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SECTOR ANALYSIS OF
BANKING SECTOR
Project Report Submitted to (SIBAR)
In Partial Fulfillment of Requirement for the Award of
PGDM (Marketing)
BY
KRATIKA MATHUR
UNDER THE GUIDENCE OF
PROF. SHITAL BHUSARE
Sinhgad Institute Of Business Administration And Research,
Kondhwa (Bk), Pune.
2010-2012
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CONTENTS:
1. INTRODUCTION
2. OVERVIEW OF THE SECTOR
3. GLOBAL SCENARIO
4. NATIONAL SCENARIO/ LOCAL; KEY PLAYERS IN THE
SECTOR
5. FUTURE GROWTH OPPORTUNITIES
6. OBSERVATIONS FROM PERSONAL INTERACTION
WITH COMPANY PROFESSIONALS
7. CONCLUSIONS
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INTRODUCTION
Modem banking developed around 500 years ago in other countries and 200 years ago
in India. The Indianfinancial system comprises a vast network of different banks. The
banking sector is the core segment indecidingthe progress of the entire economy of
the country. Activities of a modem economy are significantly influenced by the
functions and services of banks and became an indispensable part of socio-economic
life of the people.Banks not only accept the deposits from the public and deploy large
amounts of uncollateralised public fundsin a fiduciary capacity, but also leverage such
funds through the process of credit creation. In India, the bankingsector was restricted
mainly to the urban areas and neglected in the rural and semi-urban areas. After
thenationalization of 14 major banks in 1969 and six more in 1980, the scenario
changed. Since then the bankingsector in India has played a pivotal role in the Indian
economy. The Indian commercial system comprises two groups i.e. Scheduled Banks
and the other Non-Scheduled Banks. Scheduled Banks are those banks included inthe
second schedule of the banking regulation Act, 1965 and satisfying the conditions laid
down by the schedule.Non-Scheduled Banks refer to those that are not included in the
second schedule of the Banking regulation Actof 1965 and do not satisfy the
conditions laid down by that schedule. The primary objective of this study is
toanalyse the performance of Scheduled Commercial Banks since 2000 and after. The
indicators selected to studyare aggregate deposits, total credits, investments made by
the banks and priority sector lending etc. The paper isorganized as follows:. At
present, Indian public sector banksare performing well and they are at par with the
best banks in the world.
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OVERVIEW OF THE SECTOR
Indian Banking Sector: A Retrospect
The Indian financial system consists of different types of financial institutions which
are responsible for thedevelopment of the country's economy. Financial institutions
can broadly be classified into banking andnon-banking institutions. Banking
institutions are of three types: Commercial Banks, Industrial or InvestmentBanks and
Rural Banks. The most active sector of the Indian money market is the commercial
banking sector.Commercial banks in India can be classified into three groups; PublicSector, Private Sector and Foreign Banks.The majority of commercial banking in
India is in the public sector with the State Bank of India and itsassociated banks. After
liberalization, several private sector banks and foreign banks were allowed to open
theirbusiness in the Indian financial system.Modem banking in India was developed
during the British Era. In the first half of the 19th century, the BritishEast India
Company established three banks-the Bank of Bengal in 1809, the Bank of Bombay in
1840 and theBank of Madras in 1843 and then these three banks were amalgamated
into a new bank called Imperial Bank.Later it was taken over by the State Bank of
India hi 1955. For the purpose of assessment of performance ofbanks in India, the
Reserve Bank of India which was established in 1935, categories them as a Public
SectorBanks, Old Private Sector Banks, New Private Sector Banks and Foreign
Banks.
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Commercial Banks and its Structure
Commercial banks are the oldest of all types of banks. They form the base on which
other types of banksdeveloped. Commercial banks constitute the larger part of the
total banking system and these banks play a vitalrole in the country's economy and for
the general public. The commercial banking activities have a verypowerful and strong
influence on the Indian financial system. In India, commercial banks are established
as jointstock companies with the profit motive. These banks provide short-term
financial services to trade, smallindustry, agriculture, service sector and the general
public. They accept chequable deposits called demand deposits and facilitate an easy
payment mechanism. Commercial banks pool small savings and canalize the sameto
all the productive investments. The commercial banking structure in India consists of
Scheduled CommercialBanks and Non- Scheduled Commercial Batiks. Scheduled
Commercial Banks constitute those banks whichhave been included in the second
schedule of the Reserve Bank of India (RBI) Act, 1934. To become ascheduled bank,
the bank has to satisfy a few conditions. Scheduled Commercial Banks enjoy several
advantagesfrom the Reserve Bank of India and can get loans in times of need.
