A Comprehensive Report On Private sector bank Faculty Guide: Prof.Tejal mem.

Submitted By: Jignesh shah (En:11711059) Bharat patel (En:117110592105) Section : Finance B M.B.A II, SEMESTER III Parul Institute of Management & Research Parul Group of Institutes Affiliated to Gujarat Technological University (2011-13)

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History and evolution Product of private sector bank Majer players Distribution channel Issues & current trends PESTEL ANALYSIS

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History and evolution

Private-sector banks have been functioning in India since the very beginning of the banking system. Initially, during 1921, the private banks like bank of Bengal, bank of Bombay and bank of Madras were in service, which all together formed Imperial Bank of India. Reserve Bank of India(RBI) came in picture in 1935 and became the centre of every other bank taking away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there was rapid increase in the number of branches of the private banks. In April 1980, they accounted for nearly 17.5 percent of bank branches in India. In 1980, after 6 more banks were nationalised, about 10 percent of the bank branches were those of private-sector banks.[2] The share of the private bank branches stayed nearly same between 1980 and 2000.[3] Then from the early 1990s, RBI's liberalisation policy came in picture and with this the government gave licences to a few private banks, which came to be known as new private-sector banks. There are two categories of the private-sector banks: "old" and "new". The old private-sector banks have been operating since a long time and may be referred to those banks, which are in operation from before 1991 and all those banks that have commenced there business after 1991 are called as new private-sector banks.[4] Housing Development Finance Corporation Limited was the first private bank in India to receive license from RBI as a part of the RBI's liberalization policy of the banking sector, to set up a bank in the private-sector banks in India.[5]

Old private-sector banks

The banks, which were not nationalized at the time of bank nationalization that took place during 1969 and 1980 are known to be the old private-sector banks. These were not nationalized, because of their small size and regional focus.[6]
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Most of the old private-sector banks are closely held by certain communities their operations are mostly restricted to the areas in and around their place of origin. Their Board of directors mainly consist of locally prominent personalities from trade and business circles. One of the positive points of these banks is that, they lean heavily on service and technology and as such, they are likely to attract more business in days to come with the restructuring of the industry round the corner.

Growth driver:
High growth of Indian Economy: The growth of the banking industry is closely linked with the growth of the overall economy. India is one of the fastest growing economies in the world and is set to remain on that path for many years to come. This will be backed by the stellar growth in infrastructure, industry, services and agriculture. This is expected to boost the corporate credit growth in the economy and provide opportunities to banks to lend to fulfil these requirements in the future. Rising per capita income: The rising per capita income will drive the growth of retail credit. Indians have a conservative outlook towards credit except for housing and other necessities. However, with an increase in disposable income and increased exposure to a range of products, consumers have shown a higher willingness to take credit, particularly, young customers. A study of the customer profiles of different types of banks, reveals that foreign and private banks share of younger customers is over 60% whereas public banks have only 32% customers under the age of 40. Private Banks also have a much higher share of the more profitable mass affluent segment. New channel Mobile banking is expected to become the second largest channel for banking after ATMs: New channels used to offer banking services will drive the growth of banking industry exponentially in the future by increasing productivity and acquiring new customers. During the last decade, banking through ATMs and internet has shown a tremendous growth, which is still in the growth phase. After ATMs, mobile banking is expected to give another push to this industry growth in a big way, with the help of new 3G and smart phone technology (mobile usage has grown tremendously over the years). This can be looked at as branchless banking and so will also reduce costs as there is no need for physical infrastructure and human resources. This will help in acquiring new customers, mainly who live in rural areas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG report predicts that mobile banking would become the second largest channel of banking after ATMs. Financial Inclusion Program: Currently, in India, 41% of the adult population dont have bank accounts, which indicates a large untapped market for banking players.
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Under the Financial Inclusion Program, RBI is trying to tap this untapped market and the growth potential in rural markets by volume growth for banks. Financial inclusion is the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. The RBI has also taken many initiatives such as Financial Literacy Program, promoting effective use of development communication and using Information and Communication Technology (ICT) to spread general banking concepts to people in the under-banked areas. All these initiatives of promoting rural banking are taken with the help of mobile banking, self help groups, microfinance institutions, etc. Financial Inclusion, on the one side, helps corporate in fulfilling their social responsibilities and on the other side it is fueling growth in other industries and so as a

