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Report on Indian Banking Sector

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Report On Indian Banking SectorMay 2009by

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ContentsExecutive Summary 1 History of Banking Sector in India 1.1 History of SBI and Associates 1.2 History of Other (Nationalised, Private and Foreign) Banks 1.2.1 Pre Independence (1840 to 1947) 1.2.2 Post Independence to Nationalisation (1947 to 1969) 1.2.3 Nationalisation to Liberalisation (1969 to 1991) 1 5 5 6 6 7 7 8 11 14 16 16 17 18 20 21 21 23 23 24 24 26 27 28 30 30 31

REPORT ON INDIAN BANKING SECTOR

1.2.4 Liberalisation to current date (1991 to 2008) 1.3 Various Banking Groups 1.4 Regional Distribution of Branches 2 Role of Reserve Bank of India 2.1 RBI monetary and Credit Policy 2.2 Development in FY09 and role of RBI 2.3 Liquidity Adjustment Facility (LAF) 2.4 Cash Reserve Ratio (CRR) 3 Deposits 3.1 Sources of Funds for Banks 3.2 Distribution of Deposits of Banks 3.2.1 Distribution of Deposits by population 3.2.2 Distribution of Deposits by Ownership 3.3 Deposits mobilisation from household Sector 3.4 Type of Deposits 3.4.1 CASA Deposits 3.4.2 Term Deposits 3.5 Bank Group-wise Deposits Performance 3.5.1 SBI and Associates 3.5.2 Nationalised Banksi

3.5.3 Private Sector Banks 3.5.4 Foreign Banks 4 Advances 4.1 Total Advances and growth for SCBs 4.2 Credit offtake in FY09 4.3 Sectoral Bank Credit

33 34 36 36 37 39 42 43 44 44 45 46 46 48 49 51 52 54 54 57 59 62 62 63 63 64 67 67

4.4 Retail loans 4.5 Lending to Sensitive Sector 4.6 Priority Sector lending

REPORT ON INDIAN BANKING SECTOR

4.6.1 Priority Sector Lending for PSU and Private Banks 4.6.2 Priority Sector Lending for Foreign Banks 4.7 Bank Group-wise Performance 4.7.1 SBI and Associates 4.7.2 Nationalised Banks 4.7.3 Private Sector Banks 4.7..4 Foreign Banks 4.8 Bank group-wise deposit and advance maturity matching 5 Investments 5.1 SLR Investments 5.2 Non SLR Investments 5.3 Bank group-wise Credit and Investment to deposit ratios 6 Total Income 6.1 Interest on Advances and Investments 6.2 Other Income 6.2.1 Core Fee Income 6.2.2 Non-fee Income 7 Total Expenses 7.1 Operating Expenses

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7.1.1 Staff Cost 7.1.2 Non-staff Cost 8 Spread 8.1 Spread for SCBs 8.2 Bank Group-Wise Performance 9 Profitability 9.1 Profitability for SCBs 9.2 Bank Group-Wise Performance 9.2.1 SBI and Associates

69 73 75 75 76 80 80 81 81 82 83 84 85 86 89 93 94 97 98 99 100 101 102 105 109 112 112 122

REPORT ON INDIAN BANKING SECTOR

9.2.2 Nationalised Banks 9.2.3 Private Sector Banks 9.2.4 Foreign Banks 10 Non-Performing Assets (NPAs) 10.1 Trend in NPAs for SCBs 10.2 NPAs, Provisions and write back for banking groups 10.3 Sector-wise NPA Break-up 10.4 Recovery of NPAs 10.5 Bank Group-wise Performance 10.5.1 PSU Banks 10.5.2 Old Private Sector Banks 10.5.3 New Private Sector Banks 10.5.4 Foreign Banks 11 Capital Adequacy Ratio (CAR) 12 Consolidation: Is it imminent for the Indian banking sector?? 13 FY09 Result Analysis

14 Outlook on Indian Banking Industry 14.1 Advances 14.2 Deposits

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14.3 Investments 14.4 Core Fee Income 14.5 Net Interest Margins (NIMs) 14.6 Non-Performing Assets (NPAs) and Provisioning 14.6.1 Restructuring of Assets 14.7 Profitability 15 Ranking of Individual Banks 16 Players 16.1 Axis Bank

128 131 132 139 145 148 149 182 182 184 186 188 190 192 194 196 198 200 202

REPORT ON INDIAN BANKING SECTOR

16.2 Bank of Baroda 16.3 Bank of india 16.4 Canara Bank 16.5 Central Bank of india 16.6 HDFC Bank 16.7 ICICI Bank 16.8 IDBI Bank 16.10 State bank of India 16.11 Syndicate Bank 16.12 Union Bank of India

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Figure Index1.1 1.2 1.3 1.4 1.5 2.1 No. of Scheduled Commercial Banks in India Classification of banks into various groups No. of offices of commercial banks(both scheduled and non-scheduled including RRBs) over the years Regional distribution of branches for schedule commercial banks as on March 31, 2008 Distribution of branches among regions for various bank groups Changes in policy rate in FY09 to check inflation Trend in repo and reverse repo rates over the years Spread between Repo and Reverse repo rates Large LAF injection during Jul to Oct08 and subsequent absorption from Dec08 to Mar09s Changes in CRR for Macro economic objective Break-up of total resources of SCBs as on 31st March 2008 Deposits as a Percentage of total resources for various bank groups Total deposits and y-o-y growth in deposits of SCBs Total deposits and y-o-y growth in deposits of SCBs (incl. RRBs) for FY09 Deposits as a percentage of GDP over the years Percentage Distribution of total deposits by population Break-up of deposits by ownership Break-up of financial saving of household sector Movement in interest rates on saving instruments Trend in small saving mobilisation Types of deposits Proportion of low cost deposits in total deposits of SCBs Share in incremental CASA deposits by various bank groups Break-up of term deposits by ownership Trend in spread between various maturities of deposits for PSBs 10 11 13 14 15 17 18 19 19 20 21 21 22 22 23 23 24 25 25 25 26 27 28 28 29

REPORT ON INDIAN BANKING SECTOR

2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15

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3.16 3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24

Break-up of term deposits into short-term and long-term deposits Total deposits and y-o-y growth in deposits of SBI and Associates Break-up of deposits and CASA ratio of SBI and Associates Total deposits and y-o-y growth in deposits of Nationalised banks Break-up of deposits and CASA ratio of Nationalised Banks Total deposits and y-o-y growth in deposits of Private Sector Banks Break-up of deposits and CASA of Private Sector Banks Total deposits and y-o-y growth in deposits of Foreign Banks Break-up of deposits and CASA of Foreign Banks Total advances and y-o-y growth in advances of SCBs Type-wise advances Break-up for SCBs Security-wise break-up of total advances for SCBs Total Credit and y-o-y growth in credit for SCBs (incl. RRBs) for FY09 Break-up of bank credit into various sectors Lending to sensitive sectors for FY08 Bank group-wise lending to the sensitive sector (as a % of total advances) Priority Sector lending for PSBs and Private Sector Banks (as a % of total advances) Priority Sector lending for Foreign Banks (as a % of total Advances) Total advances and y-o-y growth in advances of SBI and Associates Type-wise break-up of total advances for SBI and associates Security-wise break-up of total advances for SBI and associates Total advances and y-o-y growth in advances of Nationalised Banks Type-wise break-up of total advances for Nationalised Banks Security-wise break-up of total advances for Nationalised Banks Total advances and y-o-y growth in advances of Private Sector Banks Type-wise break-up of advances for Private Sector Banks Security-wise break-up of total advances for Private Sector Banks

29 30 31 31 32 33 33 34 35 36 36 37 37 39 43 43 44 45 46 47 47 48 48 49 49 50 50

REPORT ON INDIAN BANKING SECTOR

4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18

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4.19 4.20 4.21 5.1 5.2 5.3 5.4 5.5 5.6

Total advances and y-o-y growth in advances of Foreign Banks Type-wise break-up of total advances for Foreign Banks Security-wise break-up of total advances for Foreign Banks Break-up of Investments SLR Investment and Requirement by SCBs SLR Investments by SCBs over the years Mismatch between the CAGR in deposits and advances of SCBs Credit-deposit and investment-deposit ratio of SCBs Composition of Non-SLR Investments over the years for SCBs Credit, Investment to deposit ratio for SBI and Associates Credit, Investment to deposit ratio for Nationalised Banks Credit, Investment to deposit ratio for Private Sector Banks Credit, Investment to deposit ratio for Foreign Banks Break-up of total income Break-up of Interest income of SCBs Trend in profit on sale/revaluation of Investments and 10 year bond yield Break-up of total expenses Operating cost as percentage of total assets for SCBs Operating cost a percentage of total assets for PSBs Operating cost a percentage of total assets for Private and Foreign Banks Declining trend in staff cost as a percentage of operating cost for SCBs Average business per unit of staff cost for various bank groups Staff cost as a percentage of operating cost for various bank groups Average business per unit of staff cost for PSBs Average business per unit of staff cost for Private and Foreign Banks Net Interest Margin for SCBs (in %) Net Interest Margin for PSBs (in %) Net Interest Margin for Private and Foreign Banks (in %)

51 51 52 54 55 55 56 57 58 59 59 60 60 62 62 65 67 67 68 69 69 70 71 72 72 76 77 79

REPORT ON INDIAN BANKING SECTOR

5.7 5.8 5.9 5.10 6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 8.1 8.2 8.3

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10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8

