Interim Report_balpreet Kaur

7/31/2019 Interim Report_balpreet Kaur

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INTERIM REPORT

ON

FUNDAMENTAL

ANALYSIS OF BANKING

INDUSTRY

BY

Balpreet Kaur Ratra

( 10BSP1076 )


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INTERIM REPORT

ON

FUNDAMENTAL ANALYSIS OF

BANKING INDUSTRY

By

Balpreet Kaur Ratra

( 10BSP1076 )

A report submitted in partial fulfillment of

the requirements of PGPM program of

the IBS Bangalore

Submission Date:11Jan2012


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Table of Contents

1. Introduction About the Project

1.1Introduction of the Project

1.2Objective of the Project

1.3Limitation of the Project

1.4Research Methodology

2 Fundamental Analysis

2.1 Meaning

2.2 Approaches of Fundamental Analysis2.3 Steps of Fundamental Analysis

3 Economic Analysis

3.1 State of Global Economy

3.2 Overview of Indian Economy

3.3 Key Economic Indicators of Indian Economy

4 Industry Analysis

4.1 Meaning

4.2 Overview of Banking Industry in India

4.3 Monetary Policy of India

4.4 Performance of Banking Industry

4.5 Growth of Industry

4.6 Challenges for Industry

5. References


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INTRODUCTION OF PROJECT-

Fundamental analysis-

Any investors who go to systematic investment, he/she would like to know, the complete

scenario of the industry. It is interesting to know how the fundamental analysis helps to forecast

the price of equity. So Fundamental analysis is very helpful to investors, which is reflected in

investment.

Many investors use fundamental analysis alone or in combination with other tools to evaluate

stocks for investment purposes. The goal is to determine the current worth and, more

importantly, how the market values the stock.

Earnings

Its all about earnings. When onecome to the bottom line, thats what investors want to know.

How much money is the company making and how much is it going to make in the future.

Earnings are profits. It may be complicated to calculate, but thats what buying a company is

about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular

dividend. When earnings fall short, the market may hammer the stock. Every quarter, companies

report earnings. Analysts follow major companies closely and if they fall short of projected

earnings, sound the alarm.


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SCOPE OF THE STUDY :-

The project entitled Fundamental Analysis of Banking Industry in India will enable from the

investors point of view to refer the performance of the Banks, their relative growth and thereby

decide on to buy or sell the particular slab. This study will also help to identify the bank that islagging behind in its performance.

Objective of the project

- Analysis of fundamentals to acquire knowledge of the Banking Industry

- To find out how the judgment is taken by the analyst on the basis of fundamental

analysis of the company.

- To establish linkbetween expected share price with the projected companysfinancial performance.

- To do the analysis of the different Banks in order to know the financial position of the

companies.

Methodology-

- Study of available Secondary Data related to Banking industry of India.

- Study of financial products provided by banks.

- Understanding of basics of fundamental analysis.

- Collection of Data from Secondary sources about Economy, Banking Industry.

- Doing fundamental analysis on the basis of collected Data and give conclusion.

Limitations of the study-

- This study is based on the secondary data collected from various secondary data

sources;

- Due to paucity of time important factors has been analysed and discussed.

- The approach to behavior of share price is based on long time view.


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MAIN TEXT--

What is Fundamental Analysis?

Fundamental analysis is the examination of the underlying forces that affect the well being of the

economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast

and profit from future price movements.

At the company level, fundamental analysis involves examination of financial data,

management, business concept and competition.

At the industry level, an examination of supply and demand forces for the products offered.

For the national economy, fundamental analysis focus on economic data to assess the present

and future growth of the economy.

To forecast future stock prices, fundamental analysis combines economic, industry, and company

analysis to derive a stock's current fair value and forecast future value. If fair value is not equal

to the current stock price, fundamental analysts believe that the stock is either over or under

valued and the market price will ultimately gravitate towards fair value. Fundamentalists do notheed the advice of the random walkers and believe that markets are weak-form efficient. By

believing that prices do not accurately reflect all available information, fundamental analysts

look to capitalize on perceived price discrepancies.

Economic analysis with favorable GDP with savings, investment, stable prices, balance of

payment, and infrastructure facilities which provides a best environment for common stock

investment.