Banking Sector Reforms in India
The banking sector in India has undergone remarkable changes. In 1969, 14 major
banks were nationalized andin 1980, 6 major private sector banks were taken over by
the government. The government did not nationalizethe banks whose deposits were
less than Rs.5O crore. Nationalization of commercial banks in 1968 and 1980 wasa
mixed blessing to the Indian banking sector.
Evolution of commercial banking in India is unique in the sense that during a span of
around30 years following nationalization it has emerged as the single most important
financialintermediary of the country engulfing all sections of people. Before that
Indian BankingSystem experienced a phase of regulated growth for the first time
during 1949 to 1968.Enactment of Banking Companies Act in 1949, formation of
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term lending institutions tofinance industrial sector and the appointment of the
National Credit Council in 1967 for thenecessary flow of bank credit to the preferred
sectors of the economy etc. were importantdevelopments to be noted. It should be
mentioned that till the late 60s agricultural sector wasnot supported by the banking
system in any form. Total bank branches numbering 4288 as atDecember 1947 were
concentrated in urban areas primarily having deposits of Rs.1164 croreas against the
advance of Rs. 531 crore.
Indian banking system underwent sea changes after nationalisation in all spheres of
itsactivities. Geographical expansion was the most important among other
developments. Forinstance, during 1969 and March 1999, as many as 56,857 new
branches were opened. On theeve of bank nationalisation, the total number of branches existing throughout the country wasonly 8,261. The population served per
branch was as high as 65,000. The number of branchesoperating at the end of March
1999 rose to 65,118 and increased further to 66,255 inSeptember 2001. Out of the
56,857 new branches opened during the last 30 years, 31,024branches were opened in
rural areas, of which 30,347 branches were opened during June1969 to March 1989.
The branches in rural areas now account for 50.46% of the total numberof branches as
compared to 22.17% as at June-end 1969. The population per office has comedown
abruptly to 13,000. Aggregate deposits of the banking system crossed the 10
millionmark at June end 2001 and reached Rs.1011461 crore on September 2001 from
a meagre amount of Rs.4665 crore at June 1969. At the time of independence, it was
only Rs.1164crore. The credit disbursement pattern of the banks also recorded
remarkable changes both inits functional and geographical coverage during the last
three decades. Total bank advanceshave increased from Rs.3, 609 crore at the end of
June 1969 to Rs.3, 89,460 crore at the endof March 1999 and further to Rs.567707
crore in September 2001. C-D ratio has improvedsignificantly from a mere 45.62% to
77.36% from 1947 to 1969 indicating a massive creditoff take following
nationalisation.
Along with the massive credit expansion, therehas been appreciable change in the
directionof credit flow. The share of rural credit increased from Rs.54 crores as at
June 1969 to Rs.41,193crores as at March-end 1999, and an annual average growth of
24.99%. The share ofcredit in rural areas increased from 1.5% to 14.6% as at March-
end 1989 and declined to10.58% as at March end 1999. Thus, the phenomenal hike in
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rural credit has contributedimmensely to the growth of Indian agriculture. It should be
mentioned here that one-third ofthe total advances of the scheduled commercial banks
has gone to rural and semi-urban areas.Mergers and takeovers are leading to
transnational conglomerates, which offer traditional,commercial banking services as
well as investment banking and insurance services.
After nationalization, there was a shift of emphasis from industryto agriculture. The
country witnessed rapid expansion in bank branches, even in rural areas.