Classification of Asset into Standard and Non-performing Trend in Gross NPAs to Gross Advances of SCBs Trend in Net NPAs to Net Advances of SCBs Addition and reduction in gross NPAs for SCBs over the years Addition and reduction in gross NPAs for PSBs Addition and reduction in gross NPAs for Private and foreign banks Share of priority sector NPAs in total NPAs Share of advances of PSBs to total banking gross advances and PSBs gross NPAs to total banking gross NPAs Share of advances of PSBs to total banking net advances and PSBs net NPAs to total banking net NPAs Share of Old Private Sector Banks to the total banking gross advances and Old Private Sector Banks gross NPAs to total banking gross NPAs Share of Old Private Sector Banks to the total banking net advances and Old Private Sector Banks net NPAs to total banking net NPAs Share of New Private Sector Banks to the total banking gross advances and New Private Sector Banks gross NPAs to total banking gross NPAs Share of New Private Sector Banks to the total banking net advances and New Private Sector Banks net NPAs to total banking net NPAs Share of Foreign Banks to the total banking gross advances and Foreign Banks gross NPAs to total banking gross NPAs Share of Foreign Banks to the total banking net advances and Foreign Banks net NPAs to total banking net NPAs Trend in total CRAR, Tier 1 and Tier 2 for SCBs Industrial production y-o-y growth (in %) GDP growth and Bank credit growth moves in tandem Bank credit as a percentage to GDP Share of various sectors in GDP Sharp and prompt cut in CRR than earlier slowdowns Projected sector-wise break-up of bank credit from FY09 to FY11 Average growth and y-o-y growth in credit for SCBs from FY1980 to FY2008

85 86 87 89 89 90 97 98 98 99 99 100 100 101 101 102 112 115 117 117 119 120 122

REPORT ON INDIAN BANKING SECTOR

10.9 10.10 10.11 10.12 10.13 10.14 10.15 11.1 14.1 14.2 14.3 14.4 14.5 14.6 14.7

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14.8 14.9 14.10 14.11 14.12 14.13 14.14 14.15

Average growth and y-o-y growth in deposit for SCBs from FY1980 to FY2008 Difference between credit and deposit growth over the years Share of demand deposits in incremental total deposits for SCBs Share of saving deposits in incremental total deposits for SCBs Trend in 10 years G-sec yield Trend in SLR Investment of SCBs Benchmark Prime Lending Rate (BPLR - maximum) over the years Deposit rate of for more than 1 year maturity over the years Spread between BPLR - maximum and deposits rate for more than 1 year maturity Net Interest Margin (NIM) for SCBs over the years Movements in interest rate on small saving instruments and bank deposit Trend in BPLR and saving deposit rates Trend in the spread between BPLR and saving deposit rates Trend Repo and CRR for FY09 Share of small scale credit in industrial credit over the years Ranking Parameter

123 123 124 126 129 130 132 132 134 134 136 137 137 138 142 149

REPORT ON INDIAN BANKING SECTOR

14.16 14.17 14.18 14.19 14.20 14.21 14.22 15.1

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Table Index1.1 3.1 3.2 3.3 3.4 4.1 4.2 List of banks under various banking groups Interest spreads between short-term and long-term deposits as on December 2008 (in %) CASA of Nationalised Banks (in %) CASA of Private Sector Banks (in %) CASA of Foreign Banks (in %) Bank group-wise credit offtake for FY08 and FY09 Break-up of bank credit into various sectors Provisional break-up of non-food credit for FY09 Share of various sector in incremental non-food credit for FY09 Provisional break-up of industrial credit for FY09 Share of various sector in incremental industrial credit for FY09 Bank group-wise provisional sectoral bank credit growth for FY09 Break-up of retail credit for SCBs Break-up of Priority Sector Lending for PSBs and Private Sector Banks (Rs cr) Break-up of Priority Sector Lending for Foreign banks (Rs cr) Maturity-wise break-up of deposits for various bank groups Maturity-wise break-up of advances for various bank groups Maturity-mismatch between deposits and advances Proportion of other income in total income for various bank groups Trend in other income (excluding Profit on Sale/revaluation of investments and fixed assets) (Rs cr) Bank group-wise share in interest and fee income for FY08 Profit on sale and revaluation of investment for various bank groups Trend in operating cost excluding staff cost Trend in advertising and publicity cost Spread of the SCBs over the years (in %) 12 30 32 34 35 38 39 40 40 41 41 42 42 45 46 52 53 53 63 64 64 66 73 73 75

REPORT ON INDIAN BANKING SECTOR

4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 6.1 6.2 6.3 6.4 7.1 7.2 8.1

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8.2 8.3 8.4 8.5 9.1 9.2 9.3 9.4 9.5

Spread of the PSBs over the years (in %) Spread of Old Private Sector Banks over the years (in %) Spread of New Private Sector Banks over the years (in %) Spread of Foreign Banks over the years (in %) Statement of Profit for SCBs Statement of Profit for SBI and Associates Statement of Profit for Nationalised Banks Statement of Profit for Private Sector Banks Statement of Profit for Foreign Banks Provisioning Requirement for non-performing asset depending upon the classification category Gross and Net NPAs of SCBs (Rs cr and in %) Gross and Net NPAs of various bank groups (Rs cr and in %) Distribution of banks by the ratio of Net NPAs to Net Advances Sector-wise classification of NPAs for SCBs and PSBs Sector-wise classification of NPAs for Private Sector Banks Financial Assets Securitised by Securitisation and reconstruction companies NPAs recovered through various Channels Recovery of direct agriculture advances Resources raised by banks over the years (Rs cr) Bank group-wise trend in CRAR ratio over the years (in %) Distribution of banks by CRAR List of banks amalgamated since nationalization of banks in India 1969 List of countries and no. of banks operating within a country Fund infusion by government into PSBs Government holdings in PSBs Profit and Loss account for PSBs Profit and Loss account for Private Sector Banks

76 77 78 78 80 81 82 83 84 86 87 91 93 93 94 95 96 96 103 103 104 105 106 107 107 109 110

REPORT ON INDIAN BANKING SECTOR

10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 11.1 11.2 11.3 12.1 12.2 12.3 12.4 13.1 13.2

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13.3 13.4 14.1 14.2 14.3 14.4 14.5 14.6

CASA ratio various banks in FY 08 & FY 09 Restructured Assets in Rs. cr and in % of total Advances Sector-wise and Used based growth in industrial production GDP growth rate across the country GDP growth and bank credit growth for block of years Projected credit growth for various banking group (%) Projected credit growth for various banking group (Rs cr) thus changing share in total credit in favour of PSU banks Average growth and standard deviation in deposit and credit growth from FY1980 to FY2008 (in %) Trend in incremental total and demand deposits for FY09 (Rs cr) Trend in incremental total and demand deposits over the years (Rs cr) Deposit growth for various bank groups (in %) Projected deposit growth for various banking group (%) Projected deposit growth for various banking group (Rs cr) thus changing the share in total deposits in favour of PSBs Profit on sale/revaluation of investments for SCBs Trend in Core fee income growth and projection Cut in BPLR and deposit rates by various banks Speeding up of sub-PLR lending by PSU banks at a lower interest rate to following sectors Projection for NPAs for various bank groups Sector-wise exposure of industrial credit Dependence of Indian corporates on borrowed funds Break-up of bank retail credit for SCBs and expected slippages Calculation of no. banks included in Ranking Analysis

111 111 113 114 116 120 120 121 122 125 125 126 127 127 127 128 131 133 135 139 140 141 143 150

REPORT ON INDIAN BANKING SECTOR

14.7 14.8 14.9 14.10 14.11 14.12 14.13 14.14 14.15 14.16 14.17 14.18 14.19 14.20 14.21 15.1

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AnnexuresOverall Ranking based on various parameters Ranking based on Size Ranking based on no. of branches Ranking based on total business Ranking based on Net profit Ranking based on Profitability Ranking based on Net Interest Margin 151 153 155 156 157 158 160 161 162 163 164 165 167 168 169 170 171 172 174 175 176 177 179 180 181

REPORT ON INDIAN BANKING SECTOR

Ranking based on Return on Assets (ROA) Ranking based on Return on Equity (ROE) Ranking based on CASA Ratio Ranking based on Core Spread Ranking based on Quality Ranking based on Capital Adequacy Ratio Ranking based on Tier 1 Capital Adequacy Ratio Ranking based on Gross NPAs to Gross Advances Ranking based on Net NPAs to Net Advances Ranking based on proportion of Unsecured advances in total advances Ranking based on Growth Ranking based on CAGR in Advances Ranking based on CAGR in deposits Ranking based on CAGR in Net Profit Ranking based Qualitative Factors Ranking based on business per branch Ranking based on business per employee Ranking based on Profit per employee

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Executive SummaryIndian Banking Sector is dominated by Public Sector Banks (PSBs) which accounted for 72.6% of total advances of all Scheduled Commercial Banks excluding RRBs (SCBs) on 31st March 2008. PSBs have rapidly expanded their foot prints after nationalisation of banks in India. Although there is a restrictive entry/expansion for private sector banks and foreign banks in India, these banks have increased their presence and business over last 5 years. SCBs in India have shown an impressive growth in deposits mobilisation over the years (Total deposit grown at CAGR of 19.6% from FY03-FY08 and 17.6% from FY88 to FY08). Among the group of banks, private sector and foreign banks deposits have grown at a higher CAGR of 26.7% and 22.5%, respectively from FY03 to FY08. Deposit as a percentage to GDP has increased steadily from 8.7% in FY51 to 67.8% in FY08 mainly due to rapid expansion by PSBs, entry of private and foreign banks and growing education among people with respect to saving and banking operations.