The group of New Private Sector banks dominated the league tables of growth, as against the average of other bank groups, with an average y-o-y growth in Assets at 38.7%, for Deposits at 38.8%, Advances at 39.9% and Operating Profit at 46.7%.

The group of Old Private Sector banks (refer to annexure) showed relatively lower growth in business. The annual growth rate for this group for FY07 stood at 7.1% in Assets, 6% in Deposits and 12% in Advances. However, this group fared better in Net profit, which grew by 30%. All bank groups reported a capital adequacy ratio of more than 12%.

The ratio of standard assets was highest in the case of Foreign Banks and New Private Sector banks at 98.1% each, followed by 97.3% in Public Sector banks and 96.9% in Old Private Sector banks. The ratio of Net NPAs to Total Assets was 0.6% in public sector and Old Private Sector banks, 0.5% in New Private Sector banks and 0.3% in Foreign banks.

Looking forward, Kochhar sees great potential for further growth. "If the economy grows 8%, 9% or 6.5%, the private banking sector will grow at at least two-and-a-half times the rate of Indias GDP growth. The sector could grow 16%-to-24% per annum year-on-year for the next decade. That means by 2020, we as a sector can be five times what we are today. So the growth opportunity is huge."

Adoption of banking technology

The IT revolution had a great impact in the Indian banking system. The use of computers had led to introduction of online banking in India. The use of the modern
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innovation and computerisation of the banking sector of India has increased many fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.

Number of ATMs of different private Banks Of India.

Apart from the above mentioned innovations the banks have been selling the third party products like Mutual Funds, insurances to its clients.Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.The New Private Sector Banks in India is having the largest numbers of ATMs which is fol off site ATM is highest for the SBI and its subsidiaries and then it is followed by New Private Banks, Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India. BANK GROUP OLD PRIVATE SECTOR BANKS NEW PRIVATE SECTOR BANKS whole economy NUMBER OF BRANCHES 4511 1685 ON SITE ATM 800 1883 OFF SITE ATM 441 3729 TOTAL ATM 1241 5612

6000 5000 4000 3000 2000 1000 0

NEW PRIVATE SECTOR BANKS OLD PRIVATE SECTOR BANKS OLD PRIVATE SECTOR BANKS NEW PRIVATE SECTOR BANKS

Products of the Banking Industry:

The products of the banking industry broadly include deposit products, credit products and customized banking services. Most banks offer the same kind of products with minor variations. The basic differentiation is attained through quality of service and the delivery channels that are adopted. Apart from the generic products like deposits (demand deposits current, savings and term deposits), loans and advances (short term and long term loans) and services, there have been innovations in terms and products such as the flexible term deposit, convertible savings deposit (wherein idle cash in savings account can be transferred to a fixed deposit), etc. Innovations have been increasingly directed towards the delivery channels used, with the focus shifting towards ATM transactions, phone and internet banking. Product differentiating services have been attached to most products, such as debit/ATM cards, credit cards, nomination and demat services.

Other banking products include fee-based services that provide non-interest income to the banks. Corporate fee-based services offered by banks include treasury products; cash management services; letter of credit and bank guarantee; bill discounting; factoring and forfeiting services; foreign exchange services; merchant banking; leasing; credit rating; underwriting and custodial services. Retail fee-based services include remittances and payment facilities, wealth management, trading facilities and other value added services.