Bankingdevelopment in India after nationalization was wonderful and received global
compliments. The commercial banking system gained substantial strength to improve
nation building programs. However, the nationalization process created its own
problems, like excessive bureaucratization, red-tapism and disruptive tactics of tradeunions by bank employees. Reforms in the commercial banking sector have two
distinct phases. The first phaseof reforms introduced subsequent to the release of the
Report of the Committee on Financial System(Chairman-M. Narasimham), 1992
focused mainly on enabling and strengthening measures. The second phase ofreforms,
introduced subsequent to the recommendations of the Committee on Banking Sector
Reforms(Chairman- M. Narasimham)in 1998 placed greater emphasis on structural
measures and an improvement instandards of disclosure and levels of transparency, in
order to align the Indian standards with the bestinternational practices. Reforms have
brought about considerable improvements, as reflected in variousparameters relating
to capital adequacy, asset quality, profitability and operational efficiency.
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BANKING SECTOR HIGHLIGHTS
In India, there are 84 commercial banks, which account for about 81 per cent
(total assets) of the financial sector at end-March 2006; over 3000 cooperative
banks, which account for 11 per cent; and 133 Regional Rural Banks, which
account for 3 per cent.
The capital adequacy ratio has increased to 12.4 per cent for scheduled
commercial banks as at end March 2006, which is much above the
international norm.
Commercial banks‟ net profits remained at 0.9 per cent of total assets during
2004-05 and 2005-06, up from 0.16 per cent in 1995-96.
The ratio of NPLs to total loans of scheduled commercial banks, which was as
high as 15.7 per cent at end-March 1997, declined steadily to 3.3 per cent by
end-March 2006.
The net non-performing assets declined to 1.2 per cent of net advances during
2005-06 from 2.0 per cent in 2004-05. According to the preliminary financial
results available for most of the banks for the year 2006-07, the financial
soundness has improved further.
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GLOBAL SCENARIO
Global commercial banking outlook
“Consistence increasing with Risk ”, In the line with generally improving world
macroeconomic conditions, the outlook for the global banking sector continues to
solidify. Although we are mindful of risks from rising oil prices and inflation, unrest
in the Middle East and North Africa (MENA) and reverberations from the global
supply chain emanating from Japan‟s earthquake and tsunami, our global outlook
remains generally upbeat. This backdrop shouldprovide a sufficient foundation forcontinued loan and asset growth. This is particularly the case for emerging markets
and developed states that did not experience banking sector crises in 2007-2009.
Major potential headwinds include global monetary tightening, which will be
concentrated in emerging markets.
US- Real GDP growth and Bank lending
Source: BMI, Federal Reserve
US and Eurozone: The US macro outlook suggests mixed prospects for its
commercial banks. Banklending tends to expand alongside economic growth and in
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this respect, with decent but not particularlystrong economic expansion forecast for
the foreseeable future, banking sector loan growth will be slowfor some time.
Importantly, we continue to believe that in the current climate of household
deleveraging,there will be subdued demand for credit. 2011 and 2012 are set to be
slow growth years for theEuro zone‟s banking sector as the effects of fiscal austerity
are felt across the currency bloc and banksremain hesitant to significantly ramp up
lending towards the levels experienced prior to the globalfinancial crisis, particularly
amid tighter capital constraints. That said, despite monetary tightening,confidence in
the Eurozone banking sector has continued to hold up well. This supports our view
that therisks from monetary tightening to consumer demand and banking sector
stability in the Eurozone havebeen overplayed.
Emerging Asia: The Emerging Asia banking outlook is generally positive, though we
have someconcerns about some of the highest flying sectors. In particular, we are
concerned that loan lossprovisions in the Chinese banking system are hugely
underestimated and that the stability of the industryrests on non-performing loans
remaining well behaved, which has historically not been the case followingpolicy-
driven lending sprees. Despite the potential for economic damage following theMarch 2011earthquake and tsunami to have a negative impact on Japanese banks‟
assets in the short term, ii isbullish about Japanese banking sector equities. However,
we note that this is due to our expectation ofmultiple expansion rather than
improvements to banks‟ balance sheets, which we expect to be negativelyaffected by
rising bond yields.