REPORT ON INDIAN BANKING SECTOR

Unlike their western counterparts which rely heavily on bulk deposits, banks in India rely on household sector savings as their primary source of deposits. Deposits from household sector constituted 57.4% of the total banking deposits in FY07 (Individual and HUF share in total deposits was 44.5%). This distinct feature of the Indian banks makes them less prone to financial crisis, as was seen in the western world in mid FY09. Till FY06, the CASA ratios of banks have been increasing or have remained constant, till FY06. However, in FY07 and FY08, the CASA ratio for most of the bank groups has declined mainly due to increased focused on term deposits to fund the high credit growth. Growth in term deposits of SCBs was at 28.9% and 24.5% in FY07 and FY08 as compared to 17.7% and 20.6% growth in CASA deposits in the same period. Banking sector has seen the tremendous growth in credit off take in last five years (CAGR in advances for SCBs was at 27.4% from FY03 to FY08). Sector recorded credit growth of 33.3% in FY05 which was highest in last 2 and half decades and credit growth in excess of 30% for three consecutive years from FY04 to FY07, which is best in the banking sector so far. Industrial credit accounted for 38.8% of total bank credit followed by services at 24.4%, retail loans at 22.5% and agriculture & food credit at 14.2% in FY08. Within the industrial credit, infrastructure accounts for highest share at 23.2%. (9% total bank credit). Unsecured bank credit as percentage to total credit was at 23.3% in FY08 which has increased from 10.9% in FY2000. Share of unsecured credit is highest for foreign banks at 52.8% of total credit. Total lending to sensitive sector (real estate accounts for 87.4% of sensitive sector lending) has grown at a CAGR of 46.1% during FY05 to FY08. As against this, the CAGR in total advances was at 29.1%. Among the group of banks, PSBs have least exposure to sensitive sector lending at 17.1% of total advances, followed by old private sector banks at 18.9%, foreign banks at 26.5% and new private sector banks at 34.1%.

1

Due to rapid growth in advances, proportion of interest on advances in total interest earned of the banks has increased to 71.4% in FY08 as compared to 48.2% in FY01. Proportion of interest on investment has declined. Increase in economic activity and robust primary and secondary markets have helped the banks to garner larger increase in their fee based incomes. CAGR in core fee income for SCBs over FY03 to FY08 was at 24.0% (private sector banks 34.6% and foreign banks 31%). Operating cost as a percentage to total assets for SCBs has been declining over the years. Operating cost was at 2.84% of total assets in FY01 which decreased to 1.98% of the total assets in FY08. Staff cost constitute the major portion of the total operating cost of the bank. It constituted 51.6% of total operating cost in FY08 as compared to 68.0% in FY01 for SCBs. Average business per unit of staff cost was highest for foreign banks at Rs183.3, followed by private banks at 151.8, nationalised banks at 140.4 and SBI and associates at 120.6. Spread (Return on funds minus cost of the funds) for SCBs decreased from 3.3% in FY06 to 3.0% in FY08, in spite of rapid growth in the credit off take mainly due to higher interest offered by banks on short-term deposits to attract high volume of deposits. The spread is lowest for PSBs 2.7%, followed by old private sector banks, new private sector banks and foreign banks at 2.9%, 3.2% and 4.8% respectively. Net profit for SCBs increased at a CAGR of 20.2% from FY03 to FY08. Among the group of banks, CAGR in profit of SBI and associates was lowest at 14.8% followed by nationalised banks at 17.7%. CAGR in profit of foreign banks was highest at 29.5% and private banks at 26.7%. The reason attributed to this could be the already established presence for PSBs and low base effect of private and foreign banks. A significant improvement in recovering the NPAs combined with a sharp increase in gross advances for SCBs led to a sharp decline in the ratio of gross NPAs to gross advances to 2.3% in FY08 from 12.7% in FY2000. Net NPAs to Net advances declined to 1.0% in FY08 as compared to 6.8% in FY2000. Excellent performance of high deposit and credit growth, all time low level NPAs witnessed in the period between FY04 to FY08 which is the best in banking industry so far is difficult to repeat. The Indian economy is witnessing moderation in growth which will lead to slowing of credit offtake, moderate growth in deposits and increase in slippages. Bank credit to grow at a CAGR of 17-19% from FY09 to FY11 CARE Research expects the credit offtake to slow down in next two years. Fresh credit demand will be hit by slower economic growth due to both recession in developed economies and sluggish domestic demand. We estimate growth in credit offtake to be around 15-17% for FY10 and 1921% for FY11 for SCBs. Going forward, CARE Research feels that the growth in bank credit offtake would be fuelled by growth in lending to the infrastructure sector (share of infrastructure in total bank credit will increase from 9.0% in FY08 to 12% in FY11). Although slower economic growth will delay capex cycle and overall demand for credit by corporates, incremental offtake from them will remain high for banks due to lack of funds from non banking channels. We project flat to declining growth for personal loans and credit card outstandings and moderate growth in home loans (share of retail credit will decline from 22.5% in FY08 to 18% in FY11).

REPORT ON INDIAN BANKING SECTOR

2

PSBs credit growth will be higher than industry average in FY10 mainly due to government push for cheap credit and their stronghold in lending to corporates where credit offtake will not see as big a dent as expected in retail credit. In our view, some of the private sector and foreign banks will focus more on restructuring their balance sheets and the loan portfolios which are presently highly skewed towards retail credit. We may see the balance sheet size of some such players remaining stagnant or marginally declining in FY10. Credit growth for PSBs will be around 1819% while private and foreign banks credit will grow at 12-14% and 6-8% respectively in FY10. Deposits to grow at a CAGR of 18-20% from FY09 to FY11 Banks have since FY2000 seen the wide mismatch with credit growth surpassing deposit growth. However, we feel that deposit growth will be greater than or equal to credit growth in the next two years. Keeping in mind our projection of credit growth, we expect the deposit growth rate to hover around 18% to 20% in FY10 & FY11.

REPORT ON INDIAN BANKING SECTOR

Incremental current account deposits will be lower in next two years as sluggish business coupled with shortage of funds compels corporates to curtail the idle funds kept in banking system. With slower economic growth the demand deposits will contribute only 7-8% as seen in 1992-93, 199798, 2001-03. Saving deposits/ term deposit mobilization may be less affected due to relatively declining risk appetite of investors and alternative investment options like equity investments are turning less lucrative in the present scenario. Fleet of deposits will continue in favour of PSBs as seen in H2FY09. Global financial crisis have put the expansion plan of foreign banks in India on a hold. Deposit growth for PSBs will be around 20-21% while private and foreign banks deposits will grow at 12-14% and 7-9% respectively in FY10. Lower Treasury gains We do not expect the treasury gains of FY02-FY05 (constituted around ~7-10% of total income) period to be repeated in the years to come. Most of the treasury gains were booked in Q3FY09 due to sharp fall in G-sec yield (declined from 9.5% in Jul08 to 5.1% in Jan08 i.e. in 6 months time). We expect the bond yields to remain firm due to higher borrowing by government in next two years. Also lesser excess investment in SLR portfolio will cap the treasury gains. NIMs under pressure Slower economic growth and its adverse effects on incremental credit demand have led banks to reduce loan yields ahead of deposit rates. Lagged effect of deposit rate cut is expected to trim the NIM in FY10. Spread between the Benchmark prime lending rate and deposits rate of more than one year maturity touched its historic low of 3.0% in Nov08 and is currently hovering at around 3.5% which will also translate into lower NIMs for banks. We believe that the deposit rates offer little scope for further reduction. However, cut in policy rates (CRR and repo by 400bps and SLR by 100bps) have decreased the cost of the fund for the banks, which is positive for protecting the margins for the banks. Lagging effect will not be present in FY11 and the sector will see better NIMs as compared to FY10.

3

Gross NPAs to gross advances to touch 4.3% by FY11 We believe that gross NPA to gross advances to increase from 2.3% in FY08 to 4.25-4.50% by the end of FY11 and Net NPA to Net advances to increase from current 1% to 2.7-3.0% by the end of FY11. Lower proportion of lending to stressed sectors, comparatively lower corporate leverage, and better risk management will result into lower NPAs in current asset cycle as compared to past. (FY2000 gross NPA to gross advance were in excess of 15%) Flat to marginal growth in net profit in FY10 Reduced NIMs and slower growth in advances as compared to last year will reduce the growth in Net interest income (NII). Lower treasury gains and lower core income due to slower economic activity will curtail growth in other income significantly. Higher provisioning for NPAs and increased wages due to revision for PSBs will have negative impact on profitability. CARE Research believes flat to marginally positive growth in net profit for banking industry in FY10 and moderate growth of 8-10% for FY11.

REPORT ON INDIAN BANKING SECTOR

4

Chapter 1 History of banking sector in IndiaOrigination of banking in India dates to the last decades of the 18th century with the General Bank of India, which started in 1786, and the Bank of Hindustan (both of which are now defunct.) The oldest bank in existence in India is the State Bank of India (SBI), the largest commercial bank in the country that traces its origins back to June 1806. The history of the banking sector can be better understood by dividing it into. 1. History of SBI and Associates 2. History of other banks in India (includes Nationalised Banks, Private Banks and Foreign Banks)

1.1 History of SBI and AssociatesThe oldest bank in existence in India is the SBI, which originated as the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal in 1809.