Industrial analysis growth follow a pattern. This replicates the banking industry monitory

policy, CPR, SLR, and the flow of the industry.


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ECOMONIC ANALYSIS

The level of economy has an impact on investment in many ways. If the economic growth

rapidly, the industry can also be expected to show rapid growth and vice versa. When the level ofeconomic activity is low, stock price are low, and when the level of economic activity is high the

stock price are high reflecting the prosperous outlook for sales and profit of the firms vigorous

growth with strong macroeconomic fundamentals has characterized developments in stock

market.

The economy is like the tide and the various industry groups and individual companies are like

boats. When economy expands most industry groups and companies benefits and grows.When

the economy decline, most sectors and companies usually suffer. The stock market does not

operate in a vacuum it is an integral part of the whole economy of a country.

To gain an insight into the complexities of stock market one needs to develop a sound economic

understanding and be able to interpret the impact of important economic indicators on stock

markets.

The following are some important factors which should be taken into account while doing

fundamental analysis:

Economic Growth

Per capita income

Industrial Production

Inflation

Interest Rates

Foreign Exchange Reserves

Budgetary Deficit

Domestic Savings and Investment

Tax Rates

Infrastructure

Political Situation


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imbalances which could have implications for medium and long-term interest rates. In Japan,

improved prospects on account of exports have been offset by the levelling off of public

investment and rise in unemployment.

Amongst EMEs, China continues to grow at a rapid pace, led mainly by domestic demand.

Malaysia and Thailand have recovered to register positive growth in the second half of 2009.

Indonesia recorded positive growth throughout 2009.

Overview of Indian Economy-

The Indian economy is one of the fastest growing economies and is the 12th largest in terms of

the market exchange rate at $1,242 billion (India GDP). In terms of purchasing power parity, theIndian economy ranks the fourth largest in the world. However, poverty still remains a major

concern besides disparity in income.

The Indian economy has been propelled by the liberalization policies that have been instrumental

in boosting demand as well as trade volume. The growth rate has averaged around 7% since

1997 and India was able to keep its economy growing at a healthy rate even during the 2007-

2009 recession, managing a 5.355% rate in 2009 (India GDP Growth). The biggest boon to the

economy has come in the shape of outsourcing. Its English speaking population has beeninstrumental in making India a preferred destination for information technology products as well

as business process outsourcing.

The economy of India is as diverse as it is large, with a number of major sectors including

manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a

major component of the Indian economy, as over 66% of the Indian population earns its

livelihood from this area.

However, the service sector is greatly expanding and has started to assume an increasingly

important role. The fact that the Indian speaking population in India is growing by the day means

that India has become a hub of outsourcing activities for some of the major economies of the

world including the United Kingdom and the United States. Outsourcing to India has been

primarily in the areas of technical support and customer services.


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Other areas where India is expected to make progress include manufacturing, construction of

ships, pharmaceuticals, aviation, biotechnology, tourism, nanotechnology, retailing and

telecommunications. Growth rates in these sectors are expected to increase dramatically.

Despite the liberalization the economy still largely controlled by the government and the 500+major companies it owns, which together are worth around US$500 billion, or around 40% of

GDP at current exchange rates. Thanks to past profligate spending, government debt is running

at around 80% of GDP. Servicing the interest payments on that debt is now the single largest

component of the federal budget. Fiscal discipline and deficit reduction is therefore vital for

India's future prospects.

It is also crucial to understand that India is driven primarily by domestic (consumer)

consumption. This stands in marked contrast to Japan, the Asian Tigers and now China, all of

whom have followed the export-oriented model.

With the massive growth of the Indian middle class, this vast country may become Asia's first

major 'buy' economy.


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Some of the Key Economic Indicators of Indian Economy-

India GDP Growth Rate-

The Gross Domestic Product (GDP) in India expanded at an annual rate of 7.20 percent in the

last quarter. India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world

economy, according to the World Bank. India's diverse economy encompasses traditional village

farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of

services. Services are the major source of economic growth, accounting for more than half of


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India's output with less than one third of its labor force. The economy has posted an average

growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage

points.

India Interest Rate-

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 3.25 3.25 3.34 3.55

2009 4.05 4.00 3.55 3.39 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25

2008 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 5.24

2007 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00* The table above displays t he monthly average.