End to Deflation in Sight
Japan- Client loans, % change in Y-O-Y
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Source: Bank of Japan, BMI
Emerging Europe: While Western Europe is struggling to contain a regional
sovereign debt crisis andrevive economic growth, the same pressures are less severe
in emerging Europe. With the exception ofidiosyncratic cases, banking sectors across
emerging Europe are broadly on the road to recovery and dueto expand at a faster rate
in 2011 than in 2010. Efforts to raise capital ratios, as well as less severe sovereign
debt stresses than in the Eurozone and the UK, will buoy sentiment and growth over
themedium term.
On the Mend
Emerging Europe- Bank sector asset, % change y-o-y
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Source: BMI, Central Bank
Latin America: There is expected massive expansion of the financial services sector
in Latin America over thenext few years, driven by an expanding middle class,
financial market integration and the on-going searchfor yield among developed
market investors. This is not a new theme for the region, but it is one webelieve willcontinue to offer opportunities for high-end financial services expansion over the next
fewyears. As the Latin American population becomes richer, demand for companies
that are able to managethis wealth will continue to increase and big financial names
are set to keep expanding their footprints inthe region.
Sub-Saharan Africa: The region‟s major banking sectors (South Africa, Nigeria and
Kenya) are allcontinuing their recoveries, albeit with varying degrees of strength.
Forecast strong economic growth willboost incomes, which will in turn enable an
increase in deposits and greater take-up of banking services.Rebounding economic
activity and improved liquidity are bolstering banking sector growth.
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WHERE DOES INDIAN BANKING SECTOR STAND
COMPARED TOINTERNATIONAL LEVEL?
NATIONAL SCENARIO
The banking sector all over the world is passing through a process of change and our
countryis no exception to it. It was after the beginning of the Uruguay Round of
multilateral tradenegotiations under the aegis of General Agreement on Tariffs and
Trade (GATT), crossborder trade in services came under the purview of multilateral
norms. It is important to notethat the industrialised countries dominate the cross
border trade in services. It may be pointedout that as compared to the 1980s and early
1990s, the share of foreign banks operating inIndia in the scheduled commercial
banking increased significantly since mid-1990s in termsof almost all the indicators
including income, deposits, investment, loans and advances andassets. Therefore,
during the period following the establishment of the GATS, there has
beenconsiderable increase in market access of the foreign banking service providers
in India'sdomestic market.
The process of integrating with the globalisation in a bid to develop a sound and
efficientbanking system in India at, par with international banking standards and
practices has comeinto increased focus in recent years. However, it is interesting that
the share of foreign banksin the total profitability of the scheduled commercial
banking sector in India has fallenconsiderably since mid-1990s. The increased
competitiveness in the Indian banking sector inthe post-reforms period, especially the
entry of new private sector banks and increasedefficiency of the public sector bankscould be major reasons for the fall in the profit share ofthe foreign banks.
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WHY INTERNATIONAL PERSPECTIVE NOW?
Competition in most, if not all economic activities is no longer confined to nations to
and isgetting to be more and more global. There are several reasons behind it. First,
presence offoreign banks, either as branches or even subsidiaries will grow, at least in
accordance withour own commitments to the World Trade Organization (WTO).
Second, recent experiencehas shown that foreign-owned non-banking financial
companies in India do compete both fordeposited mobilization and asset-creation,
mainly through investments. Third, even in regard tocross border payments,
organization such as Western Union and other Money Changers whoare licensed by
RBI, are spreading their reach. Forth, as multinational expand theiroperationin India;
they could justifiably continue their banking ties of the home country, even if
therange and quality of service of Indian banks are equally good. Fifth many Indian
companiesare tending to become multi-nationals and they legitimately expect banking
services to be onper with best international standards. Sixth, as disinvestments
progresses, the link betweenlarge business units and public sector banks could get
diluted unless their services are ascompetitive. In fact, even in regard to services to
governments, both central and stategovernments, a beginning has been made by theGovernments allowing private owned banksalso to undertake the business of banker
to government as agents of RBI instead of confining to Public Sector Banks. Seventh,
in respect of business in activities related to financial markets, the expanding the
presence if foreign banks and their subsidiaries; particularly ingovernment securities
market, is all too evident. Eighth, the business overseas branches ofIndian banks in
the recent years is perhaps not growing a rapidly as their counterparts andpossible
threat to their continued profitability, and hence their presence should not beignored.