REPORT ON INDIAN BANKING SECTOR

Bank of Bengal was one of the three presidency banks, the other two being the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843), all three of which were established under charters from the British East India Company. For many years, the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India which started as private shareholders banks, mostly Europeans shareholders. State Bank of India Act was established in 1955. Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India (RBI), which is India's central bank, acquired a controlling interest (60%) in the Imperial Bank of India. On April 30, 1955 the Imperial Bank of India was renamed as the State Bank of India. In 2008, the Government took over the stake held by RBI. In 1959, the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the SBI to take over eight former State-associated banks as its subsidiaries. 1. State Bank of Indore 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Mysore 5. State Bank of Patiala 6. State Bank of Travancore 7. State Bank of Saurashtra Later on in September 2008, State Bank of Saurashtra was merged with the parent bank SBI.

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1.2 History of other banks in India (includes Nationalised Banks, Private Banks and Foreign Banks)We further divide history of other banks in India into following groups. No 1 2 3 4 Year 1840 to 1947 1947 to 1969 1969 to 1991 1991 2008 Period Pre Independence Post Independence to Nationalisation Nationalisation to Liberalisation Characterised by Small size, less regulated and bank failures Slower growth, private sector dominance and start of regulation Nationalised of banks by government, high regulation, secular growth in business and expansion & rising inefficiencies De-regulation, entry of private and foreign banks and technological advancement

to Liberalisation to current date

REPORT ON INDIAN BANKING SECTOR

1.2.1 Pre Independence (1840 to 1947)Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. The second entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to form banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for the Indian banking industry. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Year 1913 1914 1915 1916 1917 1918 No. of banks failed 12 42 11 13 9 7

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1.2.2 Post Independence to Nationalisation (1947 to 1969)The Government of India (GOI) initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps taken to regulate banking include: In 1948, the RBI, India's central banking authority, was nationalised, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the RBI "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

1.2.3 Nationalisation to liberalisation (1969 to 1991)

REPORT ON INDIAN BANKING SECTOR

By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had been ensued about the possibility to nationalise the banking industry. On July 19, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi by whom 14 major commercial banks in the country were nationalised. The second phase of nationalisation of the Indian Banking Sector was carried out in 1980 with seven more banks being nationalised. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. A number of questions were raised regarding the procedure adopted by the then government in suddenly going for the nationalisation of banks. There was no official report, which had gathered expert opinions and evidence on the need either for social control or for nationalisation of banks. The chiefs of private banks had not been consulted as to the need and implications of the proposed measure. Arguments of government for nationalisation were as follows Before the nationalisation, the privately-owned banks were operating on the criteria of profit maximisation and lesser emphasis was placed on the development of rural areas. Credit and deposits base was confined to large corporates and wealthy depositors. The nationalised banking set-up would vigorously pursue expansion programmes to cover rural areas, smaller towns and lower income groups. To pay special attention to inter-sectoral balances and balanced regional development. To take away the stranglehold of the few industrial houses on credit and reduce their control over the community's resources.7

Ensure stability in the functioning of the credit institutions and inspire more confidence among the depositors. Encourage healthy competition between large and small industrial houses. In summary, the following are the steps taken by the Government of India to regulate the banking institutions in the country: 1949: Enactment of Banking Regulation Act. 1955: Nationalisation of SBI. 1959: Nationalisation of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalisation of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalisation of seven banks with deposits over Rs.200 crores.

REPORT ON INDIAN BANKING SECTOR

1.2.4 Liberalisation to current date (1991 to 2008)The policies of nationalisation and social reforms that were supposed to promote a more equal distribution of funds, also led to inefficiencies in the Indian banking system. To alleviate the negative effects, some reforms were enacted in the second half of the 1980s. The main policy changes were the introduction of Treasury Bills, the creation of money markets, and a partial deregulation of interest rates. Despite the reform attempts, the Indian banking sector had like the overall economy severe structural problems by the end of the 1980s. By international standards, the Indian banks were extremely unprofitable despite a rapid growth in deposits. In 1991, GOI liberalised the economy. The objective of banking sector reforms was in line with the overall goals of the 1991 economic reforms of opening the economy. Narsimhan Rao government embarked on a policy of liberalisation by licensing a small number of private banks. These new banks came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalised the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. Interest rate liberalisation 1. The interest rate structure was too complex with both lending and deposit rates set by the RBI. The regulation of lending rate for loans in excess of rupees two lakhs, which accounted for over 90% of total advances, was abolished in October 1994. 2. Banks were allowed to decide and announce Prime Lending Rate (PLR), after taking into account the cost of the funds and transaction costs.

8

3. From October 1995, regulations relating to fixing of rate of interest for term

deposits with a maturity of more than two years were liberalised. The minimum maturity was subsequently lowered from two years to 15 days in 1998. 4. Since 2004, the RBI is only regulating and prescribing deposit rates for the savings deposits and deposits from Non resident Indians For all other deposits above 15 days, banks are free to set their own interest rates. Privatisation 1. In the year 1994, Private sector banks were permitted to commence operations in India. Banks were allowed to raise the capital to meet the capital adequacy norms through capital market route, provided the government holding does not fall below 51%. 2. FDI/FII limits on investments in shares of private sector banks were raised to 51% in 2001. 3. In 2004, FDI/FII limits on investments in shares of private sector banks was further relaxed and increased to 74%, with no one FII holding more than 5% stake without the consent of RBI and FII limit in PSBs was capped at 20%. 4. Foreign banks with restriction on branch opening and operation were allowed to enter on selective basis in 2004. More liberal entry for foreign banks was proposed after April 2009. Entry of foreign banks RBI announced its policy decision on March 2004 for gradual entry of foreign banks in India in synchronised manner in two phases. In order to allow the Indian Banks sufficient time to prepare for global competition, initially the entry of foreign banks in first phase was more restrictive. Phase 1 (March 2005 to March 2009) 1. Foreign banks were allowed to establish presence in India and were given an option to operate through branch presence or set up a 100% Wholly Owned Subsidiary (WOS). 2. Foreign banks were allowed to open 12 branches a year (the limit was in line with World Trade Organisation (WTO) commitment). Branch licensing procedure was kept same as applicable for private banks. More liberal branch opening policy was adopted in under-banked areas. 3. The limit of 12 branches a year was raised to 20 branches for foreign banks in March 2006. 4. Acquisition of shares in Indian banks by foreign banks was permitted for banks which are identified by RBI for restructuring.

REPORT ON INDIAN BANKING SECTOR

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Phase 2 (April 2009 onwards) 1. Branch expansion: - After reviewing the experience of the first phase, RBI has proposed to remove the restriction on branch expansion and limited excess to Indian market and treating them on par with domestic banks to the extent appropriate. 2. Listing of foreign banks: - After completion of the proposed year of operation in India, WOS of foreign banks will be allowed to list and dilute the stake in the manner that at least of 26% of the paid-up capital remains with the resident Indian. 3. Mergers and acquisitions: - After a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatory approvals and such conditions as may be prescribed, to enter into merger and acquisition transactions with any private sector bank in India, subject to the overall investment limit of 74 per cent.

REPORT ON INDIAN BANKING SECTOR

No. of banks in India have declined over the past 10 yearsAs depicted in the following graph, the number of SCBs has been declining over the years from around 300 banks in FY2000 to 165 banks as on date. Several small regional rural banks have been merged with their parent banks or have closed down.

Fig 1.1 No. of Scheduled Commercial Banks in India325 275 225 175 125 75 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Oct-08

Source: RBI and CARE Research

No. of reporting SCBs

10

1.3 Various Banking GroupsFig 1.2 Classification of banks into various groupsBanks in India

Scheduled Commercial Banks

Unscheduled Commercial Banks

REPORT ON INDIAN BANKING SECTOR

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

State Bank of India and Associates

Nationalised Banks

Source: CARE Research

The commercial banking structure in India consists of: Scheduled Commercial Banks in India Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The scheduled commercial banks in India comprise of SBI and its associates, nationalised banks, foreign banks, private sector banks, co-operative banks and regional rural banks. Non-scheduled bank in India means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank. SCBs in India can be divided into five groups. SBI and its associates Nationalised banks Private sector banks Foreign banks.Regional Rural Banks (RRBs)

We have done the analysis of first four banking groups and excluded RRBs in our report.

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Table 1.1 List of banks under various banking groups SBI and Associates1. SBI 2. State Bank of Bikaner and Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 5. State Bank of Mysore 6. State Bank of Patiala 7. State Bank of Travancore

Nationalised Banks1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8. Corporation Bank 9. Dena Bank 10. IDBI Bank Ltd. 11. Indian Bank 12. Indian Overseas Bank 13. Oriental Bank of Commerce 14. Punjab National Bank 15. Punjab & Sind Bank 16. Syndicate Bank 17. Union Bank of India 18. United Bank of India 19. UCO Bank 20. Vijaya Bank

REPORT ON INDIAN BANKING SECTOR

Private Sector Banks1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Axis Bank Bank Of Rajasthan Catholic Syrian Bank City Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank ICICI Bank IndusInd Bank ING Vysya Bank 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank Ratnakar Bank SBI Commercial & International Bank South Indian Bank Tamilnad Mercantile Bank Yes Bank

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Foreign Banks1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. ABN AMRO Bank Abu Dhabi Commercial Bank Antwerp Diamond Bank Arab Bangladesh Bank Bank Of America Bank Of Bahrain & Kuwait Bank Of Ceylon Bank Of Nova Scotia Bank Of Tokyo-Mitsubishi-UFI Barclays Bank BNP Paribas Calyon Bank Chinatrust Commercial Bank Citibank 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. DBS Bank Deutsche Bank HSBC JP Morgan Chase Bank Krung Thai Bank Mashreq Bank Mizuho Corporate Bank Oman International Bank Shinhan Bank Societe Generale Sonali Bank Standard Chartered Bank State Bank of Mauritius

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

Fig 1.3 No. of offices of commercial banks(both scheduled and non-scheduled including RRBs) over the years80000 75000 70000 65000 60000 55000 50000 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

No. of OfficesSource: RBI and CARE Research

Growth % (y-o-y)

The number of offices (branches plus administrative offices) for all SCBs increased from 64,184 in FY1995 to 77,773 in FY2008. The number of offices for SCBs increased at a higher pace between FY06 and FY08. The branch network increased by 10% between FY06 to FY08 in three years as compared to 10.6% from FY1995 to FY2005 (i.e. 10 years).

