1. India Banking & Finance Industry
Benjamin Weber
Institute of Management Technology Nagpur
October 17, 2011
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2. Facts I
Well-organised and regulated financial industry.
A strong banking sector is needed to power economical
growth.
42% of rural population in India have bank accounts.
Total asset size of Indian banking industry rose from USD 250
billion (March, 2000) to USD 1.3 trillion (March, 2010);
CAGR: 18 % .1
Retail banking sector: 30% CAGR2
ATMs: 70 000 (2010) to 250 000 (2020)3
Structural changes in regulatory frameworks, securisation,
stringent NPA.
1
IBEF, 2011.
2
Chanda Kochhar, ED, ICICI Bank.
3
Boston Consulting Group, 2011.
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3. Facts II
Pitfalls of growth: home, car, consumer loans.
Primary target & fluffiest segment: upwardly mobile urban
salaried class.
Limit of FDI in private banks has been lifted to 74%, no cap
on voting rights anymore.
Average Tier-1 Capital Adequacy Ration of 10% (Basel III:
8.5%).4
TOP 10 banks accounted for 57% share of total credit (March
31, 2011).5
Loans increased by 19.9%, deposits by 18.4%.
Indian labor force grows faster than population.
Mortgage loan and wealth management will grow 10 times by
2020.6
4
IBEF, 2011.
5
See above.
6
Boston Consulting Group, 2011.
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4. Facts III
Retail New market areas: Wealth management, private
banking, doorstep banking; housing is expected to
continue to be the biggest growth segment followed
by auto loans. Significant growth can be identified in
areas of electronic banking, credit cards, investment
advisory services.
Corporate Doubling of credit flow to the SME; annual growth of
20% (5Y period, ending by 2011-12).
Micro Increasing economic prosperity in rural areas vs.
fierce competition in urban and metropolitan areas
→ opportunity to cater rural market.
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5. for more of it. Having moved the needle on almost all Sound performance is complemented by rapid growth
performance metrics in the last decade, the Indian that supports India’s GDP expansion. At the current rate,
banking industry stands out for its relatively robust the Indian banking industry will be the world’s third–
balance sheet and sound performance. As shown in largest by 2025, as shown in Exhibit 1b. This increasing
Indian Banking Industry at a Glance
Exhibit 1a. Indian banking: Sound health and balanced performance
Return on equity (%) Cost: Income ratio (%) Valuation (P–BV) Bad debt1 to assets ratio
Return on Cost to Price / book Bad debt to
Country Country Country Country
equity income ratio ratio assets ratio
Turkey 19.6% Indonesia 79.3% Indonesia 3.6 Russia 2.4%
Indonesia 17.8% Germany 75.1% Malaysia 2.3 Indonesia 2.0%
Malaysia 17.4% France 73.1% Canada 2.0 Turkey 1.3%
China 16.7% Canada 65.7% Russia 2.0 USA 1.2%
India 15.3% USA 65.4% Thailand 1.9 China 0.9%
Singapore 14.6% Russia 59.4% India 1.8 Spain 0.7%
Australia 14.0% Thailand 56.7% China 1.7 South Korea 0.6%
Canada 12.4% Australia 55.6% Australia 1.6 India 0.6%
South Korea 10.1% Malaysia 54.6% Turkey 1.5 Singapore 0.5%
Spain 8.2% India 47.3% Singapore 1.4 Thailand 0.4%
Russia 7.9% South Korea 46.5% South Korea 0.9 Malaysia 0.4%
Thailand 6.9% Spain 42.1% USA 0.8 Germany 0.4%
France 4.0% Turkey 41.9% Spain 0.8 Australia 0.4%
USA 2.7% China 40.4% France 0.5 Canada 0.3%
Germany –0.8% Singapore 40.1% Germany 0.3 France 0.2%
Sources: OECD; IBA data; Turkish Banking Association; Central Banks of Malaysia, Singapore, Thailand and Indonesia; Thomson Reuters Datastream;
BCG analysis.
Note: Weighted averages over the years 2007 to 2009. Indian data for a year corresponds to year ending in March (e.g. April 2009 to March 2010 corresponds
to year 2009). For other countries the data corresponds to the calendar years. The valuation data is for the calendar year 2010.
1
The bad debt charged to P&L as a percentage of assets.
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6. Will Exhibit 1b.#3 by 2025? worlds 3rd largest by 2025
it be Indian Banking will be
Sources: EIU country data; OECD; IBA data; BCG analysis.
significance and influence comes with a higher level of reasonable interest margins and serving high cost, high
responsibility towards the real economy. The global risk customers that are on national priority.
Benjamin Weber
banking crisis has highlighted the perils of irresponsible Institute of Management Technology Nagpur
India Banking with the real economy footing the bill for banks’
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7. MARKET OVERVIEW
Banking November 2010
Structure of Banking Industry system
Structure of the Indian banking
Reserve Bank of India
Banks Financial institutions
Scheduled Cooperative
All-India financial State-level Other
Commercial credit
institutions institutions institutions
Banks (SCBs) institutions
Regional rural Urban Rural cooperative
Public sector Private sector Foreign banks
banks (RRB) cooperative credit institutions
banks (27) banks (22) (32)
(82) banks (1,674) (96,751)
Source:“Report on trend and trend ofand progress ofRBI website, www.rbi.org.in, accessed 30 November 2010
Source: Report on progress banking in India 2009–10”, banking in India 200910, RBI website,
www.rbi.org.in.