Finally, the relatively strong and growing presence of foreign banks, especially
intransactions of non-public sector organizations is too obvious to be missed. The
businessremittances of non-resident Indians (NRIs) were largely with public sector
banks as long asthe transactions emanated from West Asia. With emergence of the
more enlightenedmetropolitan or urban centred NRIs, particularly those in the USA
and hailing businessopportunitiesassociated with them are tending to drift towards
foreign banks.
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Key player of Indian Banking Sector
The roots of the State Bank of India rest in the first decade of 19th century, when the
Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806.
The Bank of Bengal was one of three Presidency banks, the other two being the Bank
of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on
1 July 1843). All three Presidency banks were incorporated as joint stock companies
and were the result of the royal charters. These three banks received the exclusive
right to issue paper currency in 1861 with the Paper Currency Act, a right they
retained until the formation of the Reserve Bank of India. The Presidency banks
amalgamated on 27 January 1921, and the reorganized banking entity took as its
name: Imperial Bank of India. The Imperial Bank of India remained a joint stock
company
Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of
India, which is India's central bank, acquired a controlling interest in the Imperial
Bank of India. On 30 April 1955, the Imperial Bank of India became the State Bank
of India. The government of India recently acquired the Reserve Bank of India's stake
in SBI so as to remove any conflict of interest because the RBI is the country's
banking regulatory authority.
In 1959, the government passed the State Bank of India (Subsidiary Banks) Act,
enabling the State Bank of India to take over eight former state-associated banks as its
subsidiaries. On 13 September 2008, the State Bank of Saurashtra, one of its associate
banks, merged with the State Bank of India.
SBI has acquired local banks in rescues. For instance, in 1985, it acquired the Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, the
State Bank of Travancore, already had an extensive network in Kerala.
State Bank of India (SBI) is the leading commercial bank in India, offering services
such as retailbanking, commercial banking, international banking and treasury
operations. The bank is an integralpart of State Bank Group, which includes seven
other banks and offers additional services such asmutual funds and insurance. The
bank primarily operates in India. It is headquartered in Mumbai,India and employsabout 222,933 people.
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The company recorded revenues of INR 1478439.2 million ($32,229.9 million) in the
financial yearended March 2011 (FY2011), an increase of 10.5% over FY2010.
Operating profit was INR199197.6million ($4,342.5 million) in FY2011, an increase
of 6.6% over FY2010. Its net profit was INR1,11,799.4 million ($2,437.2 million) in
FY2011, a decline of 6.9% over FY2010.
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FUTURE GROWTH OPPORTUNITIES
With the Indian economy growing at a brisk clip of nine-plus percent per annum,
there is growing global and domestic interest inthe nation‟s banking industry.
Attracted by the idea of servicing afast growing economy and the promiseof a
liberalized scenario in 2009, a hostof foreign banks have either applied to orare in
talks with India‟s banking regulator,the Reserve Bank of India (RBI), for licenses. The
Royal Bank of Scotland,Royal Bank of Canada, Credit Suisse and
Switzerland‟s UBS AG are among themany banks reported to have evincedinterest in
being part of the Indianbanking sector.The entry of new banks is unlikelyto result in
overcrowding as the Indian banking sector has tremendous potentialfor growth.
According to the PwCreport, total domestic credit in India wasaround $400 billion
compared to China‟s$ 2.8 trillion.But the new banks will have to competewith
existing banks including nationalized ones, private sector banks,foreign banks,
smaller institutions includingco-operative banks and in someareas with non-banking
finance companiestoo.
The Indian banking system hascome a long way since 1786 when thefirst bank was
set up in India. In the pre-Independence days, initially banks wereset up as private
institutions with mostlyEuropean shareholders. Post-independence,most of the banks
were nationalized in 1969.In the 1990s, following economicreforms, the banking
sector was alsoliberalized. The entry of private banks and increasing competition
resultedin nationalised banks becoming more efficient and turning aggressive in
themarket place. The introduction of automatedteller machines (ATMs),
phonebanking and internet banking by mostbanks has bid adieu to the
serpentinequeues seen earlier. A younger populationand rapid economic growth
hasboosted consumer banking.
