The Indian banking system is anessential, unreplaceable aspect of the Indian economy.
With the potential tobecome the fifth largest banking industry in the world by 2020 and thirdlargest by 2025 according to KPMG-CII report, India’s banking and financialsector is expanding rapidly. In FY16, value of public sector bank assets stoodat USD1.4 trillion. The total Indian banking sectorassets reached USD1.96 trillion in FY15 from USD1.
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3 trillion in FY10, with over70 per cent accounted for by the public sector. Total Indian asset market sizeis expected to reach USD1.97 trillion in FY17-18. One major contributing factorfor this is the Banking Laws (Amendment) Bill that was passed in 2012 thatallows the Reserve Bank of India (RBI) to make final guidelines on issuing newbank licenses. Moreover, the role of the IndianGovernment in expanding the banking sector is noteworthy.
It is expected thatthe new guidelines issued by RBI will curb practices of impish borrowers andstreamline the loan system in the country. In the coming time, India couldsee a rise in the number of banks in the country, a shift in the style ofoperation, which could also evolve by incorporating modern technology in theindustry.1.1.1. Brief History of Banking SectorThe banking sector in India hasgrown and developed significantly, from a closed, British controlled market tothe segment that we see today.· In 1921, the banking sector was a closed market,with the State-owned Imperial Bank of India being the only bank existing.
· In 1935, the RBI was established as the centralbank of country, with the Quasi central banking role of Imperial Bank coming toan end.· From 1936 – 1955, the Imperial Bank expanded itsnetwork to 480 branches. In order to increase penetration in rural areas,Imperial Bank was converted into State Bank of India. · From 1956 -2000, the nationalisation of 14 commercialbanks 1969, and another 6 in 1980 took place. Private players started emerging,such as ICICI, that intensified the competition. This led to technologyupgradation in all PSU banks.
· From 2000, till present, there have beentremendous changes. As of Feb 2017, India has the largest foreign exchangereserves (approximately USD 363.14 billion). In addition, the RBI has allowedforeign investment of up to 10% in the Indian market by foreign banks, whichopens up opportunities for further development. 1.1.
2. Executive Summary for 2016-17Asset Growth – In FY16, value ofpublic sector bank assets stood at USD1.4 trillion. Total Indianbanking sector assets reached USD1.96 trillion in FY15 from USD1.
3 trillion inFY10, with over 70 per cent accounted for by the public sector. Total Indianasset market size is expected to reach USD1.97 trillion in FY17 Growing Lending and Deposits – Totallending and deposits have increased at a CAGR of 6 per cent during FY11-15 and12.9 per cent, respectively, during FY06-15 and are further poised for growth,backed by demand for housing and personal finance Higher ATM Penetration – ByAugust 2016, total number of ATMs in India increased to 202,801 and is furtherexpected to double over next few years, thereby leading to increase in thenumber of ATMs per million people in India from 105 in 2012, to about 300 by2017. Increasing Rural Penetration– As of March 2016, 56 regional ruralbanks are functioning in the country. Under 1 phase of FIP (2010-13), 74,000villages, with population exceeding 2,000 people, were covered with 2,493banking outlets. RBI has allowed, regional ruralbanks with net worth of at least USD15.
28 million to launch internet bankingfacilities. Airtel payments bank opens over 1 lac accounts in UP, of which 60per cent have been opened in rural areas. 1.1.3. Structure of Banking SectorAs can be seen, Banks andFinancial Institutions are the 2 kinds of entities in the Indian Market, withfinancial institutions encompassing All India Financial Institutions (i.e.nationally present institutions), State Level Institutions, and OtherInstitutions, at a regional level.
Banks could include structuredcommercial banks, referred to as SCBs, i.e. Scheduled Commercial Banks, seen ata national and State Level, or Cooperative Credit Institutions, which areusually at a regional level (with the exception of few key players like AmulCooperation etc.). 1.
1.4. Growth in the Banking Sector:The growth in the Indian BankingIndustry has several aspects to it, i.e. Growth in deposits, Growth in AssetsBase, as well as Money Supply, Interest Income and Other Income. In addition,the NPA scenario too has been improving, although it has a long way to go. Thiswill be further aided by the Basel III norms to be implemented over the comingyears.A.
Growth in DepositsDuring FY06–17, deposits grew ata CAGR of 12.03 per cent and reached 1.54 trillion by FY17.