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Percent

1.4 Regional Distribution of BranchesFig 1.4 Regional distribution of branches for SCBs as on March 31, 2008

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

On an overall basis, the branches of the SCBs in India are fairly distributed. The state-owned banks have to adhere to social objective set by the government. Since nationalisation, PSBs have increased their presence in rural and semi-urban areas. Private and foreign banks started operating post 1994. Since the main driver for these banks was profit maximisation and due to restriction on opening of branches, their branch network is being concentrated in metro and urban regions.

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Fig 1.5 Distribution of branches among regions for various bank groups

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

As depicted in above graphs, there is a noticeable difference between rural and semi-urban presence of PSBs, private & foreign banks. SBI and associates and nationalised banks have around 34% of the branches situated in rural area as compared to 12.5% and 0% for private and foreign banks.

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Chapter 2 Role of Reserve Bank of IndiaEstablished in 1935, under the Reserve bank of India Act, 1934, RBI is the central bank of the country. RBI was nationalised in the year 1949. Functions of the RBI can be divided into two. Monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Non-monetary functions includes supervision of banks operating India, promotion of sound banking

2.1 RBI monetary and credit policyREPORT ON INDIAN BANKING SECTORGOI uses various tools for development of economy. Two important tools of macroeconomic policy are Monetary Policy and Fiscal Policy. Fiscal policy is decided by the GOI through annual budget by the Finance Ministry. Monetary policy is a subject matter of RBI.

Monetary PolicyThe RBI is responsible for formulating and implementing Monetary Policy which is essentially a stabilisation policy. It is not intended to influence the long-term growth potential of the economy, but aims at ironing out the fluctuations in the economy also referred to as business cycles. This is done to minimise fluctuations and ensure a sustainable mix of growth and inflation in the economy. The RBI regulates the supply of money and the cost and availability of credit in the economy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements. The Monetary Policy aims to maintain price stability, full employment and economic growth. Historically, the Monetary Policy is announced twice a year - a slack season policy (AprilSeptember) and a busy season policy (October-March) in accordance with the agricultural cycles. These cycles also coincide with the halves of the financial year. The RBI as per the world-wide practice has shifted to market-based instruments for monetary management from non-market-based instruments like interest rate control. The RBI can influence the cost of funds and availability of credit in the economy by altering the repo/reverse repo rates, changing the reserve requirements and engaging in open market operations.

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2.2 Developments in FY09 and Role of RBIThe RBIs role in monetary development and price stability can be well understood by the developments which happened in FY09. We divide the developments in financial markets in FY09 into two.

From April 2008 to September 2008Up to the mid of FY09, India continued its dream run of high economic growth. Due to sustained inflow of foreign capital in India and high commodities and oil prices, inflation rate touched record highs of 12.91% in August 2008. The RBI reacted to this by increasing the Cash Reserve Ratio (CRR) by 150 bps from 7.5% to 9.0% and increase in repo rate by 125 bps from 7.75% to 9.0% up to the end of September 2008. This enabled the bank to suck out excess liquidity in the system, thereby containing inflation.

REPORT ON INDIAN BANKING SECTOR

From September 2008 to March 2009Near collapse of the worlds financial system and global recession made its impact felt on the domestic economy in last two quarters of FY09. The domestic economy slowed down considerably in later half of the FY09. Movement in inflation was southward due to world-wide slowdown and correction in commodities prices. In order to check the domestic slowdown RBI, aided by declining inflation, slashed the CRR, SLR and repo rates sharply by 400 bps, 100 bps and 400 bps, respectively over a period of 6 months from Aug08 to Jan09.

Fig 2.1 Changes in policy rate in FY09 to check inflation14 13 12 11 10 9 8 7 6 5 4 3 2 1 Jun-07 Aug-07 May-07 Sep-07 Apr-07 Jul-07

Inflation Rate (%)

High inflation: CRR, repo increased by 150 and 125 bps to suck the liquidity

Lower inflation and ease in liquidity: CRR, repo and SLR reduced by 400, 350 and 100 bps to check growth

Jun-08

Jan-08

Aug-08

Jan-09

Feb-09

May-08

Dec-07

Nov-08

Dec-08

Apr-08

Nov-07

Source: RBI and CARE Research

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Mar-08

Mar-09

Apr-09

Feb-08

Sep-08

Jul-08

Oct-07

Oct-08

2.3 Liquidity Adjustment Facility (LAF)LAF is used by RBI for managing the day-to-day liquidity in the banking system. LAF operations are carried out twice in a day. LAF is carried out with the help of two key rates viz Repo rate and Reverse repo rate. The term repo stands for repurchase agreement. Repo rate is the rate that RBI charges the banks when they borrow from it or the rate at which RBI lends to the banks. Repo operations increase liquidity in the system. Reverse repo rate is the rate that RBI offers the banks for parking their funds with it or the rate at which RBI borrows from the banks. Reverse repo operations suck out liquidity from the system.

Fig 2.2 Trend in repo and reverse repo rates over the years9.5 8.5

REPORT ON INDIAN BANKING SECTOR

7.5 Percent 6.5 5.5 4.5 3.5 2.5 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Sep-08 Mar-09

Repo rateSource: RBI and CARE Research

Reverse Repo

RBI uses the LAF to inject or absorb the liquidity into the banking system. Increasing repo rate from 7.75% in May 2008 to 9.0% in September 2008 was done to increase the cost of credit and to tighten the liquidity in the system due to increasing inflation. However, falling inflation and fear of economic slowdown prompted RBI to reduce the repo and reverse repo rates to bring down the cost of the credit. Yearly trend since FY01 shows that, repo and reverse repo rates are either increasing or decreasing in the given financial year, with the exception of FY09. High inflation due to over-heating of the economy in the first half resulted in RBI increasing the rates. Global financial crisis in mid FY09 and fear of slowdown supported the rate reduction.

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Fig 2.3 Spread between Repo and Reverse repo rates3.5 3.0 2.5 Spread (%) 2.0 1.5 1.0 0.5 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Sep-08Jan-09

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

The spread between the repo and reverse repo also signals RBIs intention of cheaper/costlier credit. Deceasing spread from July 2003 till September 2006 suggests the cheaper credit policy from RBI to push economic growth. The spread was at it lowest level of 1.0% from April 2005 to September 2006. The increasing spread from May 2008 to September 2008 suggests the tightening of credit due to higher inflation and overheating of the economy. However from September 2008 onwards, the RBI has adopted cheaper credit policy and thereby has reduced the spread between the repo and reverse repo from 3.0% in September 2008 to 1.5% in February 2009.

Fig 2.4 Large LAF injection during Jul to Oct08 and subsequent absorption from Dec08 to Mar09s1200000 700000 200000 Jun-07 Sep-07 Oct-07 Jun-08 Jan-08 Sep-08 Oct-08 Feb-08 Dec-07 May-07 Nov-07 May-08 Nov-08 Dec-08 Aug-07 Aug-08 Apr-07 Apr-08 Feb-09 Jul-07 Jul-08 Mar-08 -300000 -800000 -1300000 Mar-09 Apr-09 Average daily absorption of Rs. 56594 cr in Apr'09

Rs cr

Average daily infusion of Rs. 42791cr in Sept'08

Source: RBI and CARE Research

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Mar-09

The bankruptcy/sell out/ restructuring of some of the worlds largest financial institutions brought pressures on the domestic money and foreign exchange markets, in conjunction with temporary local factors such as advance tax outflows. In order to alleviate these pressures, the RBI initiated a series of measures. The average daily net outstanding liquidity injection under LAF was Rs.42,591 crore during September 2008 as compared with Rs.22,560 crore in the previous month. Liquidity conditions eased from November 2008. The LAF shifted from net injection mode to net absorption mode. The average daily net outstanding liquidity absorption under LAF was Rs.22,294 crore during December 2008. Lesser avenues of lending due to economic downturn had made banks to park excess funds with RBI under reverse repo. Daily abruption under reverse repo crossed Rs. 1,00,000 crore in April 2009. RBI has been discouraging reverse repo in order to compel the banks to lend more. RBI has cancelled the secondary liquidity adjustment facility (evening reverse repo auctions) effective from May 2009 and reduced the reverse repo rate to 3.75%.

2.4 Cash Reserve Ratio (CRR)REPORT ON INDIAN BANKING SECTORAll commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the CRR which can also be effectively used to manage liquidity, inflation and cost of credit in the banking system by RBI. Higher CRR will increase the cost of the fund with the bank and in turn will make the credit costlier for borrower and vice-versa.

Fig 2.5 Changes in CRR for Macro economic objective9 8.5 8 7.5 7 percent 6.5 6 5.5 5 4.5 4 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Sep-08 Mar-09sharp cut in CRR (400 bps in 5 months) to address liquidty crunch CRR at record high of 9.0%, last seen in Mar'00 to check soaring inflation.