The traditional banking businessthat caters to the needs of corporate isalso growing at
a fast pace. Today IndiaInc‟s global aspirations are being fuelledby foreign bankers,
who help them raisefunds (either equity or debt) or financetheir acquisition plans. For
instance, Citibankhas reportedly helped in financingup to $15 billion of acquisitions
by Indiancorporate overseas. The small andmedium enterprises (SMEs) segment toois
seeing resurgence as they go global in technology, markets and funds.
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A fast developing country like Indiaalso needs good infrastructure to sustaineconomic
growth, leading to opportunitiesin the areas of infrastructure / projectfinance.
Incidentally, the governmenttoo is keen to ensure that credit growthmoves into the
productive side, that is,industry and the rural economy.
Thanks to the RBI, the Indian bankingsector remains on track. When
inflationthreatened to derail the growth story, itenforced strict norms that helped to
reinin inflation. The level of nonperformingassets (NPA) in Indian banks too is
inkeeping with internationally acceptablelevels and is lower than in some SouthEast
Asian countries.
In anticipation of the growth in thecoming years, existing players in India aredrawing
up major expansion plans. TheTatas are said to have lined up a massiveinvestment of
over a billion dollarsover the next three to four years througha new company, Tata
Capital. AnilAmbani wants Reliance Capital, one of the fastest growing financial
sector companies,to be among the top three financialservices companies, including
banks,in the country. It plans to increase itsemployee strength from current 11,000to
50,000 over the next two years.
The resilience of the Indian bankingsystem was first visible when the countrycame
out unscathed from the EastAsian crisis. The gradual pace of reformsin the country
have only resulted in makingthe banking sector one of the mostsound and robust in
the world. Barringsocial or political volatility, most industryofficials are confident
that the sector willcontinue to do well.
The banking industry has been apartner in the nation‟s progress. India‟stryst with
growth is likely to continuein the future as a robust banking sectorprovides the critical
support necessaryfor stable and sustained growth.
Experts have also projected that Indiawould emerge as the third largest banking hub
in the world by 2040.The banking sector will grow significantlyfaster than GDP in the
„E7‟emerging economies of China, India,Brazil, Russia, Indonesia, Mexico
andTurkey, ccording to new projectionsby PricewaterhouseCoopers. Totalprofits from
domestic banking in theE7 could be around half those in theG7 (US, Japan, Germany,
UK, France,Italy and Canada) by 2025 and largerthan in the G7 much before
2050.The new projections for the bankingmarket, using projected marketexchange
rates, suggest that total domesticcredit in China could overtakethe UK and Germanyby 2010, Japanby 2025 and the US before 2050. Indiacould also rise from relatively
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OBSERVATIONS FROM PERSONAL INTERACTION WITH
COMPANY PROFESSIONAL
GLOBAL
As of 31 December 2009, the bank had 157 overseas offices spread over 32 countries.
In Nepal, SBI owns 55% of Nepal SBI Bank, which has branches throughout the
country. In Moscow, SBI owns 60% of Commercial Bank of India, with Canara Bank
owning the rest. In Indonesia, it owns 76% of PT Bank Indo Monex. In Kenya, State
Bank of India owns 76% of Giro Commercial Bank, which it acquired for US$8
million.
NATIONAL
State Bank of India (SBI) is the largest banking and financial services company in
India by revenue and total assets. As of March 2011, it had assets of US$ 370 billion
with over 13,000 outlets including 150 overseas branches and agents globally.
The achievements in the recent years are:-
SBI has turned into the third-largest employer in India among listed
companies after Coal India Limited and Tata Consultancy Services.
Best Online Banking Award, Best Customer Initiative Award & Best Risk
Management Award (Runner Up) by IBA Banking Technology Awards 2010
Best Bank 2009 by Business India
Best Bank – Large and Most Socially Responsible Bank by the Business Bank
Awards 2009
The Most Trusted Brand 2009 by the Economic Times
B.L Mathur
Administrative Officer
SBBJ ( Associated Bank - SBI)
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CONCLUSION
SWOT ANALYSIS
State Bank of India (SBI) is the leading commercial bank in India, offering services
such as retailbanking, commercial banking, international banking and treasury
operations. Low cost CASA andreduced reliance on bulk deposits help the bank
reduce the cost of funds and thus improve profitability,but deregulation of savings
interest rates, and increasing competition could affect the bank's
financialperformance.
