be divided in 4 phases, as under:

Pre 1947: no entry norms, several banks failed as they wereeither too small to stand global pressures or mismanaged

1947-1967: Banking Companies Act (now called Banking

Regulation Act) enacted, SBI expanded in rural areas, nexus

between big industrial houses and banks resulted in no creditbeing extended to agricultural or SSI sector

1967-1991/92: tightening of social controls, directed lending

introduced, asset quality suffered, banks low on profitability

From 1991-92 onward: financial sector reforms, prudentialnorms in accordance with international best practices,

improved profitability, greater risk aversion also leading to low

credit, particularly to agricultural sector

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NON BANKING FINANCE COMPANIES: 2009

Deposit taking NBFC-D [336]

Non deposit takingNBFC- ND [12402] - There are a

few very important companies classified in this category

under the sub-category, NBFC-ND-SI, which are

systemically important, have asset size of over Rs 100crores and are the fastest growing category in the NBFCs

space

Residuary NBFC RNBFC [2]

Total(12740)

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Some other Classifications: Finance Companies

There are 43 Housing finance companies.

These are regulated by NHB

NBFCs are also classified on the basis of Asset

Type as Asset Finance Companies, Loan

Companies and Investment Companies Mortgage Guarantee Company (Reserve Bank)

Guidelines, 2008' notified on 15th February

2008 now allows mortgage guaranteecompany to commence the business of

providing mortgage guarantee in India

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Lecture IPart IV

Group Presentations

Guidelines to follow

AND

List of Topics for Groupprojects/presentations

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Topics: Indian Banks, NBFCs and Insurance Companies

Each group will analyze in depth one bank /

NBFC. Before presenting a view on thecompany, you should present a detailed

analysis of the business that the company is

in If the promoters are interested in a

significant manner in other activities, you will

need to very briefly talk about the otherimportant entities in/activities of the group

and discuss the overall strategy of the group/

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Section A: To Study and report on

Group 01: Axis Bank Group 02: Central Bank of India

Group 03: Dhanalakshmi Bank

Group 04: State Bank of Bikaner & Jaipur

Group 05: Punjab National Bank

Group 06: Yes Bank

Group 07: LIC Housing Finance

Group 08: IDFC

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Minimum aspects that will you focus on1. Analysis of the business that the company is in

2. Historical Background of the company/promoters/group

3. Performance over a period of 10 years; Ratio Analysis

4. Competition/Major players/Relative position of the company in

the sector/segment

5. Strategy6. Financial Strength/Capital Adequacy/Position vis--vis

regulatory norms

7. NPAs: Gross/Net/Recoveries/Restructured assets, if relevant

8. Technology9. Current development(s)/challenge(s); Future prospects

10. Share Price/Valuation

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Next class: A brief presentation

Make a oral 5 minutes presentation (1 person

only from each group) in the next class to talk

about what exactly you will cover in your

group presentations later. No PPTs requiredfor this purpose

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Guidelines for final presentations Two group (s) will present in each session. This will be an

exhaustive presentation of 30 minutes duration

All group members to present jointly. There will be an individualevaluation of each members presentation

Commencement of presentations begin in the 8thclass

Soft copy of all group PPTs to reach me in advance, by 5.30 pmone day before the 8thclass. Delay will attract a penalty

The order of presentations will be advised by the 6thclass so thatall group members remain present

Each of the group members must contribute to make the exerciseworthwhile for the group as well as the other students and allstudents must take interest in what the other groups present


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Happy Learning!

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Documents

CB Lecture I Section A