Banking Sector and
Opportunities in India
March 2004
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
2
Indian economy - Strong fundamentals
Forex
reserves

Exports

GDP growth

3
Ten year
average of 6.0%
US$ 50
billion in
FY2003
US$ 90 billion
Indian economy - Strong fundamentals
Interest rates

6.5% decline in
last five years
Short term
debt

0.8% of GDP
External debt

4
20% of GDP
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
5
7.4
Strong growth drivers…

Services



Information technology
Business process outsourcing
Financial services
Entertainment, media, travel & tourism

Industry
Strong domestic demand
 Improving competitiveness – lower interest
rates, increased productivity, better working
capital management, deleveraging
 Export thrust

Agriculture
6
Favourable climatic conditions with good
monsoon
 Modernisation of agriculture – scale and
farming methods
…underpinned by strong infrastructure
growth…

Roads
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

Industry
7
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
…though certain areas require close
attention

Power
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
Need for urban rejuvenation – housing, roads,
utilities
 Local bodies in several cities taking initiatives
in this area

Urban
infrastructure
8
Changing demographic profile
35 - 49 years
17%
> 50 years
14%
< 14 years
34%
15 - 35 years
35%
Source: Ministry of Home Affairs, Government of India
…high proportion of younger, working population driving
growth
9
Robust household savings pattern
23%
Household savings as a % of GDP
22.5%
17%
11%
10.1%
5%
1970-71
1985-86
Source: Economic Survey 2002-2003, Ministry of Finance
10
2000-01
2001-02
Large inflows of foreign currency
Gross forex inflows (US$ billion)
95.23
100
79.44
75
67.13
58.25
50
25
25.60
~
~
1990- 91
1997- 98
M erchand ize exp o rts
1999- 00
Services exp o rts
Source: Economic Survey 2002-2003, Ministry of Finance; RBI
11
2001- 02
2002- 03
NRI remittances etc
Strong external position
Forex reserves & external debt (US$ billion)
100
104.23
83.80
74.81
75
78.00
External debt
50
25
Gap
5.80
29.42
~
~
0
Forex reserves
1990-91
Source: RBI
12
1999-00
2002-03
Enhanced corporate competitiveness
Return on Equity (PAT / Equity)
1.6
21%
Asset turnover (Revenue /
Assets)
1.3
14%
0.9
7%
0.6
0.2
0%
1997-98 1998-99 1999-00 2000-01
1997-98
1998-99
1999-00
India
Shanghai A (Chinese cos. listed in Shanghai SE)
H-shares (Chinese cos. listed in HK SE)
Red chips (Chinese Govt. controlled cos. listed in HK SE)
Source: Deutsche Bank
13
2000-01
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
14
..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 worldclass efficiency
 2000: Articulation of international competitiveness
15
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.
16
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
17
A decade of change and evolution…
Pre-reform

Indian
economy

Extensive
regulation
Focus on
industrial
sector
The 1990s





Financial
sector

Highly
segmented
Public sector
dominance

Liberalisatio
n
Globalisation
Structural
change –
services
Opening up
of various
sub-sectors
Private
sector
participation
..financial sector mirroring
macro-economic change
18
Today




Resilient
industry
Buoyant
services
sector
Diversified
financial
groups
Globally
benchmarke
d
The banking sector today
Depth



Countrywide coverage
Large number of players
Increasingly
sophisticated financial
markets
Diversification



Technology


19
Increasing use of
technology in operations
Poised to expand and
deepen technology usage
Emergence of integrated
players
Diversifying capital
deployment
Leveraging synergies
Regulation


Robust regulatory system
aligned to international
standards
Efficient monetary
management
Sector snapshot
Size


Total assets of US$ 335 billion
Total deposits of US$ 279 billion

Over 290 scheduled banks
 Public sector: 27
 Private sector: new – 9; old – 24
 Foreign: 37
 Over 190 regional rural banks