Strengths Weakness
Status of being the largest public sector
bank providing substantial size and scale
benefits
Low cost CASA and reduced reliance on
bulk deposits
Prudent lending practices and
provisioning helping control net NPAs.
Compared to foreign banks in India,
SBI‟s overseas presence is minuscule.
Susceptible to political interventions.
Opportunities Threats
New licenses and approvals likely to
expand revenue and profits
Growth in general insurance industry will
help SBI to increase the market share
Acceleration in project SHIP enhances
competitive strength
Deregulation of savings accounts interest
rates could affect deposit growth and
margins
Base rate system could limit interest
manoeuvrability
Opening of Indian banking sector leading
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Expansion of home loan market in
Bangladesh would increase profits
to intnse competition.
Strengths
Status of being the largest public sector bank providing substantial size andscale benefits
SBI is the largest commercial bank in India. The bank ranks amongst the top
25 banks in the Asianregion and is the only Indian bank to appear in the list of
the world's top 100 banks. Magnitude ofthe bank's size is evident from the
total business done (deposits and advances in 2010-11(INR14,78,439.2
million or $32229.97million), branch network (21500 branches ,including
branchesthat belong to its associate banks), ATM network (25,000 belong to
SBI). This is one of the largestcore banking networks in the world and
growing as well. During 2008-10, the bank increased itsscale by acquiring
State Bank of Saurashtra, and State Bank of Indore. Leveraging its strong
presencein the Indian banking industry, the bank has been able to effectively
position itself on the world mapand gain global recognition.
Low cost CASA and reduced reliance on bulk deposits
Low cost current account and savings account (CASA) deposits has been SBI
a key strength of thebank. During 2010-11, SBI saw excellent growth in all
businesses/market segments in which itoperated. SBI's average CASA growth
during 2010-11 was around 22.52%. Growth in low costCASA deposit base
has helped the bank to reduce reliance on bulk deposits, unlike its private
sectorcompetitors or foreign banks with significant presence in India. Low
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cost CASA and reduced relianceon bulk deposits help the bank reduce the cost
of funds and thus improve profitability.
Prudent lending practices and provisioning helping control net NPAs
SBI is known for prudent lending practices. The bank's net non performing
assets NPAs) declined by INR28,470 million. The net NPA as at the end of
March 2011 was 1.63%. Account TrackingCentres have also been set up at all
Local Head Offices for centralised follow up of borrowers in theNPA
category. The bank's healthy NPA ratio not only meets the requirements of the
regulatorsworldwide but is also comparable to the best banks globally. Prudent
lending practices andprovisioning helped the bank register higher return on
average assets compared to its peers.
Weaknesses
Compared to foreign banks in India, SBI's overseas presence is minuscule.
SBI is one of the top 100 banks in the world. It is also one of the top 10 banks
in Asia. The numberof foreign offices increased from 142 as on 31st March
2010 to 156 as on 31st March 2011 spreadacross 32 countries.Yet, the bank's
dependence on the domestic market (India) is too high at 95.13%in 20010-11.
Compared to its peers (top 10 largest banks in Asia), SBI's international
operationscontribution to revenue and profits are miniscule. The
management's aim to transform the bank intoa global bank can't be realized
without expanding the contribution from international operations.Moreover,
the lack of significant contribution from international operations increases the
businessrisk for the bank.
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Susceptible to political interventions
Government of India is the largest shareholder in SBI. In June 2008, Reserve
Bank of India (RBI)transferred its stake (59.73%) in SBI to the Government of
India (GOI). It is widely believed thatruling political party could misuse GOI's
stake in SBI to direct lending to priority sectors/preferredsectors to achieve
certain political objectives. As a result, SBI may not be able to deploy its
assetsoptimally. Over a period, if GOI doesn't reduce its stake in SBI then that
could have an impact onthe SBI management's strategies as well. Moreover,
SBI which used to enjoy above sovereign ratings on its debt issues could
increasingly find it difficult to get above sovereign ratings. This inturn would
lead to rise in cost of capital.