India benchmark interest rate stands at 3.75 percent. In India, interest rate decisions are taken bythe Reserve Bank of India's Central Board of Directors. The official interest rate is thebenchmark repurchase rate.


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India Inflation Rate

The inflation rate in India was 14.86 percent in February of 2010. Inflation rate refers to a

general rise in prices measured against a standard level of purchasing power. The most wellknown measures of Inflation are the CPI which measures consumer prices, and the GDP deflator,which measures inflation in the whole of the domestic economy. This page includes: IndiaInflation Rate chart, historical data and news.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 16.22 14.86

2009 10.45 9.63 8.03 8.70 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.972008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.70

2007 6.72 7.56 6.72 6.67 6.61 5.69 6.45 7.26 6.40 5.51 5.51 5.51* The table above displays t he monthly average.

The average inflation of India in 2011: 9.08 %

India Industrial Production

Industrial Production in India expanded 15.10 percent during the last surveyed month. Industrial

production measures changes in output for the industrial sector of the economy which includes

manufacturing, mining, and utilities. Industrial Production is an important indicator for economic


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forecasting and is often used to measure inflation pressures as high levels of industrial

production can lead to sudden changes in prices.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2010 16.70 15.10

2009 1.00 0.20 0.30 1.10 2.10 8.30 7.20 10.60 9.30 10.20 12.00 17.60

2008 6.20 9.50 5.50 6.20 4.40 5.40 6.40 1.70 6.00 0.10 2.50 -0.20

2007 11.60 11.00 14.80 11.30 10.60 8.90 8.30 10.90 7.00 12.20 4.90 8.00* The table above displays t he monthly average

FDI in India-

Foreign direct investment (FDI) is probably one of the most significant factors leading to the

globalization of the international economy. FDI inflows to the developing countries increased

remarkably in the 1990s and now accounts for about 40 per cent of global FDI.

Improved global sentiment and strong industrial output numbers in India are increasinglyattracting foreign investors in the country. Other factors being attributed to the revival in foreign

direct investment (FDI) in recent times include increasing consumer confidence.


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India has been ranked at the third place in global foreign direct investments this year, following

the economic meltdown, and will continue to remain among the top five attractive destinations

for international investors during the next two years,

India attracted FDI inflows of US$ 1.74 billion during November 2009, a 60 per cent increase

over the US$ 1.08 billion achieved in same month last year. The cumulative amount of FDI

inflows from August 1991 to December 2009 stood at US$ 127.46 billion, according to the latest

data released by the Department of Industrial Policy and Promotion (DIPP). India attracted FDI

equity inflows of US$ 1.54 billion during December 2009. On a cumulative basis, FDI equity

inflows of US$ 20.92 billion were recorded during April-December 2009. India's FDI inflows

touched US$ 26.5 billion in the April-December period last fiscal. The country has attracted FDI

worth US$ 23.82 billion in the January-October 2009 period and October 2009 alone witnessed a56 per cent year-on-year jump in FDI with inflows of US$ 2.33 billion, according to the

DIPP.The services sector comprising financial and non-financial services attracted FDI worth

US$ 3.54 billion during April-December 2009-10, while computer software and hardware sector

garnered about US$ 595 million during the said period.

Foreign Exchange Reserves-

Foreign Exchage reserves is very important for any economy as it is the main indicator of an

economy when it comes to comparison with other economies in global front.

Foreign exchange reserves increased by US$ 11 billion as against a decline of US$ 20 billion

during the corresponding period a year ago. Foreign exchange reserves stood at US$ 279 billion

as on March 31, 2010. The six-currency trade-based real effective exchange rate (REER) (1993-

94=100) appreciated by 15.5 per cent during 2009-10 up to February as against 10.4 per cent

depreciation in the corresponding period of the previous year.

According to the latest data released by the Reserve Bank of India, the value of gold in reserves

rose $551 million to touch $18,537 million. Foreign currency assets comprising dollars, pounds

and euro, among others, on the other hand dipped $354 m during the week. Special Drawing

Rights (SDR) reserve currency with the International Monetary Fund and the reserve

capital with the IMF dipped by $6m and $34m, respectively, during the week.