Strong growth insavings amid rising disposable income levels are the major factors influencingdeposit growth. Access to banking system hasalso improved over the years due to persistent government efforts to promotebanking-technology and promote expansion in unbanked and non-metropolitanregions. At the same time India’s banking sector has remained stable despiteglobal upheavals, thereby retaining public confidence over the years. Deposits under Pradhan MantriJan Dhan Yojana (PMJDY), have also increased.
As on November 9, 2016,USD6,971.68 million were deposited, while 255.1 million accounts were opened B. Growth in Banking Sector AssetsTotal banking sector assets haveincreased at a CAGR of 11.71 per cent to USD1.
96 billion duringFY13–15 Assets of public sector banks,which account for more than 70 per cent of the total banking assets, grew at aCAGR of 12 per cent. Private sector expanded at an CAGR of 13 per cent, whileforeign banks posted a growth of 9 per cent.Total assets of Public SectorBanks amounted to USD 1384.31 billion in FY16.Corporate demand for bank loanshave grown due to continued infrastructure investments, and due to other policydecisions such as reducing oil subsidies, issuing of telecom spectrum licensesand the proposed abolition of penalty on loan prepayment C. Growth in Money SupplyDuring FY06–17, total money supplyin the country increased at a CAGR of 9.92 per cent, reaching to USD1.
8trillion by the June end 2016. Narrow money supply (M1) grew ata CAGR of 7.08 per cent while its components currency with public and depositmoney of the public, grew at a CAGR of 10.
1 per cent and 5.1 per cent,respectively, during FY06–16, and stood at USD397.37 billion by the end of June2016. During FY06-16, broad moneysupply (M2) grew at a CAGR of 12.2 per cent reaching to USD415.7 billion inJune 2016. Money supply (M3) grew at a CAGRof 15.
7 per cent, during FY06-16, and stood at USD1.78 trillion by the end ofJune 2016. During FY06–16, highestaverage growth in time deposits was witnessed at a rate of 12.41 per cent, withthe value of time deposits reaching to USD1.
38 trillion in June 2016. D. Growth in Interest Income and Other IncomePublic sector banks account forover 72.3 per cent of interest income in the sector in FY15. They lead the packin interest income growth with a CAGR of 11.
5 per cent over FY09-15. Overall, the interest income forthe sector has grown at 11 per cent CAGR during FY09-15. Interest income ofPublic Banks was witnessed to be USD105.44 billion in FY16.Public sector banks account forabout 57.65 per cent of income other than from interest (‘other income’). ‘Otherincome’ for public sector banks has risen at a CAGR of 5.7 per cent duringFY09-15.
Overall, ‘Other income’ for thesector has risen at 7.53 per cent CAGR during FY09-15.Other income for Public banksincreased from USD12.39 billion in FY15 to USD12.69 billion in FY16.E.
Non Performing AssetsDespite the global financialcrisis, net Non-Performing Assets (NPA) of Indian banking sector have declinedover the past few years. Gross NPA to Gross Advances in public sector banksgrew from 4.46 per cent in FY14 to 5.09 per cent in FY15.Private sector banks maintainedlowest gross non-performing assets to gross advances at 2.16 per cent in FY15.
Net NPA to Net advances bypublic sector banks increased from 2.92 percent in FY15 to 5.75 percent inFY16.F.
Basel III NormsAn NPA is defined as a loan oran advance where; · Interest and/ or instalment of principal remainoverdue for a period of more than 90 days in respect of a term loan; ?· The account remains ‘out of order’ – in respectof an overdraft/cash credit (OD/CC)· The bill remains overdue for more than 90 daysin case of bills purchased and discounted. ?· An existing NPA account is upgraded to standardcategory only on collection of all overdues. ?In accordance with theguidelines of RBI, banks must adopt a standardised approach for credit risk,basic indicator approach for operational risk and standardised durationapproach for market risk for computing capital adequacy. Basel III Capital regulationsare applicable to Banks in India from 1st April, 2013 and will be fully phasedin by 31st March, 2018. Detailed guidelines on Basel III Capital Regulationsand Guidelines on Composition of Capital Disclosure Requirements are issued byRBI and consolidated under the Master Circular – Basel III Capital RegulationsJuly 2013. 1.