Source: RBI and CARE Research

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Chapter 3 Deposits3.1 Sources of Funds for BanksDeposits are traditionally the main source of funding for banks. As shown below, deposits as a percentage to total resources of the SCBs were at 76.7% as at 31st March 2008.

Fig 3.1 Break-up of total resources of SCBs as on 31st March 2008

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

However, reliance on deposits as a primary source of funds has decreased over the years for SCBs. Within the categories of banks, PSBs have higher proportion of deposits in their total resources as compared to private and foreign banks. The reliance on deposits as resources by Foreign banks was the least at 52.5% as on 31st March 2008, whereas, deposits as a percentage to total resources of Nationalised banks and SBI and associate banks were high at 79.9% and 76.5%, respectively on the same date.

Fig 3.2 Deposits as a Percentage of total resources for various bank groups90 85 80 Percent 75 70 65 60 55 50 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

SBI and Associates SCBsSource: RBI and CARE Research

Nationalised Banks Foreign Banks

Private Sector Banks

21

Fig 3.3 Total deposits and y-o-y growth in deposits of SCBs3,500,000 3,000,000 2,500,000 Rs. cr 2,000,000 1,500,000 1,000,000 500,000 FY02 FY03 Total Deposits Source: RBI and CARE Research FY01 FY04 FY05 FY06 FY07 FY08 % y-o-y growth 17.2 14.0 12.7 16.2 16.6 17.8 23.1 24.6 26 24 22 Percent 20 18 16 14 12 10

REPORT ON INDIAN BANKING SECTOR

SCBs in India have shown an impressive growth in deposits mobilisation over the years. Total deposits with SCBs have grown from Rs.9,00,307 crores in FY2000 to Rs.33,20,054 crores in FY08. Total deposits with SCBs have grown at a CAGR of 19.6% in the last five years (from FY03 to FY08) and at a CAGR of 17.4% in the last 20 years ended FY08. Among the group of banks, private sector and foreign banks deposits have grown at a CAGR of 26.7% and 22.5%, respectively, in the last five years, chiefly due to lower base effect of these banks. Deposit growth in FY09 Deposits for SCBs (including RRBs) grew at 19.8% in FY09 as against growth of 22.4% in FY08.

Fig 3.4 Total deposits and y-o-y growth in deposits for SCBs (incl. RRBs) in FY093,900,000 3,800,000 3,700,000 3,600,000 3,500,000 3,400,000 3,300,000 3,200,000 3,100,000 3,000,000 2,900,000 2,800,000 Jun-08 Jan-09 Nov-08 Dec-08 Aug-08 Feb-09 Oct-08 Sep-08 Jul-08 May-08 Mar-09 Apr-08 30 28 26 24 22 20 18 16 14 12

Total deposit for SCBs (including RRBs) Source: RBI and CARE Research

y-o-y growth(%)

22

Percent

Rs Cr

Fig 3.5 Deposits as a percentage of GDP over the years70 65 60 Percent 55 50 45 40 35 30 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 39.2 40.8 41.7 48.4 45.8 52.1 58.9 54.4 54.4 63.0 67.8

Source: RBI and CARE Research

REPORT ON INDIAN BANKING SECTOR

Steady increase in deposits as a percentage of GDP shows the reducing dependence on parallel economy and increased penetration of banks into the financial system. It has increased from just 8.7% of GDP in FY51 to 67.8% of GDP in FY08. Rapid expansion of branches by PSBs over the years, entry of private and foreign banks, growing education among the people for savings and banking operations are the key reasons for the same.

3.2 Distribution of deposits of SCBs3.2.1 Distribution of deposits by populationFig 3.6 Percentage Distribution of total deposits by population80 70 60 Percent 50 40 30 20 10 0 14.7 FY01 FY02 FY03 FY04 Semi-urban FY05 FY06 FY07 19.6 13.3 9.4 FY08 65.7 77.3

Rural Source: RBI and CARE Research

Urban+metro

As shown above, the growth in the deposits for banks have primarily came from urban and metro regions. Deposits from urban and metro region increased at a CAGR of 21.9% from FY01 to FY08. Share of deposits from urban and metro region have increased from 65.7% to 77.3% from23

FY01 to FY08. Rapid urbanisation, increase in income level of the people in urban and metro region due to boom in sectors such as IT and financial services and increased penetration by private and foreign banks are the key reasons for the same. Despite increased presence in rural India by PSBs over the years, share in deposits of rural and semi-urban regions has actually decreased from 19.6% and 14.7% to 13.3% and 9.4%, respectively during the same period. Deposits from semi-urban and rural India grew at CAGR of 12.7% and 11.7%, respectively. Growth in deposits from rural region is the lowest among the three.

3.2.2 Distribution of deposits by OwnershipFig 3.7 Break-up of deposits by ownership

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

Banks collect deposits from household and corporate sector. Banks in India rely on household sector savings as their primary source of deposits. Deposits from households constituted 57.4% of the total banking deposits in FY07 (Individual and HUF share in total deposits was 44.5%). This is in sharp contrast to banks in the western world which rely heavily on bulk deposits from corporates and High Net worth Individuals (HNIs). This distinct feature of the Indian banks makes them less prone to financial crisis, as was seen in the western world in mid FY09. The next highest contributor to the bank deposits was the government at 14.5% which includes deposits by public sector undertakings at 4.6% of the total deposits.

3.3

Deposits mobilisation from household sector

Deposits of household sector with banks have increased at a CAGR of 30.1% from FY04 to FY08 as compared to the CAGR of 17.9% in gross financial saving of household sector in the same period. Banks have increased their share in household sector savings from 37.4% in FY04 to 55.3% in FY08.

24

Share of Small scale savings in household sector has declined from 19.5% in FY05 to 5.1% in FY07 and to -3.7% in FY08. Investment in government securities (7.5% in FY04 to -2% in FY08) and share of provident/pension funds (13.6% in FY04 to 8.2% in FY08) has also decreased over the years. This can be mainly attributed to lower interest rate provided on the above stated traditional saving instruments as compared to bank deposits and the growing importance of bank tax-saving deposits, mutual funds (1.2% in FY04 to 7.7% in FY08) and insurance (13.7% in FY04 to 17.5% in FY08) as tax-saving instruments.

Fig 3.8 Break-up of financial saving of household sector60 50 40 Percent 30 20 10 0 -10 FY04 FY05 FY06 FY07 FY08

REPORT ON INDIAN BANKING SECTOR

Deposits with Banks Investment in Small Savings Provident and Pension Funds Source: RBI and CARE Research

Investment in Government securities Insurance Funds Mutual Funds (Other than UTI)

In FY07 and FY08, the receipts under small saving schemes showed a negative growth of 10.6% and 20.1%, respectively. As shown above, the interest rate provided by banks have increased since FY04 whereas interest rate on small saving has been kept constant since FY04 at 8%.

Fig 3.9 Movement in interest rates on saving instruments.

Fig 3.10 Trend in small saving mobilisation

10 9 8 7 6 5 4 Jun'08 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

200000 125000 R s. cr 50000 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08

35 25 5 P ercent 15 -5

Percent

-25000 -100000

-15 -25

Interest rate on small saving instruments Maximum Interest on Fixed depositsSource: RBI and CARE Research

Receipts

y-o-y growth

25

3.4

Types of Deposits

Fig 3.11 Types of depositsDeposits with Banks

Demand (CASA) Deposits

Term Deposits

REPORT ON INDIAN BANKING SECTOR

Current DepositsSource: RBI and CARE Research

Saving Deposits

Short Term (< 1 year)

Long Term (> 1 year)

Current deposits: These are deposits maintained for the purpose of meeting day-to-day requirement of the businesses. Banks generally do not pay any interest on current account deposits. Saving deposits: These deposits are maintained by households. Interest rate on saving deposits are administered by RBI and are currently kept at 3.5% since 2001 (brought down from 4.5%) Current and saving account deposits together are known as demand deposits or low-cost deposits and they do not have any maturity period. Term deposits: Also known as fixed deposits these are payable at the end of fixed maturity period decided at the time of opening the deposit account. Banks provide fixed deposits for the period ranging from seven days to five years. Interest rate on domestic term deposits have been de-regulated since October 1997, thus banks are free to decide on the interest rate to be offered on term deposits. Banks in India are also allowed to offer differential rates of interest on wholesale domestic term deposits of Rs.15 lakhs and above i.e. the interest rate offered on the wholesale domestic term deposits can differ from those offered on the retail domestic term deposits.

26

3.4.1 CASA depositsCurrent Account and Saving Account (CASA) deposits (also known as demand deposits) are low cost and have no maturity period. High proportion of CASA deposits in total deposits reduces the average cost of deposits and in turn the cost of funds for the bank. Over the years, the CASA ratios of banks have been increasing or have remained constant, till FY06. However, in FY07 and FY08, the CASA ratio for most of the bank groups has declined. To tap the high credit demand growth, the banks have been offering attractive interest on term deposits, thereby reducing the reliance on CASA deposits. The CASA deposits have grown by 17.7% and 20.6% in FY07 and FY08, respectively.