Major players in India:

There are 25 private sector banks in India which are categorized by the RBI as Old Private Sector Banks and New Private Sector Banks. The 18 Old Private Sector Banks are as follows

Bank of Rajasthan [ Merger with ICICI going on] Bharat Overseas Bank Catholic Syrian Bank City Union Bank Dhanlaxmi Bank Federal Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Lakshmi Vilas Bank Lord Krishna Bank Nainital Bank Ratnakar Bank Sangli Bank SBI Comm & Intl Bank Ltd South Indian Bank Tamilnadu Mercantile Bank Ltd

The New Private Sector Banks where you have to deal with very carefully due to tons of Hidden Fees and Charges and almost similar pathetic customer care as that of PSU Banks.

DCB Development Credit Bank HDFC Bank ICICI Bank

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IndusInd Bank Kotak Mahindra Bank Axis Bank Yes Bank

Distribution channel of private banking:

Some of the distribution channels currently used include:

online banking offering; our growing network of automated telling machines (ATMs); telephone banking, which can be conducted through both fixed lines and mobile systems; branches and customer suites that offer comprehensive service offerings; and specialised suites for Private Banking, Priority and Commercial customers.

The banking industry is expected to be a leading player in ebusiness. Banks have established an Internet presence with various objectives. Most of them are using the Internet as a new distribution channel. Financial services, with the use of Internet, may be offered in an equivalent quantity with lower costs to the more potential customers. In the Romanian case, there have been identified some specific issues that restrain e-banking adoption: penetration and skills (PC, Internet), attitude towards technology, security and privacy concerns; trust in banking institutions, banking culture, e-banking culture, Internet banking

Issues and current trends:

On the growing influence of globalisation on the Indian banking industry, the report is of the opinion that the financial sector would be opened up for greater international competition under WTO. Opening up of the financial sector from 2005, under WTO, would see a number of global banks taking large stakes and control over banking entities in the country. They are expected to bring with them capital, technology, and management skills which would increase the competitive spirit in the system leading to greater efficiency. Government policy to allow greater FDI in banking and the move to amend Banking regulations Act to remove the existing 10 per cent cap on voting rights of shareholders are pointer to these developments, says the report. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and the various Free Trade Agreements that India is entering into with other countries, such as Singapore, will also impact on globalisation of Indian banking. However, according to the report, the flow need not be one way. Some of the Indian banks may also emerge global players. As globalisation opens up opportunities for Indian corporate entities to expand their business overseas, banks in India wanting to increase their international presence could naturally be expected to follow these corporate entities and other trade flows out of India. Alongside, the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. In the past mergers were initiated by regulators to protect the interest of depositors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to gain momentum in the coming years, says the report. Mergers between public sector banks or public sector banks and private banks could be the next logical development, the report adds. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards, insurance etc. Branch Authorisation Policy As you are aware, the RBI announced a new Branch Authorisation Policy in September 2005 under which certain changes were brought about in the authorisation process adopted by the RBI for the bank branches in the country. As against the earlier system, where the banks approached the RBI, piece meal, through out the year for branch authorisation, the revised system provides for a holistic and streamlined 10