1.5. Use of Technology in BankingIn the last few years, technology is being increasinglyused by Indian banks· Banks are using technology at various levelssuch as, back-office processing, convergence of delivery channels, IT-enabledbusiness process reengineering as well as communication with customers · Indian banks currently devote around 15% oftotal spending on technology · Spending on technology is expected to increaseat an annual rate of 14.
2 per cent · Banks in the country are set to benefit furtheras they move ahead in implementing additional technological advancements · Indian banking and securities companies willspend USD8.89 billion on IT products & services in 2015, an increase ofnearly 15.2 per cent over 2014Technology has allowedbanks to increase their scale rapidly and manage increased business andtransactions volume with lesser man power and reduced costs (at the operationallevel). Digital analytics is providing deeper insights into customer needs andenabling banks to offer highly targeted products and services; this is likelyto pick up pace in the coming years. New channel-integration technologies areenabling a more seamless end-to-end experience for banking customers. Customer Relationship Management(CRM) and data warehousing will drive the next wave of technology in banks. Indianbanks are rapidly focusing on SMAC (Social, Mobile, Analytics and Cloud) techniquesto reach new customers.Real Time Gross Settlement(RTGS) and National Electronic Funds Transfer (NEFT) are being implemented byIndian banks for fund transaction.
Securities Exchange Board of India (SEBI)has included NEFT and RTGS payment system to the existing list of methods thata company can use for payment of dividend or other cash benefits to theirshareholders and investors.1.1.
6. Other Notable Trends in BankingA. Improved Risk Management Practices· Indian banks are increasingly focusing onadopting integrated approach to risk management · Banks have already embraced the internationalbanking supervision accord of Basel II.; interestingly, according to RBI,majority of the banks already meet capital requirements of Basel III, which hasa deadline of 31 March 2019 · Most of the banks have put in place theframework for asset-liability match, credit and derivatives risk management B. Diversification of Revenue Stream· Banks are laying emphasis on diversifying thesource of revenue stream to protect themselves from interest rate cycle and itsimpact on interest income · Focusing on increasing fee and fund based incomeby launching plethora of new asset management, wealth management and treasuryproducts.
C. Consolidation in the Industry· With entry of foreign banks competition in theIndian banking sector has intensified · Banks are increasingly looking at consolidationto derive greater benefits such as enhanced synergy, cost take-outs fromeconomies of scale, organisational efficiency, and diversification of risks D. Demonetization· RBI Deputy Governor, said that sincedemonetization the Central Bank has collected over USD 185.81 billion indemonetized notes from various bank branches · The effects of demonetization are also visiblein the fact that bank credit plunged by 0.
8 per cent from November 8 toNovember 25, as USD 9.85 billion were paid by defaulters. As per RBI, a totalof USD 125.53 billion was deposited in banks till November 27, 2016 E. Know Your Customer· RBI mandated the Know Your Customer (KYC)Standards, wherein all banks are required to put in place a comprehensivepolicy framework in order to avoid money laundering activities · The KYC policy is now mandatory for opening anaccount or making any investment such as mutual funds.1.1.
7. Industry Value Chain 1.1.8.
Porter Five Forces AnalysisA. Competitive Rivalry· At present public sector banks, led by SBI &associates, control 77.3 per cent of the banking sector · Rivalry is much aggressive in metropolitan areas· Issuing of new licenses will increasecompetitive rivalry in rural areas over medium to long term B. Threat of New Entrants · High entry barriers, as RBI and Central Bankcontrol the issuance of licenses. · New licenses may reduce market-share of publicbanks. C.
Substitute Products · For deposit substitutes include investment ingold, real estate, equity etc. · For advances substitutes include, bonds, IPO/FPO,etc.D. Bargaining Power of Suppliers · Largely, customers prefer banks for itsreliability.
· Gradually, customers have hedged inflation byinvesting in other riskier avenues.E. Bargaining Power of Customers · Nascent debt market and volatile stock market,are less opted.· Banks are an indispensable source of fund inIndia. 1.1.9.
Banking Industry Marketing MixThe first task before the publicsector commercial Banks is to formulate that Bank marketing mix which suits thenational socio-economic requirements. A. Product:To be more specific, theperipheral services need frequent innovations, since this would be helpful inexcelling competition.