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In the banking sector, banks have again started parking funds in mutual funds in the absence of

lending opportunities during this time of the year. They parked an additional Rs 766 crore during

the fortnight ended April 23 to take their total MF exposure to Rs 1,06,285 crore.

FISCAL POLICY -

The fiscal policy of 2010-11 is being guided by the principles of gradual adjustment from the

fiscal expansion undertaken during 2008-09 and 2009-10. The adjustment path is being so

calibrated that it would not affect the revival process and at the same time stabilize the debt to

GDP ratio of the Government in the medium term. In the Medium Term Fiscal Policy Statement

of 2009-10, the Government had enumerated the roadmap for fiscal consolidation during 2010-

11 and 2011-12.

The Government is adhering to these commitments made in July 2009 and has also benefitted

from the recommendations of the 13th Finance Commission on fiscal consolidation. Accordingly

fiscal deficit in BE 2010-11 has been reduced to 5.5 per cent of GDP. This correction of fiscal

deficit is attributed to reduction in total expenditure by 0.6 per cent of GDP (from 16.6 per cent

in BE 2009-10 to 16.0 per cent in BE 2010-11), increase in gross tax revenue by 0.4 per cent of

GDP (from 10.4 per cent in BE 2009-10 to 10.8 per cent in BE 2010-11) and increase in non

debt capital receipt by 0.6 per cent of GDP (from 0.1 per cent in BE 2009-10 to 0.7 per cent in

BE 2010-11). All the above numbers are with reference to the revised GDP numbers.


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INDUSTRY ANALYSIS-

Meaning-

The purpose of industry analysis is to review prevailing conditions within specific industry andits segments. The company's industry obviously influences the outlook for the company. Even

the best stocks can post mediocre returns if they are in an industry that is struggling.

It is often said that a weak stock in a strong industry is preferable to a strong stock in a weak

industry.

To assess the industry group potential, an investor would want to consider the overall growth

rate, market size, and its importance to economy. While the individual company is still

important, its industry group is likely to exert as much as, or more, influence on the stock price.

When stock move the usually move as groups; there are very few lone guns out there. An

understanding of the industry sector involved, including the maturity of the sector and any

cyclical effects that the overall economies have on it, is also necessary.

The followings are some important factors which should be considered in

Fundamental Analysis

Growth: A growing industry gives room for profitability.

Profitability: Average profitability of the industry should be attractive.

Competition and Market share:

Technology trends

Government Policy


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Indian Banking Industry-

Overview

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949

can be broadly classified into two major categories, non-scheduled banks and scheduled banks.

Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership,

commercial banks can be further grouped into nationalized banks, the State Bank of India and its

group banks, regional rural banks and private sector banks (the old/ new domestic and foreign).

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and

resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant

growth in the geographical coverage of banks. Every bank had to earmark a minimum

percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing

sector also grew during the 1970s in protected environs and the banking sector was a critical

source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980.

Since then the number of scheduled commercial banks increased four-fold and the number of

bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the early

nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new

private sector banks and the foreign banks. The new private sector banks first made their

appearance after the guidelines permitting them were issued in January 1993. Eight new private

sector banks are presently in operation. These banks due to their late start have access to state-of-

the-art technology, which in turn helps them to save on manpower costs and provide better

services.


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Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking.

The banking industry has moved gradually from a regulated environment to a deregulated market

economy. The market developments kindled by liberalization and globalization have resulted in

changes in the intermediation role of banks. The pace of transformation has been more

significant in recent times with technology acting as a catalyst. While the banking system has

done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial

sector would be opened up for greater international competition under WTO. Banks will have to

gear up to meet stringent prudential capital adequacy norms under Basel II. In addition to WTO

and Basel II, the Free Trade Agreements (FTAs) such as with Singapore, may have an impact on

the shape of the banking industry. Banks will also have to cope with challenges posed by

technological innovations in banking. Banks need to prepare for the changes. In this context the

need for drawing up a Road Map to the future assumes relevance. The idea of setting up a

Committee to prepare a Vision for the Indian Banking industry came up in IBA, in this

background.