Opportunities
New licenses and approvals likely to expand revenue and profits
The financial year 2009-10 saw several positive developments for the bank. A
joint venture formed with Societe Generale Securities Services for undertaking
custodial services business commencesbusiness. Similarly, another joint
venture with Insurance Australia Group (IAG) commenced business.In the
years to come, the bank is likely to expand into seven niche areas viz. Mobile
Banking,Merchant Acquisition Business, SME Current account and Supply
Chain Finance, Savings Bank,Cash Management Product, NRI remittances
and Government business. The bank is likely toannounce aggressive business
plans, improving processes and matching organizational structuresin order to
grow in these areas.
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Growth in general insurance industry will help SBI to increase the market
share
Insurance penetration in India is very low and the general insurance industry is
expected to grow at15 to 20 % annually over 10 years. There are 14 general
insurance companies in India, whichincludes the four government owned
players accounting for over 60% of the market at the end ofMarch 2009.
Following detariffing last year, the general insurance saw a steep reduction in
premiumrates resulting in a 12.5% growth in premium in 2008-09. The Indian
non-life insurance market grewby 12.6% in 2008 to reach a value of $7.1
billion, representing a compound annual growth rate(CAGR) of 14.7% for the
period spanning 2003-2008. In 2012, the Indian non-life insurance marketisforecast to have a value of $11.2 billion, an increase of 57.6% since 2008, at a
CAGR of 9.5% forthe five-year period 2008-2012. SBI's joint venture with
Insurance Australia Group (IAG) wills enableit to benefit from insurance
market expansion in India.
Acceleration in Project SHIP enhances competitive strength
SBI is in talks with the government of India to hasten the process of merging
some of its associatebanks with itself. In July 2010, State Bank of Indore
merged with SBI. Earlier in August 2008, State Bank of Saurasthra (SBS)
merged with SBI.These mergers are expected to accelerate Project SHIP(SHIP
is short form for four associates State Bank of Saurashtra, State Bank of
Hyderabad, StateBank of Indore and State Bank of Patiala.) signalling for the
merger of sequence of associate banksin the near future. All the above
mentioned four banks are wholly owned subsidiaries directly controlledby
SBI. So, there is no need for any annual general body meeting (AGM)
approval and the mergerdecision can be taken anytime after convening a
formal meeting of the boards of directors.Acceleration in Project SHIP
enhances SBI's competitive strength against its global peers operatingin India.
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Base rate system could limit interest rate manoeuvrability
The Indian banking transited from a benchmark prime lending rate (BPLR)
regime to a base rate system of lending, in July 2010. The base rate is the
minimum rate at which banks can lend after meeting all their costs. So the
base rate includes the cost of deposits, the cost of running the bank and a bit of
profit margin. Though, SBI being one of the banks with highest low cost
CASA deposits and thus can lend customers at a base rate lower than that of
its peers, the room to manage net interest margin is now difficult for the bank.
This could have negative consequences for credit off-take and thus limit
interest income of the bank. Another consequence that could be foreseen is the
increased demand for foreign deposits and borrowings in order to increase
interest ratemanoeuvrability. Increased dependence on bulk foreign deposits
and borrowings could lead to higher foreign exchange risks and asset liability
management risks.
Opening of Indian banking sector leading to intense competition
The Indian banking sector is progressively being opened to foreign banks.
Reserve Bank of India,India's central bank will allow foreign banks to invest
up to 74% in Indian banking sector and also set up branches in rural India. The
regulatory changes will be made to industry structure and sector consolidation
in areas such as freedom to deploy capital; regulatory coverage; corporate
governance; labour reforms and human capital development; and support for
creating industry utilities and service bureaus. At present in India, there are 28
public sector banks, 27 private sector banks and 29 foreign banks. These
numbers are set to increase in the months to come as RBI intends to increase
competition levels in Indian banking industry. New private-sector, foreign
banks and other large public-sector banks (PSBs) are quite competitive, posing
a serious challenge to SBI's franchise.