The product portfolio designing is found significant tomaintain the commercial viability of the public sector banks. The banksprofessionals need to assign due weightage to their physical properties. Theyare supposed to look smart active and attractive. B. PricePrice is a critical andimportant factor of bank marketing mix due numerous players in the industry.Most consumers will only be prepared to invest their money in search ofextraordinary or higher returns. They are ready to pay additional value ifthere is a perception of extra product value.
This value may be improvedperformance, function, services, reliability, promptness for problem solvingand of course, higher rate of return C. Promotion:Bank Marketing is actually isthe marketing of reliability and faith of the people. It is the responsibilityof the banking industry to take people in favour through Word of mouthpublicity, reliability showing through long years of establishment and otherservices. D. Place:The choice of where and when tomake a product available will have significant impact on the customers.Customers often need to avail banking services fast for this they require thebank braches near to their official area or the place of easy access.
1.1.10. Challenges faced by Banking IndustryThe banking industry in India isundergoing a major change due to the advancement in Indian economy and continuousderegulation. Some challenges it faces are:A. Deregulation:This continuous deregulation hasgiven rise to extreme competition with greater autonomy, operationalflexibility, and decontrolled interest rate and liberalized norms and policiesfor foreign exchange in banking market.
The deregulation of the industrycoupled with decontrol in the interest rates has led to entry of a number ofplayers in the banking industry. Thereby reduced corporate credit off which hasresulted in large number of competitors battling for the same pie. B.
ModifiedNew Rules: As a result, the market placehas been redefined with new rules of the game. Banks are transforming touniversal banking, adding new channels with lucrative pricing and freebees tooffer. New channels squeezed spreads, demanding customers better service,marketing skills heightened competition, defined new rules of the game pressureon efficiency. Need for new orientation diffused customer loyalty. Bank has ledto a series of innovative product offerings catering to various customersegments, specifically retail credit. C. Efficiency:Excellent efficiencies arerequired at banker’s end to establish a balance between the commercial andsocial considerations Bank need to access low cost funds and simultaneouslyimprove the efficiency and efficacy.
Owing to cut- throat competition in theindustry, banks are facing pricing pressure, have to give thrust on retailassets. D. DiffusedCustomer Loyalty: Attractive offers by MNC andother nationalized banks, customers have become more demanding and theloyalties are diffused. Value added offerings bound customers to change theirpreferences and perspective. These are multiple choices; the wallet share is reducedper bank with demand on flexibility and customization. Given the relatively lowswitching costs; customer retention calls for customized service and hasslefree, flawless service delivery. E.
MisalignedMind-Set: These changes are creatingchallenges, as employees are made to adapt to changing conditions. Theemployees are resisting to change and the seller market mind-set is yet to bechanged. These problems coupled with fear of uncertainty and controlorientation. Moreover, banking industry is accepting the latest technology bututilization is far below from satisfactory level. F. CompetencyGap: The competency gap needs to beaddressed simultaneously otherwise there will be missed opportunities. Placingthe right skill at the right place will determine success. The focus of peoplewill be doing work but not providing solutions, on escalating problems ratherthan solving them and on disposing customers instead of using the opportunityto cross sell.
Strategic options to cope with the challenges: Dominant players in the industryhave embarked on a series of strategic and tactical initiatives to sustainleadership. The major initiatives incorporate: · Focus on ensuring reliable service deliverythrough Investing on and implementing right technology. · Leveraging the branch networks and salesstructure to mobilize low cost current and savings deposits. · Making aggressive forays in the retail advancessegments of home and personal loans. · Implementing initiatives involving people,process and technology to reduce the fixed costs and the cost per transaction. · Focusing on fee based income to compensate foesqueezed spread. · Innovating products to capture customer ‘mindshare’ to begin with and later the wallet share.
· Improving the asset quality as Basel II norms. The banking environment of todayis rapidly changing and the rules of yesterday no longer applicable. Thecorporate and the legal barriers that separate the various banking, investmentand insurance sectors are less well defined and the cross-over are increasing.As a consequence the marketing function is also changing to better support thebank in this dynamic market environment.
The key marketing challenge today isto support and advice on the focus positioning and marketing resources neededto deliver performance on the banking products and services. Marketing, as aninvestment advisor, is about defining 4Ps and implementing key strategicinitiatives to Market segments, increasingly redefined, relevant micro-segmentsto survive and flourish in the highly competitive market.