Banking

Executive Summary

The banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit offtake (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself.

In the good times, the banks have sought to consolidate, restructure and take an assertive stance to fuel future growth.

Apart from streamlining their processes through technology initiatives banks are also resorting to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income in a big way.

The stress now is on creating new advantages from existing assets. People resources are now trained to deliver this advantage.

Policy changes that were initiated in 2002-03, helped reform the sector in more ways than one. Due to the securitisation and asset reconstruction act that was passed by the parliament, the lenders were in a better position to effect recoveries.

Higher inflation and the prospect of the US raising interest rates may necessitate a hike in interest rates in the domestic markets also. This may in turn curb the growth of the credit in the economy. Hence while the growth in credit may still be robust, a higher interest rate scenario may however limit the potential.

Going forward the new law will bring about greater accountability within the system and ensure that borrowers do not take undue advantage of the system. Already an asset reconstruction company has been set up by SBI in partnership with other institutions like ICICI Bank and IDBI. If properly implemented, this new law may lead to significant benefits for the banking sector as a whole.

The sector looks ready to piggyback on the overall economic growth that is envisaged. Banks are also gearing up to catch the source of economic growth, be it industry, service or agriculture by creating advantages in each area.

Overview

With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit offtake (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front.

Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. Windfall treasury gains made in the falling interest rate regime were used for writing off the doubtful and loss assets. Incremental provisioning made for asset slippages have safeguarded the banks from witnessing a sudden impact on their bottomlines.

Retail lending (especially mortgage financing) formed a significant portion of the portfolio for most banks and the entities customized their products to cater to the diverse demands. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds.
Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income

Key Players (Indian)

Allahabad Bank

Andhra Bank

Bank Of Baroda

Bank Of India

Bank Of Madura Limited

Bank Of Maharashtra

Bank Of Punjab Limited

Bank Of Rajasthan Limited

Canara Bank

Centurion Bank Limited

City Union Bank Limited

Corporation Bank

Dena Bank

Dhanalakshmi Bank Limited

Federal Bank Limited

Global Trust Bank Limited

H D F C Bank Limited

I C I C I Bank Limited

I D B I Bank Limited

ING Vysya Bank Limited

Indian Overseas Bank

Indusind Bank Limited

Jammu & Kashmir Bank Limited

Karnataka Bank Limited, The

Karur Vysya Bank Limited, The

Kotak Mahindra Bank Limited

Lakshmi Vilas Bank Limited

Nedungadi Bank Limited

Oriental Bank Of Commerce

Punjab National Bank

South Indian Bank Limited, The

State Bank Of Bikaner & Jaipur

State Bank Of India

State Bank Of Mysore

State Bank Of Travancore

Syndicate Bank

U T I Bank Limited

Uco Bank

Union Bank Of India

United Western Bank Limited

Vijaya Bank

Players to Watch

State Bank of India, ICICI Bank, Canbank, Punjab National Bank, Bank of India, Union Bank, HDFC Bank, Kotak Mahindra Bank.

Current Trends

Policy changes that were initiated in 2002-03, helped reform the sector in more ways than one. Due to the securitisation and asset reconstruction act that was passed by the parliament, the lenders were in a better position to effect recoveries. Higher recoveries were seen in 2003-04 in addition to a higher number of cases being filed on the strength of this new law. However the year also saw delay in the implementation of crucial policy decisions like lifting the ceiling (10%) on voting rights and further liberalisation of the FDI limit in the banking sector.

During the previous year, the RBI helped increase the liquidity in the markets by reducing the CRR (Cash Reserve Ratio) to 4.5% from 4.75%, while the bank rate was lowered to 6%. Softer interest rate bias as well as increased liquidity helped grow the banks' credit by 14.6%. What was disturbing however, is the fact that food credit showed a de-growth, compared to the same period last year.

Public sector banks saw windfall gains in their G-Sec portfolio in the recent year. This helped them record strong growth in their bottomlines. They have consequently been able to provide aggressively for NPAs. Similarly like the previous year,banks saw a fair amount of aggressiveness in the retail segment.

There was also a significant year for the banking sector due to the fact that banks were in a better position to negotiate with defaulters to recover bad debts. This was essentially due to the strength provided by the new Securitisation act that gives significant amount of power to the lenders to go after defaulting borrowers. However there are still gray areas, which need to be sorted out in order to increase the potency of the new law

People Challenges

Wide Skilling: Bankers are now expected to be savvy sellers and marketers as well. Only relying on core banking service skills will not support Banks create penetration into the rural markets. A strong focus on selling skills and communication is required.

Innovation: With little product differentiation and increasing competition, Banks will now have to start creating innovative products and services. While there will be product innovation, the need for process based innovation will also become pertinent.

Leadership: Increasingly banking organisational structures are getting leaner. There is a lot more emphasis on leadership all around. Even the ‘teller’ who had a functional role is expected to lead business growth.

Retaining Talent: Though attrition levels are manageable in the banking industry, going forward, retaining quality talent is going to be an expensive proposition.

People & Business Skills Inventory

Based on the trends and the outlook of the banking sector, the people and business skill inventory (apart from core banking skills and knowledge) looks like

Communication / Presentations
Sales (generic/solution selling)
Leadership
Innovation
Motivation
Managing teams / conflict
Customer service
Change Management

Outlook

RBI's soft interest rate policy has helped increase the liquidity in the market, however credit offtake has not exactly been robust. Going forward, the scenario is set to change in favour of higher credit offtake due to expected improvement in agricultural output on the back of good monsoons as well as revival in the Indian industry. However the same cannot be said for the interest rate regime.

Higher inflation and the prospect of the US raising interest rates may necessitate a hike in interest rates in the domestic markets also. This may in turn curb the growth of the credit in the economy. Hence while the growth in credit may still be robust, a higher interest rate scenario may however limit the potential.

While the new law regarding securitisation and foreclosure of assets may take a while to bear any large benefits, currently the benefits of increased power in the hands of the lender are making the borrowers to come to the negotiating table. The previous year, saw a scenario where the borrowers were forced to negotiate with the lenders, which consequently led to the borrowers returning some of the dues to the lenders.

Going forward the new law will bring about greater accountability within the system and ensure that borrowers do not take undue advantage of the system. Already an asset reconstruction company has been set up by SBI in partnership with other institutions like ICICI Bank and IDBI. If properly implemented, this new law may lead to significant benefits for the banking sector as a whole.

Currently the banking sector in the country is strongly fragmented and hence with further policy changes taking place in the sector, consolidation is likely to take place at a faster rate.

However this is subject to the removal of the ceiling on voting rights will ensure that private sector and foreign banks will be in a much better position to carry out acquisitions in the banking sector. A hike in FDI capital limits in the sector would further go a long way in the process of consolidation.

In terms of credit growth, going forward. India's core sector is witnessing a revival of sorts. The manufacturing sector especially led by steel and cement industries has shown significant improvement in the previous year. It is expected the trend will continue.

Hence as corporate growth picks up lending too is likely to see an uptick. Retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years.