Monetary Policy in India-

In the wake of the global economic crisis, the Reserve Bank pursued an accommodative

monetary policy beginning mid-September 2008. This policy instilled confidence in market

participants, mitigated the adverse impact of the global financial crisis on the economy and

ensured that the economy started recovering ahead of most other economies. However, in view

of the rising food inflation and the risk of it impinging on inflationary expectations, the Reserve

Bank embarked on the first phase of exit from the expansionary monetary policy by terminating

some sector-specific liquidity facilities and restoring the statutory liquidity ratio (SLR) of

scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October

2009.


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The process was carried forward by the second phase of exit when the Reserve Bank announced

75 basis points increase in the CRR in the Third Quarter Review of January 2010. As inflation

continued to increase, driven significantly by the prices of non-food manufactured goods, and

exceeded the Reserve Banks baseline projection of 8.5 per cent for March 2010 (made in the

Third Quarter Review), the Reserve Bank responded expeditiously with a mid-cycle increase of

25 basis points each in the policy repo rate and the reverse repo rate under the LAF on March 19,

2010.

The monetary policy response in India since October 2009 has been calibrated to Indias specific

macroeconomic conditions. Accordingly, our policy stance for 2010-11 has been guided by the

following three major considerations:

First, recovery is consolidating. The quick rebound of growth during 2009-10 despite failure of

monsoon rainfall suggests that the Indian economy has become resilient. Growth in 2010-11 is

projected to be higher and more broad-based than in 2009-10. In its Third Quarter Review in

January 2010, the Reserve Bank had indicated that our main monetary policy instruments are at

levels that are more consistent with a crisis situation than with a fast recovering economy. In the

emerging scenario, lower policy rates can complicate the inflation outlook and impair

inflationary expectations, particularly given the recent escalation in the prices of non-food

manufactured items. Despite the increase of 25 basis points each in the repo rate and the reverse

repo rate, our real policy rates are still negative. With the recovery now firmly in place, we need

to move in a calibrated manner in the direction of normalising our policy instruments.

Second, inflationary pressures have accentuated in the recent period. More importantly, inflation,

which was earlier driven entirely by supply side factors, is now getting increasingly generalised.There is already some evidence that the pricing power of corporates has returned. With the

growth expected to accelerate further in the next year, capacity constraints will re-emerge, which

are expected to exert further pressure on prices. Inflation expectations also remain at an elevated

level. There is, therefore, a need to ensure that demand side inflation does not become

entrenched.


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Third, notwithstanding lower budgeted government borrowings in 2010-11 than in the year

before, fresh issuance of securities will be 36.3 per cent higher than in the previous year. This

presents a dilemma for the Reserve Bank. While monetary policy considerations demand thatsurplus liquidity should be absorbed, debt management considerations warrant supportive

liquidity conditions. The Reserve Bank, therefore, has to do a fine balancing act and ensure that

while absorbing excess liquidity, the government borrowing programme is not hampered.

Against this backdrop, the stance of monetary policy of the Reserve Bank is intended to:

Anchor inflation expectations, while being prepared to respond appropriately, swiftly and

effectively to further build-up of inflationary pressures.

Actively manage liquidity to ensure that the growth in demand for credit by both the private and

public sectors is satisfied in a non-disruptive way.

Maintain an interest rate regime consistent with price, output and financial stability.

Due to inflation reaching 2 digit figures , RBI has been continuously changing the monetary

policy and increasing the repo rate during 2011.

CRR Rates-

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from

time to time. Increase in CRR means that banks have less funds available and money is sucked

out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a

portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the

system, and thereby, inflation by tying the hands of the banks in lending money.

CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their

deposits in the form of cash. However, actually Banks dont hold these as cash with

themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is

considered as equivlanet to holding cash with themselves.. This minimum ratio (that is the part

of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or

Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the cash reserve


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ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use

only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR),

the lower is the amount that banks will be able to use for lending and investment. This power of

RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands

of a central bank through which it can control the amount that banks lend. Thus, it is a tool used

by RBI to control liquidity in the banking system.

RBI decreased CRR for the banks when the global slowdown was taking toll of all the

economies and specially banking and finance institutions. RBI in first in its moves reduced CRR

from its August 2008 9% to 5% in January 2009. But recently RBI has started its normalization

policy and hiked CRR to 6% in its annual monetary policy.