9
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8. MARKET OVERVIEW
Banking November 2010
Structural Change
Market analysis … (1/3)
There has been a gradual shift in business from public to private and foreign banks.
Market share by assets (2002–03) Market share by assets (2009–2010)
7% 7.2%
17% Public banks 19.1% Public banks
Private banks Gradual
Private banks
shift
Foreign banks 73.7% Foreign banks
76%
Source:banking systemtrend and progress of banking in Indiabanks (SCBs) withwebsite,
• The Report on in India is dominated by scheduled commercial 200910, RBI a pan-India
www.rbi.org.in. March 2010, SCBs controlled most of the assets, with the rest being controlled by a large
presence. As of
number of small cooperative credit institutions with a very limited geographic reach.
• Within SCBs, public sector banks accounted for 73.7 per cent of the assets and the rest was held by
foreign banks and private sector banks.
Source: “Report on trend and progress of banking in India 2009–10”, RBI website, www.rbi.org.in, accessed 30 November 2010
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9. banks to differentiate themselves, to improve customer captures how the face of Indian banking will change during
service, to generate new leads for sales, and to reduce the next decade. It shows the percentage composition of
costs. The productivity survey revealed that many banks transaction volumes by channel in 2003, 2010, and as
may not be ready to harness this opportunity. projected for 2020. Cash and cheque, which dominate the
The Exhibit 3a. fundamental change?
most Banking will not be the same
Transaction profile of India is expected to dramatically change
POS payment by mobile
P2P remittance / transfer
100 Bill and utility payments
9 13 Ticket bookings
Mobile top-ups
13 Insurance premiums
80
21 Shopping on mobile
7
42 Government payouts
7
60 14 Cash management
instructions (business)
6
94 Mobile other
40 45
Mobile POS
32 Online
49 POS (card)
20
ATM cards
16 13 Call centre
0 Cash and cheque
2003 2010 2020 (base) 2020 (optimistic)
~30% financial ~45% Financial ~65% financial ~80% financial inclusion
inclusion inclusion inclusion Adoption of Aadhar and direct credit of subsidy
Regulations to encourage mobile transactions
Sources: FIBAC Productivity Survey 2011; RBI reports; Central banks of Germany, Rigorous implementation of DTC1 and GST2
US and South Korea; World Bank population data; “The Mobile Financial Channel innovations by banks
Services Development Report” by World Economic forum in collaboration with Promotion of low cost NPCI interbank switch (RuPay)
BCG; BCG analysis. Adoption of smart phone technology and 3G
1
Direct tax code.
2
Goods and services tax.
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10. economies. Unlike many developed economies, this of Indian commercial banks as on March 31, 2011.
charge has not increased significantly post crisis. Control Corporate and institutional credit, which accounts for
over bad debt indeed appears to be one of key successes more than 50 percent of the credit, is the lowest risk
of the industry and its regulators. A disaggregated and segment followed closely by home loans. Unsecured
NPAExhibit 6a. NPA profile of Indiaindicator
Ratio as quality Banking
Category wise NPA
Sources: FICCI IBA Productivity Survey 2011; BCG analysis.
Note: Asset Finance = Construction equipment, commercial vehicles; Loan against security = Loan against jewels, deposits, shares, etc.
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11. Exhibit 1e. Bank systems with lower opex ◊ Rising interest rates im
tend OPEX → lower
Profitability: Lower to operate at lower NIMs NIM due to Mark–to–Marke
book. Productivity en
for such loss of profitab
ROE.
◊ The specter of econom
looms large in the ba
inevitable in such an e
already being seen in
management is crucial
such a scenario.
◊ Improving the efficacy
mechanism is crucial
inflation. As such, a dis
on the possibility of d
(SB) interest rate. It
deregulated, SB intere
Sources: OECD data; IBA data; Austin Bank – Brazil; Turkish Banking
Association; Central Banks of Malaysia, Singapore, Thailand and competition. Exhibit 1f
Indonesia; BCG analysis. SB rate increases on t
Note: Weighted averages over the years 2005 to 2009. Indian data
for a year corresponds to year ending in March (e.g. April 2009 to percent increase in SB
March 2010 corresponds to year 2009). For other countries the data the customers, the RO
corresponds to the calendar years.
percent. Given the low
Benjamin Weber Institute of Management Technology Nagpur
the industry to set high aspirations on composite metrics Exhibit 1f. SB rate d
of productivity. Such composite metrics have to
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12. Challenges?
1. Branch sales and service excellence
2. New channel excellence
3. Lean operations and operating model
4. Highperformance organization
5. Bad debt management: proactive, preemptive, and preventive
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