Over 66,000 branches
 Public sector: 46,000
 Private sector: 5,500
 Foreign: 190
 Regional rural: 14,400
Number of
banks
Branch network
20
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
21
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

22
Proactive approach to resolution and increase in
provisioning levels in the system
…with significant success in
resolution
Gross NPAs as % of GDP
(%)
50.0%

Position much
stronger than other
Asian economies
43%
43%
40.0%
40%
30%
30.0%
20.0%
15%
10.0%
4%

Net NPL accretion
tapering off with
progress in asset
resolution and
increase in
provisioning levels
Source: E&Y, RBI
23
US$ bn
I nd i a
S. Ko re a
Jap an
M a l a y si a
T ha i l a nd
Chi na
0.0%
Net NPAs of banks & FIs
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1997
1998
1999
2000
2001
2002
A new orientation among banks…
Traditional/ public 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
24







New/ private sector
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
Technology- the ICICI Bank experience
25
Channel
Share of
transactions in
March 2000
Share of
transactions in
July 2003
Branches
94%
28%
ATMs
3%
51%
Internet
2%
10%
Call centre
1%
11%
Retail credit opportunity…
70
60
60
55
52
50
%
40
33
36
30
27
20
10
18
14
4
0
Korea
Taiwan
Consumer loans / GDP (% )
M alaysia
Thailand
India
Consumer loans / Total loans (% )
Source: SSKI, CLSA
..penetration currently low, with growth driven by
strong fundamentals…
26
Retail credit drivers
Changing
demographic
profile
Declining retail
loan interest
rates
 Middle
& high income households
increased from 11.6 million in fiscal
1995 to 25.7 million in fiscal 2002
 Interest
rates on residential
mortgages have reduced by 7%
over last 4 years
 Entry
Increasing
availabilit
y
27
of banks has led to increased
competition and coverage
 Increasing use of technology
further enhancing reach and
accessibility
Retail market size
18.0
Annual disbursement (US$ billion)
16.5
16.0
CAGR of 31%
14.0
12.9
12.0
9.4
10.0
8.0
7.3
6.0
4.0
2.0
0.0
1999-00
Housing finance
Commercial vehicle finance
Consumer durable finance
28
2000-01
Car finance
2-wheeler finance
2001-02
2002-03
Credit card spend
Personal loans
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


29
Sophisticated banking services
Scientific portfolio construction and management
Financial services potential: insurance
16.0%
14.0%
14.2%
Premium as a % of GDP
12.1%
12.0%
10.0%
9.0%
8.0%
6.0%
5.2%
4.0%
2.9%
2.7%
2.2%
Thailand
India
China
2.0%
0.0%
United
Kingdom
South
Korea
United
States
Malaysia
Life insurance
General insurance
Source: Swiss Re, Economic Research & Consulting (June 2002)
…the opening up of the sector provides a major
opportunity for financial services
players
30
The “international Indian”
opportunity
Area of large
NRI population
Areas of large
PIO population
Canada
(0.42 mn)
()
UK
(0.72 mn)
US
(1.2 mn)
GCC
West Indies
Number of
NRIs
Nepal
(4.1
mn)
Zimbabwe/
Uganda
South
Africa
Singapore/
Malaysia
(0.14 mn NRIs)
Fiji
Australia and New
Zealand
(< 0.1 mn)
…the Indian diaspora, the emergence of Indian
multinationals and resultant economic flows
have created a new opportunity
31
Agenda
Economic backdrop
Banking sector - overview & opportunities
In summary
32
In summary

The reform and liberalisation process has
transformed the Indian economy

Structural shift with service sector growth


Improved competitiveness in manufacturing after
intermediate period of restructuring &
rationalisation

Growing international linkages



33
Immense potential to leverage technology and
knowledge capital
Exports, manufacturing and distribution overseas
India as a manufacturing base
Globally benchmarked businesses, capable of
competing internationally
In summary (contd).



34
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
Thank you
35