Reverse Repo Rates

The rates at which the Reserve Bank of India takes money from the commercial banks are known

as reverse repo rates. The private or public sector banks always prefer to provide loans to the

Central Bank as they know that their money would be in safe hands if given to it. The

commercial banks always prefer to lend during when the reverse repo rates are higher as it

provides generation of more revenues. So in other words we can define Reverse repo rate as the

rate at which the RBI absorbs liquidity from the commercial banks.

Repo Rates-

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When

the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say

that in case, RBI wants to make it more expensive for the banks to borrow money, it increases

the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the

repo rate.


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The following table shows the trends of Repo and Reverse repo rates in India.

Source:RBI


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Policy Announcement Reverse Repo Rate Repo Rate

November 2008 6.00% 7.50%

December 2008 5.00% 6.50%

January 2009 5.50% 5.50%

March 2009 3.50% 5.00%

April 2009 3.25% 4.75%

March 2010 3.50% 5.00%

April 2010 3.75% 5.25%

April 2011 7% 8%

December 2011 7.5% 8.5%

This table shows how RBI has timely increased and decreased the rates according to the state of

the economy and specially for the good health of the Banking and Finance Industry in the times

of Economic slowdown.

SLR-

Every bank is required to maintain at the close of business every day, a minimum proportion of

their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-

encumbered approved securities. The ratio of liquid assets to demand and time liabilities is

known as Statutory Liquidity Ratio (SLR).

Present SLR is 24%. RBI is empowered to increase this ratio up to 40%. An increase in SLR

also restrict the banks leverage position to pump more money into the economy.

Bank Rate-

Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to

commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any

upward revision in Bank Rate by central bank is an indication that banks should also increase


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accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to

US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

Growth of Indian Banking Industry-

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is

expected to remain the same in the coming years. Based on the projections made in the "India

Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts

that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets

of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That

will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in

2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during

the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95

and 2002-03. It is expected that there will be large additions to the capital base and reserves on

the liability side.

Challenges to Banking industry in India

The banking industry in India is undergoing a major transformation due to changes in economic

conditions and continuous deregulation. These multiple changes happening one after other has a

ripple effect on a bank trying to graduate from completely regulated seller market to completed

deregulated customers market.

Deregulation: This continuous deregulation has made the Banking market extremely

competitive with greater autonomy, operational flexibility and decontrolled interest rate and

liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol

in interest rates has led to entry of a number of players in the banking industry. At the same time

reduced corporate credit off take thanks to sluggish economy has resulted in large number of

competitors batting for the same pie.

New rules: As a result, the market place has been redefined with new rules of the game. Banks

are transforming to universal banking, adding new channels with lucrative pricing and freebees

to offer. Natural fall out of this has led to a series of innovative product offerings catering to

various customer segments, specifically retail credit.


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Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks

need to access low cost funds and simultaneously improve the efficiency. The banks are facing

pricing pressure, squeeze on spread and have to give thrust on retail assets.

Diffused Customer loyalty: This will definitely impact Customer preferences, as they are boundto react to the value added offerings. Customers have become demanding and the loyalties are

diffused. There are multiple choices, the wallet share is reduced per bank with demand on

flexibility and customization. Given the relatively low switching costs; customer retention calls

for customized service and hassle free, flawless service delivery.

Misaligned mindset: These changes are creating challenges, as employees are made to adapt to

changing conditions. There is resistance to change from employees and the Seller market

mindset is yet to be changed coupled with Fear of uncertainty and Control orientation.

Acceptance of technology is slowly creeping in but the utilization is not maximized.

Competency Gap: Placing the right skill at the right place will determine success. The

competency gap needs to be addressed simultaneously otherwise there will be missed

opportunities. The focus of people will be on doing work but not providing solutions, on

escalating problems rather than solving them and on disposing customers instead of using the

opportunity to cross sell.


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References-

Books-

Getting Started in Fundamental Analysis by Michael C. Thomsett

Mastering Fundamental Analysis by Michael C. Thomsett

Financial Management- I by ICFAI publication

Websites-

www. Indianmoney.com

www. Money.rediff.com

www. Moneycontrol.com

www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx

Interim Report_balpreet Kaur

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