Banking Sector and

Opportunities in India

March 2004
 Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

2
 Indian economy - Strong fundamentals

Forex
reserves
 US$ 90 billion
Exports
 US$ 50
billion in
GDP growth FY2003
 Ten year
average of 6.0%

3
 Indian economy - Strong fundamentals

Interest rates
 6.5% decline in
last five years Short term
debt
 0.8% of GDP
External debt
 20% of GDP

4
 Diversified composition, robust growth
Projected
Sectoral share
Sector growth FY2004
of GDP
(%)

Services 56.1 7.3

Industry 21.8 5.0

Agriculture 22.1 10.7

GDP 7.4

5
 Strong growth drivers…
 Information technology
 Business process outsourcing
Services  Financial services
 Entertainment, media, travel & tourism

 Strong domestic demand

Industry  Improving competitiveness – lower interest
rates, increased productivity, better working
capital management, deleveraging
 Export thrust

 Favourable climatic conditions with good

Agriculture monsoon
 Modernisation of agriculture – scale and
farming methods

6
 …underpinned by strong infrastructure
growth…
 Construction of Golden Quadrilateral and
North-South, East-West corridors
Roads  13,000 km long - world’s largest single
highway project
 Boosting demand for steel, cement,
commercial vehicles

 Basic telephone subscriber base of 39.9

million, growing at an average rate of 23% over
last 7 years
Industry  Cellular subscriber base of 11.7 million,
growing at an average rate of 88% over last 6
years
 Positive impact on efficiency of firms and
services exports

7
 …though certain areas require close
attention
 Certain mis-steps have constrained
development in this sector
 Now being corrected through policy initiatives
Power  Electricity Act passed by Parliament
 New focus on creating capacities as well
as enhancing transmission and
distribution efficiency

 Need for urban rejuvenation – housing, roads,

Urban utilities
infrastructure  Local bodies in several cities taking initiatives
in this area

8
 Changing demographic profile

> 50 years
14%
35 - 49 years
17%
< 14 years
34%

15 - 35 years
35%
Source: Ministry of Home Affairs, Government of India

…high proportion of younger, working population driving

growth

9
 Robust household savings pattern
23% Household savings as a % of GDP
22.5%

17%

11%

10.1%

5%
1970-71 1985-86 2000-01
2001-02
Source: Economic Survey 2002-2003, Ministry of Finance

10
 Large inflows of foreign currency
Gross forex inflows (US$ billion)
100 95.23
79.44
75 67.13
58.25
50

25
25.60
~
~

-
1990- 91 1997- 98 1999- 00 2001- 02 2002- 03

M erchand ize exp o rts Services exp o rts NRI remittances etc

Source: Economic Survey 2002-2003, Ministry of Finance; RBI

11
 Strong external position
Forex reserves & external debt (US$ billion)

104.23
100
83.80
74.81
75
78.00 External debt
50 Forex reserves
Gap
25
5.80 29.42
0
~
~

1990-91 1999-00 2002-03

Source: RBI

12
 Enhanced corporate competitiveness

Return on Equity (PAT / Equity) Asset turnover (Revenue /

21% 1.6
Assets)

1.3
14%
0.9
7%
0.6

0% 0.2
1997-98 1998-99 1999-00 2000-01 1997-98 1998-99 1999-00 2000-01

Shanghai A (Chinese cos. listed in Shanghai SE) India

H-shares (Chinese cos. listed in HK SE)
Red chips (Chinese Govt. controlled cos. listed in HK SE)
Source: Deutsche Bank

13
 The above developments are the
result of a decade of reform…
 Focus on globalisation
 Opening up of the economy
 Thrust on export led growth
 Deregulation to encourage technology & capital
flows
 Integration with international financial markets
 Key reform measures
 Lowering of tariff barriers and liberalised imports
 Average tariff reduced from 53% to 18% in last 5 years
 Full convertibility of the rupee on current account
 Permitting domestic companies to access foreign
capital markets
 Substantial liberalisation of restrictions on foreign
investment
14
 ..driving transformational change
 Dramatic growth of services sector
 Over 50% of GDP
 Significant contributor to exports

 Restructuring of manufacturing sector over the

past decade
 Early 1990s: capitalising on domestic demand
 Mid- to late 1990s: restructuring to achieve world-
class efficiency
 2000: Articulation of international competitiveness

15
 The underlying fundamentals are based on
a deep structural change in the economy
and provide a sustainable platform for
continued growth. The opportunities in the
banking sector have to be viewed in this
context.

16
 Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

17
 A decade of change and evolution…
Pre-reform The 1990s Today
 Liberalisatio
 Extensive n  Resilient
regulation industry
Indian  Globalisation
 Focus on  Buoyant
economy  Structural
industrial services
sector change – sector
services
 Opening up  Diversified
 Highly of various financial
Financial segmented sub-sectors groups
sector  Public sector  Private  Globally
dominance sector benchmarke
participation d

..financial sector mirroring

macro-economic change
18
 The banking sector today
Depth
 Countrywide coverage
 Large number of players
 Increasingly
sophisticated financial
markets
Technology
 Increasing use of
technology in operations
 Poised to expand and
deepen technology usage
19
Diversification
 Emergence of integrated
players
 Diversifying capital
deployment
 Leveraging synergies
Regulation
 Robust regulatory system
aligned to international
standards
 Efficient monetary
management
 Sector snapshot

 Total assets of US$ 335 billion

Size  Total deposits of US$ 279 billion

 Over 290 scheduled banks

 Public sector: 27
Number of  Private sector: new – 9; old – 24
banks  Foreign: 37
 Over 190 regional rural banks