approach for the purpose, by granting a bank-wise, annual aggregated authorisation, in consultation and interaction with each applicant bank. The objective is to ensure that the banks take an integrated view of their branch- network needs, including branch relocations, mergers, conversions and closures as well as setting up of the ATMs, over a one-year time horizon, in tune with their own business strategy, and then approach the RBI for consolidated annual authorisations accordingly. There seems to be some misunderstanding in some quarters that, under the new policy, the banks have to wait for the annual authorisation exercise and are constrained in approaching the RBI for any emergent authorisation in between. Since the branch expansion planning of the banks is expected to be a well thought out, Board-approved annual process, normally, there should be no need for any emergent or urgent authorisation being required by the banks, in the interim. However, I would like to emphasise that the new policy does not preclude the possibility of any urgent proposals for opening bank branches being considered by the RBI even outside the annual plan, specially in the rural / under-banked areas, anytime during the year. This flexibility has been clearly articulated in our policy guidelines as contained in the Master Circular of July 2007 but somehow, it seems to have got overlooked. There also seems to be a feeling among some banks that under the new authorisation policy, the process adopted is more cumbersome and, as a result, there have been delays in issuing authorisations. Since the banks are required to approach the RBI only after obtaining the approval of their respective Boards for their annual branch expansion plan, it is possible that the preparatory time required for filing their annual plan with the RBI might be a little longer. The processing time at the end of the RBI, however, has been generally in the range of one to two months which I consider to be reasonable, given the element of consultation with the banks built into the process. However, the actual number of authorisations issued by the RBI under the new policy has been much higher than before. For instance, as against the a total of 881,1125 and 1259 authorisations given by the RBI under the old policy regime during 2003-04, 2004-05 and 2005-06, respectively, the number of authorisations issued under the new policy during 2006-07 was 2028. Thus, as against the general perception that the new policy has been more restrictive in grantingauthorisations, the fact is that there has been a sharp increase of about 61 per cent in the total number ofauthorisations granted last year

POLITICAL
Banking act 1949(code of conduct) Rules of RBI-Indian Banking Association. Restriction on mergers

Economical
Money inflation and deflation 11

 Industrial growth Liberalization Globalization Capital market requirement CRR and other rates. social Banking habits of the people. Income level is rising Society and aspiration values

Technical
Product innovation Focus on increasing level of service by technicaladvancement

To what degree a government intervenes in the economy. Ex-taxpolicy, labour law, environmental law, traderestrictions, tariffs, and political stability Some of the major political factors affecting the Bankingindustry are: : Focus on regulation of government Budget and budget measures Foreign Direct Investment limits Indian banking sector is least affected as compared to other developed countriesthanks to robust policy framework of RBI. Government affects the performance of banking sector most by legislature and framing policy government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers. Stricter prudential regulations with respect to capital and liquidity gives India an advantage in terms of credibility over other countries. To support capitalisation, the government has infused Rs 23,200 crore (US$ 5.2 billion) into stateowned banks during the last three fiscals The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to
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foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment Increase Farm Credit Subvention of 1% to be paid as incentive to farmers Debt Waiver for Farmers Setting up of separate task force for those not covered under the debt waiver scheme Agriculture has been the mainstay of our economy with 60% of our populationderiving their sustenance from it.In the recent past, the sector has recorded a growth of about 4% per annum withsubstantial increase in plan allocations and capital formation in the sector with help ofbanking assistance.The one-time bank loan waiver of nearly Rs 71,000 crore to cover an estimated 40 million farmers was one of the major highlights Every year RBI declares its 6 monthly policies and accordingly the variousmeasures and rates are implemented which has an impact on the bankingsector.The Economic measures affects the banking sector to boost the economy by giving certain concessions or facilities. If in the savings are encouraged, thenmore deposits will be attracted towards the banks and inturn they can lendmore money to the agricultural sector and industrialsector, therefore, booming the economy .If the FDI limits are relaxed, then more FDI are brought in India through banking channels Key July Sept OctEvery year RBI declares its 6 monthly Rate 26th 16th 25thpolicies and accordingly the various smeasures and rates are implemented whichhas an impact on the banking CRR 6.oo 6.00 6.00sector.In past 24 months RBI has changed its Repo 8.00 8.25 8.50key monetary rates 13 times to curb rateinflation and other economic risks. Rever 7.00 7.25 7.50 se repo rate SLR 24 24 24 Indian economy has registered isdirectly related to the growth of framing favorable FDI policies GDP.These plans directly affect andbank earns interest on that. robust growth in past years and Banking sector the economy.GOI is trying to push the economy by , NRIInvestment plans which directly affect the banking industry as money comes through banks