Fig 3.12 Proportion of low cost deposits in total deposits of SCBs45 40 35 34.0 34.0 34.4 22.3 12.1 36.6 37.0 38.6 36.5 35.7

REPORT ON INDIAN BANKING SECTOR

Percent

30 25 20 15 10 5 FY01 FY02 FY03 FY04 20.7 13.2 21.3 12.7 23.7 12.9

24.2 12.8

25.1 13.5

23.4 13.1

22.4 13.3

FY05

FY06

FY07

FY08

% Current A/c DepositsSource: RBI and CARE Research

% Saving Deposits

CASA Ratio

The CASA ratio for SCBs has increased from 34% in FY01 to reach 38.6% in FY06, but declined to 35.7% in FY08. Trend in incremental CASA deposits As shown below, the share of incremental CASA deposits has seen major change over the years. Nationalised banks grabbed 50.4% share in incremental CASA deposits of SCBs in FY01. In FY06, they garnered 47.0% share in incremental CASA deposits and within two years in FY08, their share sharply dropped to just 29.6% in FY08. The private sector banks have been able to increase their share in incremental CASA deposits from 15.3% in FY01 to 28.1% in FY08.

27

Fig 3.13 Share in incremental CASA deposits by various bank groups50 40 Percent 30 20 10 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08

SBI and Associates

Nationalised Banks

Private Sector Banks

Foreign Banks

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

3.4.2 Term depositsFig 3.14 Break-up of term deposits by ownership

Source: RBI and CARE Research

Household sector is the primary contributor to the term deposits of the banks. It constituted 47.9% of the total term deposits for FY07 as against 49.1% for FY06. Term deposits from nonresidents constituted 6.7% for FY07 (8.3% for FY06). In order to match higher credit demands, banks have increased their focus on term deposits in FY07 and FY08 as it was difficult to fund high credit demand solely with the growth in current and saving deposits. Banks have offered attractive interest on the deposits with tenure of 1.5 years or less. Depositors were more inclined to park the funds in short-term deposits as spread between

28

the long-term and short-term deposits had narrowed. This has changed the term deposit mix in favor of low-tenure deposits.

Fig 3.15 Trend in spread between various maturities of deposit for PSBs1.0 0.8 0.5 0.3 (0.3) (0.5) (0.8) (1.0) 0.75 0.50 Mar'06 Mar'07 Mar'08 Jun'08 (0.25) 0.75 0.50 0.35 Oct'0837.4

Percent

(0.15)

(0.50) (0.85)

REPORT ON INDIAN BANKING SECTOR

spread between 1 year and 1 to 3 years deposit spread between 1 year and 3 or more years depositSource: RBI and CARE Research

Fig 3.16 Break-up of term deposits into short-term and long-term deposits80 70 60 50 40 30 20 10 0

71.1

68.9

Percent

65.2

64.8

61.9 38.1

60.6 39.4

60.5 39.5

62.6

28.9

31.1

34.8

35.2

FY00

FY01

FY02

FY03 Short term

FY04

FY05

FY06

FY07

Long term

Source: RBI and CARE Research

Share of deposits with less than one-year maturity in total term deposits increased continuously from 28.9% in FY00 to 39.5% in FY06 and thereafter decreasing to 37.4 in FY07. As against this, long-term deposits after showing continuous decline from FY2000 to FY06, however increased from 60.5% to 62.5% in FY07. The increase could mainly be attributed to higher interest rate provided by banks on deposits ranging from 1 year to 1.5 years of maturity. Banks, particularly private sector banks had come out with innovative term deposit products such as 400 days deposits, deposits for 1 year and 15 days etc. Due to this, the share of deposits with 1 to 2 years of maturity increased sharply from 26.5% in FY06 to 32.7% in FY07.

29

The spread between short-term and long-term deposits have narrowed over the years, particularly since FY07 onwards. In December 2008, the spread between the short-term and long-term deposits was either negative or zero for most of the banks. This has altered the maturity profile of term deposits significantly.

Table 3.1 Interest spreads between short-term and long-term deposits as on December 2008 (in %)Name 1 to 1.5 yrs SBI 9.5 ICICI Bank 10.5 HDFC Bank 9.5 Source: RBI and CARE Research 3 yrs to 5 yrs 9.0 9.5 9.0 Spread -0.5 -1.0 -0.5 5 yrs and above 9.0 9.5 9.0 Spread -0.5 -1.0 -0.5

REPORT ON INDIAN BANKING SECTOR

Economic slowdown post December 2008 has altered the scenario of negative spread. Banks are no longer hungry to garner high deposits to fuel the credit offtake. As on March09, the spread between shortterm and long-term deposit rate was positive, ranging between 100 bps to 150bps.

3.5 Bank group-wise deposit performanceTotal deposits of SCBs grew at 23.1%. Term deposits registered a growth of 24.5% which was higher than the growth in demand deposits (20.5%) in FY08.

3.5.1 SBI and AssociatesFig 3.17 Total deposits and y-o-y growth in deposits of SBI and Associates800,000 700,000 600,000 Rs. cr 500,000 400,000 300,000 200,000 100,000 FY01 FY02 FY03 Total Deposits FY04 FY05 FY06 FY07 FY08 % y-o-y growth 12.5 10.7 7.3 5 11.4 21.8 16.8 16.8 22.2 20 15 10 Percent 25

Source: RBI and CARE Research

30

Fig 3.18 Break-up of deposits and CASA ratio of SBI and Associates100% 80% 60% 40% 20% 0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 CASA Ratio % Current A/c Deposits % Saving Deposits % Term Deposits 36.6 36.5 37.0 39.3 39.1 43.4 42.9 42.0 55 50 45 40 35 30 25 20 Percent

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

The total deposits of SBI and associates grew at a CAGR of 14.6% from FY03 to FY08, lowest among the group of banks, while the industry CAGR was at 19.6%. Deposits touched at Rs.7,73,875 crores in FY08 from Rs.6,33,476 crores in FY07, registering a growth of 22.2%. Low-cost deposits constituted 42.0% of the total deposits, down by 90bps in FY08. The proportion of low-cost deposits has increased from 36.6% in FY2000 to 43.4% in FY06. However the same is showing a declining trend since last two years mainly due to increase in term deposits mobilisation to fund the high growth.

3.5.2 Nationalised BanksFig 3.19 Total deposits and y-o-y growth in deposits of Nationalised banks1,600,000 1,400,000 Rs. cr 1,200,000 1,000,000 800,000 600,000 400,000 FY01 FY02 FY03 Total Deposits FY04 FY05 FY06 FY07 FY08 % y-o-y growth 13.8 12.9 11.4 15.3 17.2 16.0 18.1 30 26.0 25 Percent 20 15 10 5

Source: RBI and CARE Research

31

Fig 3.20 Break-up of deposits and CASA ratio of Nationalised Banks100% 80% 60% 40% 20% 0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 CASA Ratio % Current A/c DepositsSource: RBI and CARE Research

55 50 45 35.4 35.5 36.8 35.4 33.7 40 35 30 25 20 % Saving Deposits % Term Deposits Percent 36.2 37.0 38.2

REPORT ON INDIAN BANKING SECTOR

Total deposits of Nationalised banks grew at a CAGR of 18.5% from FY03 to FY08. Deposits touched at Rs.16,06,995 crores in FY08 from Rs.13,60,724 crores in FY07, registering a growth of 18.1%. The growth rate in FY08 was lower than that of FY07 (26.0%), which was the highest in the decade and y-o-y deposit growth in other years was in the range of 11% to 19%. Low-cost deposits constituted 33.7% in FY08 down sharply from 38.2% in FY06. Growth in the term deposits was 31.6% and 21.2% in FY07 and FY08, respectively, as against this; the growth rate in demand deposits was 16.8% and 12.4%, respectively.

Table 3.2 CASA of Nationalised Banks (in %)Top 5 banks Punjab National Bank Bank Of Maharashtra Dena Bank United Bank Of India Punjab & Sind Bank Source: RBI and CARE Research FY08 43.0 42.2 39.2 38.6 36.3 FY07 46.2 43.2 44.5 42.0 45.7 Bottom 5 banks IDBI Ltd. UCO Bank Vijaya Bank Oriental Bank Of Commerce Bank Of India FY08 16.6 25.7 27.3 27.9 30.6 FY07 25.4 29.2 30.8 30.3 32.2

Among the nationalised banks, CASA ratio of IDBI Bank declined sharply from 25.4% in FY07 to 16.6% in FY08, followed by Central Bank of India (CASA declined by 590bps). Out of the 20 nationalised banks, 19 banks showed a declined in CASA ratio in FY08 baring Union Bank of India, whos CASA ratio remained constant at 34.9%. Nationalised banks have also resorted to term deposit for funding high credit demand as well as faces intense competition from private and foreign banks for cornering higher share in demand deposits.

32

3.5.3 Private Sector BanksFig 3.21 Total deposits and y-o-y growth in deposits of Private Sector Banks650,000 550,000 Rs. cr 450,000 350,000 250,000 150,000 50,000 FY01 FY02 FY03 Total Deposits FY04 FY05 FY06 FY07 FY08 % y-o-y growth 20.2 24.0 22.1 29.8 17.2 36.2 28.8 22.3 40 35 30 25 20 15 10 5 Percent

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

Fig 3.22 Break-up of deposits and CASA of Private Sector Banks100% 80% 60% 40% 20% 0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 CASA Ratio % Current A/c Deposits % Saving Deposits % Term Deposits 24.0 23.9 23.9 29.9 30.5 32.8 30.4 29.8 55 50 45 40 35 30 25 20 Percent

Source: RBI and CARE Research

Total deposits of Private sector banks grew at a CAGR of 26.7% from FY03 to FY08, highest among all the banking groups. Deposits touched at Rs.6,75,073 crores as on 31st March 2008 from Rs.5,51,987 crores as on 31st March 2007. Deposits grew by 36.2%, 28.8% and 22.3% in the years FY06, FY07 and FY08, respectively. CASA ratio for Private sector banks has remained low as compared to other banking groups over the years. This is because these banks does not have wide branch network, which is essential for garnering CASA deposits and moreover, innovative products such as flexi deposits (which allow customer to maintain the fixed deposits which can be withdrawn as and when need arises) introduced by the private banks also diverted more funds to such fixed deposit accounts.