 Over 66,000 branches

 Public sector: 46,000
Branch network  Private sector: 5,500
 Foreign: 190
 Regional rural: 14,400

20
 Structural issues
 Non-performing assets

 Legacy systems
 Low levels of technology

 Seller’s market mindset

 Low level of innovation in products and services
 Limited responsiveness to customers’ needs

The Indian banking sector has responded to these

structural issues by adopting certain strategic
imperatives

21
 Legacy issues addressed…
 Challenges of a changing competitive environment
 Small and unviable pre-liberalisation units
 Large investments post-liberalisation impacted by
global commodity cycles and high interest rates
 Supportive legal and regulatory changes
 Setting up of Debt Recovery Tribunals and enactment
of SARFAESI Act, reducing delays in enforcement of
security and creating effective legal deterrent
 Corporate Debt Restructuring Forum for restructuring
viable companies
 Enabling framework for asset reconstruction
companies
 Proactive approach to resolution and increase in
provisioning levels in the system

22
 …with significant success in
resolution Gross NPAs as % of GDP
(%)
50.0%
43% 43%
40%
40.0%
 Position much 30%
30.0%
stronger than other 20.0% 15%
Asian economies 10.0% 4%
0.0%

Jap an
Chi na

I nd i a
M a l a y si a

S. Ko re a
T ha i l a nd
US$ bn Net NPAs of banks & FIs
 Net NPL accretion 12.0
10.0
tapering off with 8.0
progress in asset 6.0
4.0
resolution and 2.0
0.0
increase in 1997 1998 1999 2000 2001 2002
provisioning levels
Source: E&Y, RBI
23
 A new orientation among banks…
Traditional/ public sector New/ private sector
 Sell products  Meet customers’ needs
 Product research: what  Customer research:
will sell? what does the customer
 Product sales and want?
profitability targets  Customer segment
 Product specialist sales and profitability
groups targets
 Introduce new  Customer owners
offerings every few  Customer specific new
years/months offerings every
 “Branch banking” week/day
 Focus - customer  Customer convenience
acquisition  Deepen relationships

24
 Technology- the ICICI Bank experience
Share of Share of
Channel transactions in transactions in
March 2000 July 2003

Branches 94% 28%

ATMs 3% 51%

Internet 2% 10%

Call centre 1% 11%

25
 Retail credit opportunity…
70

60 60
55
52
50

40
% 33
36
30

27
20 18

10 14
4
0
Korea Taiwan M alaysia Thailand India

Consumer loans / GDP (% ) Consumer loans / Total loans (% )

Source: SSKI, CLSA

..penetration currently low, with growth driven by

strong fundamentals…
26
 Retail credit drivers
Changing  Middle& high income households
demographic increased from 11.6 million in fiscal
profile 1995 to 25.7 million in fiscal 2002

 Interest
rates on residential
Declining retail
mortgages have reduced by 7%
loan interest
rates over last 4 years

 Entry of banks has led to increased

Increasing competition and coverage
availabilit  Increasing use of technology
y further enhancing reach and
accessibility

27
 Retail market size
18.0 Annual disbursement (US$ billion)
16.5
16.0

14.0 CAGR of 31%

12.9
12.0

10.0 9.4
8.0 7.3
6.0

4.0

2.0

0.0
1999-00 2000-01 2001-02 2002-03
Housing finance Car finance Credit card spend
Commercial vehicle finance 2-wheeler finance Personal loans
Consumer durable finance

28
 Changing profile of corporate banking…
 Change in corporate focus - improving efficiency
 Better asset utilisation and financial management
 Limited new capacity creation
 Increasing disintermediation in top tier segment
 However, several opportunities for banks
 Technology-driven fee-based services
 Treasury and risk management products
 Facilitating resource raising by corporates through
syndication, securitisation and market-making
 New approach to SME lending
 Sophisticated banking services
 Scientific portfolio construction and management

29
 Financial services potential: insurance
16.0%
14.2%
14.0%
12.1% Premium as a % of GDP
12.0%
10.0% 9.0%
8.0%
6.0% 5.2%
4.0% 2.9% 2.7% 2.2%
2.0%
0.0%
United South United Malaysia Thailand India China
Kingdom Korea States

Life insurance General insurance

Source: Swiss Re, Economic Research & Consulting (June 2002)

…the opening up of the sector provides a major

opportunity for financial services
players
30
 The “international Indian”
opportunity Area of large
NRI population

Areas of large
PIO population
Canada () Number of
(0.42 mn) UK NRIs
(0.72 mn)
US
(1.2 mn) GCC Nepal
(4.1
West Indies mn)

Zimbabwe/ Singapore/
Uganda Malaysia Fiji
(0.14 mn NRIs)

South Australia and New

Africa Zealand
(< 0.1 mn)

…the Indian diaspora, the emergence of Indian

multinationals and resultant economic flows
have created a new opportunity

31
 Agenda

Economic backdrop

Banking sector - overview & opportunities

In summary

32
 In summary
 The reform and liberalisation process has
transformed the Indian economy
 Structural shift with service sector growth
 Immense potential to leverage technology and
knowledge capital
 Improved competitiveness in manufacturing after
intermediate period of restructuring &
rationalisation
 Growing international linkages
 Exports, manufacturing and distribution overseas
 India as a manufacturing base
 Globally benchmarked businesses, capable of
competing internationally

33
 In summary (contd).
 The banking sector has achieved significant
success in addressing legacy concerns
 Resolution of asset quality concerns through
recovery, restructuring and provisioning
 Focus on technology and customer orientation
 The economic transformation provides major
opportunities for the banking sector
 Retail finance – credit and banking services
 Corporate finance - banking services and
structured finance
 The sector is poised to capitalise on these
opportunities

34
 Thank you

35