Interest Rates:RBI controls interest rates, which RBI monitors regularlyRecently RBI reduced bank rate to stimulate growth of banking industryInflation Rate:India is facing huge troubles due to inflation as it is 10% now.To curb the inflation and slowdown of economy RBI has taken varioussteps like lowering interest rates to increase the demand in banking sectorSavings and Investments: Gross domestic saving is 28% of total income in IndiaLatest step taken by RBI to deregulate savings rates is a step to increaseBank savings It includes cultural aspects and health consciousness, population growth rate, agedistribution, career attitudes and emphasis on safety. This could be classifiedinto:Before the birth of the banks, people of India were used to borrow money localmoneylenders, shahukars, shroffs. They were used to charge higher interest andalso mortgage land and house. But after emergence of banks attitude of people
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waschanged and they have started lending from the banks Life style of India is changing rapidly. They are demanding high class products. They have become more advanced. People needs and wants are increasing day by day. And this has this has opened opportunities for banking sector to tap this change. This has made things available easily to everyone. Increase in population is one of he important factor, which affect theprivate sector banks. Banks would open their branches after looking into thepopulation demographics of the area.Newer branches are coming to serve the increasing population. This incentive to bankscomes on the back of the continuing need to open more branches in these States inorder to ensure more uniform spatial distributionLiteracy rate in India is very low compared to developed countries.Illiterate people hesitate to transact with banks. So, this impacts negatively onbanks. But there is positive side of this as well i.e. illiterate people trust more onbanks to deposit their money, they do not have market information.Opportunities in stocks or mutual funds Technology plays a very important role in banks internal control mechanisms as wellas services offered by them. Through the use of technology new products and serviceare introduced. It include technological aspects suchas R&D activity, automation, technology incentives and the rate of technologicalchange. Some of the technological changes which brought radical changes in bankingindustry are described below : The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed anytime, anywhere banking facilities Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunicationfacilities and computer technology by using terminals installed at customers homeand they can make the balance inquiry, get the statement of accounts, giveinstructions for fund transfers, etc. Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile Technology advancement has changed the face of traditional banking systems. Technology advancement has offer 24X7 banking even giving faster and securedservice Indian economy has registered a high growth for last three years and is expected tomaintain robust growth rate as compare to other developed and developingcountries. Banking Industry is directly related to the growth of the economy.The growth rate of different industries were:Agriculture : 18.5%Industry : 26.3%Services : 55.2% It is great news that today the service sector is contributing more than half of the Indian GDP. It takes India one step closer to the developed economies of the world. Earlier it was agriculture which mainly contributed to the Indian GDP. This increases the avenues of
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investment by the industrial sector . This wouldfurther increase the borrowings by the industries leading to the banking Industry In regards with the service sector , as the income of the people will increase, lending and savings will increase leading to increased business for the banks . There are two major factors determining the legal aspects of the Banking Industry :In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank ofIndia (RBI) "to regulate, control, and inspect the banks in India.The Banking Regulation Act also provided that no new bank or branch of an existingbank could be opened without a license from the RBI, and no two banks could havecommon directors The Reserve Bank of India (RBI) will intervene to smooth sharp movements in the rupee and prevent a downward spiral in its value, but will balance this with the need to retain reserves in the event of prolonged turbulence The impressive performance of Indian banks as compared to other large economies onalmost all parameters - profitability, cost to income ratio, non-performing asset (NPA)levels, valuations, net interest margins, fee income - the industry is on the right side ofaverage among comparable economies. Transition from class banking to mass banking and increased customer focus isdrastically changing the landscape of Indian banking. Expansion of retail banking has alot of potential as retail assets New channels (like ATM and mobile phones) allow transactions at a fractional cost.The study exposes a possibility for the next decade. Investment in technology in theIndian banking industry is about half of international average Consolidation in the banking industry has remained crucial to ensuring technologicalprogress, excess retention capacity, emerging opportunities and deregulation of variousfunctional and product

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