33

Low cost deposits constituted 32.8% in FY08 (highest in last 13 years), which has increased from 29.8% in FY07. CASA ratio expanded by 300 bps as against which the CASA ratio for PSBs have declined. Private sector banks have increased the number of branches over the last 2 to 3 years and have been able to garner a larger share in current accounts from corporate and corporate salary accounts from business houses. Growth in demand deposits in FY08 was at 34.5% which is twice that of growth in term deposits which stood at 17.1%.

Table 3.3 CASA of Private Sector Banks (in %)Top 5 banks HDFC Bank Axis Bank Jammu & Kashmir Bank Ratnakar Bank ING Vysya Bank Source: RBI and CARE Research FY08 54.5 45.7 39.2 38.3 31.5 FY07 57.7 39.9 37.0 37.8 28.9 Bottom 5 banks Yes Bank Indusind Bank City Union Bank Lakshmi Vilas Bank Karnataka Bank FY08 8.5 15.7 20.9 21.7 22.1 FY07 5.8 14.9 24.3 22.0 23.4

REPORT ON INDIAN BANKING SECTOR

3.5.4 Foreign BanksFig 3.23 Total deposits and y-o-y growth in deposits of Foreign Banks200,000 175,000 150,000 Rs. cr 125,000 100,000 75,000 50,000 25,000 0 FY02 FY03 Total Deposits Source: RBI and CARE Research FY01 FY04 FY05 FY06 FY07 FY08 % y-o-y growth 20.0 15.6 9.0 7.4 7.8 31.7 32.6 26.7 35 30 Percent 25 20 15 10 5

34

Fig 3.24 Break-up of deposits and CASA of Foreign Banks100% 80% 60% 40% 20% 0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 CASA Ratio % Current A/c DepositsSource: RBI and CARE Research

48.0 42.9 32.5 29.6 33.8

50.5 43.2 44.7

55 50 45 40 35 30 25 20 Percent

REPORT ON INDIAN BANKING SECTOR

% Saving Deposits

% Term Deposits

Total deposits of foreign banks grew at a CAGR of 22.5% from FY03 to FY08, as against 19.6% growth of the industry. Deposits touched at Rs.1,91,114 crores in FY08 from Rs.59,190 crores in FY01. Deposits grew by 31.7%, 32.6% and 26.7% in the years FY06, FY07 and FY08, respectively. CASA ratio for foreign banks is highest among all the banking groups (44.7% in FY08). Requirement of keeping minimum balance in saving account is high for foreign banks.

Table 3.4 CASA of Foreign Banks (in %)Top 5 banks Arab Bangladesh Bank Mashreq Bank Antwerp Diamond Bank Sonali Bank Deutsche Bank Source: RBI and CARE Research FY08 90.4 89.7 87.0 81.4 69.5 FY07 80.2 48.4 81.8 83.0 74.4 Bottom 5 banks DBS Bank Barclays Bank Bank Of Nova Scotia Societe Generale State Bank Of Mauritius FY08 3.1 5.2 5.8 8.5 12.5 FY07 2.1 0.8 7.2 3.9 15.3

35

Chapter 4 Advances4.1 Total Advances and growth in advances for SCBsAdvances for SCBs grew at a CAGR of 27.4% during FY03 to FY08

Fig 4.1 Total advances and y-o-y growth in advances of SCBs2,550,000 2,150,000 1,750,000 Rs Cr 1,350,000 950,000 20.0 18.5 14.5 22.8 16.8 33.3 31.8 35 30.6 25.0 30 25 Percent 20 15 10 5 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Total Advances Y-o-Y Growth (%)

REPORT ON INDIAN BANKING SECTOR

550,000 150,000

Source: RBI and CARE Research

Fig 4.2 Type-wise break-up of total advances for SCBs70 60 50 Percent 40 30 20 10 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 Bills Purchased & DiscountedSource: RBI and CARE Research

54.5 35.8

54.4 36.1 41.8

49.8

47.6

49.0 43.1

54.0 38.0

55.9 37.2

57.7 36.0

58.0

44.5

35.9

9.7

9.6

8.3

8.0

7.9

8.0

6.8

6.3

6.1 FY08

Cash Credits, Overdrafts & Loans

Term Loans

The total advances of SCBs grew by 25.0% in FY08 as compared to 30.6% in FY07. The total lending of SCBs as a whole grew at a CAGR of 27.4% from FY03 to FY08. The share of term loans in total advances has constantly increased over the years from 35.8% in FY2000 to 58.0% in FY08. The higher percentage of term loan signifies better interest rate spread for the bank. As a result, the share of short-term lending has decreased to 35.9% in FY08 from

36

54.5% in FY2000. The reason for the high share of term loan is increased disbursement to infrastructure projects over the years which require long term finance and the merger of domestic financial institutions which typically provide long term infrastructure finance like IDBI with IDBI Bank and ICICI with ICICI Bank.

Fig 4.3 Security-wise break-up of total advances for SCBs100 90 80 70 60 50 40 30 20 10 0 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Unsecured 10.9 8.9 14.1 8.3 13.6 8.4 13.3 7.4 14.6 6.5 17.7 5.9 20.0 5.8 20.4 5.2 23.1 4.4

Percent

80.2

77.7

78.0

79.4

78.9

76.4

74.2

74.4

72.5

REPORT ON INDIAN BANKING SECTOR

Secured By Tangible Assets

Covered By Bank/ Government Guarantees

Source: RBI and CARE Research

Share of unsecured advances have increased over the years from 10.9% in FY2000 to 23.1% in FY08.

4.2 Credit offtake in FY09During FY09, the growth in credit offtake was at 17.3%, lower than 22.3% for FY08.

Fig 4.4 Total Credit and y-o-y growth in credit for SCBs (incl. RRBs) for FY092,900,000 2,800,000 2,700,000 2,600,000 2,500,000 2,400,000 2,300,000 2,200,000 2,100,000 Jun-08 Dec-08 Aug-08 Jan-09 May-08 Feb-09 Oct-08 Sep-08 Jul-08 Nov-08 Mar-09 Apr-08 30 28 26 24 22 20 18 16 14 12

Total Credit for SCBs (Including RRBs)Source: RBI and CARE Research

y-o-y growth(%)

37

Percent

Rs Cr

A closer analysis reveals that credit offtake in FY09 can be divided into two periods viz, High credit offtake period (April to September/October 2008) Slower credit offtake period (After October 2008)

High credit offtake period (April to September/October 2008)Credit offtake in H1FY09 increased by 25.2% over H1FY08. The main reasons were : Relatively high GDP growth rate of 9.3% up to August 2008 resulting in high demand for credit by corporates. Sharp increase in credit offtake by oil marketing companies of Rs.36,208 crore during April-October 2008 as compared with a decline of Rs.1,146 crore in the corresponding period of the previous year compelled by high crude prices.

REPORT ON INDIAN BANKING SECTOR

Substitution of other sources of finance with bank finance by corporates reflected by sharp increase in bank resources to the commercial sector (30.4% y-o-y growth upto Q3FY09) in spite of a an overall flat flow of financial resources to the commercial sector

Slower credit offtake (After October 2008)The demand for credit moderated from October 2008 onwards, reflecting the slowdown of the economy in general and the industrial sector in particular. The credit offtake increased by 8.5% in H2FY09 as compared to 15.9% H2FY08. Decline in commodity prices and drawdown of inventories brought down working capital requirements by the corporates The demand for credit by oil marketing companies also moderated due to softening of crude oil prices. In addition, substantially lower credit expansion by private and foreign banks also muted the overall flow of bank credit during the period.

Table 4.1 Bank group-wise credit offtake for FY08 and FY09y-o-y growth (%) in Credit Particulars Public sector banks (PSBs) Private sector banks Foreign banks Scheduled commercial banks (including RRBs) Source: RBI and CARE Research FY08 22.5 19.9 28.5 22.3 FY09 20.4 10.9 4.0 17.3

Credit offtake for PSBs was above the industry average at 20.4%. Credit offtake for private and foreign banks was at 10.9% and 4.0% for FY09 as compared to 19.9% and 28.5% in FY08 respectively indicating the effects of slowdown.

38

4.3 Sectoral Bank CreditFig 4.5 Break-up of bank credit into various sectors

REPORT ON INDIAN BANKING SECTOR

Source: RBI and CARE Research

Deployment of gross bank credit among various sectors remained more or less the same in FY08 as it was in FY07. The industry (small, medium and large) accounts for the largest share in the bank credit at 38.8% for FY08, followed by services which accounts at 24.4% of bank credit. Fair spread of credit among the various sectors reduces concentration risk for banks.

Table 4.2 Break-up of bank credit into various sectors for FY07 and FY08% of gross bank credit FY06 Food Credit Non-food Credit Agriculture and allied Industry Services : of which real estate Retail Housing loans Source: RBI and CARE Research 15.3 97.2 12.0 38.1 22.1 1.8 12.8 FY07 2.5 97.5 12.5 37.7 22.6 2.4 12.5 FY08 2.0 98.0 12.2 38.8 24.3 2.8 11.4

Share in gross bank credit for Agriculture and Industry have remained more or less same in last 3 years i.e. from FY06 to FY08. Share of services have increased from 22.1% to 24.3% during the same period while share of housing loans have reduced. Share of real estate loans have increased from 1.8% in FY06 to 2.8% in FY08

39

Among the Industry, Infrastructure accounts for highest