SWOT Analysis of Indian Banking Industry

The accelerating shift in economic power from the developed to emerging economies is
dramatically changing the banking industry across the world. The international banking scene
has in recent years witnessed strong trends towards globalization and consolidation of the
financial system. Stability of the financial system has become the central challenge to bank
regulators and supervisors throughout the world. The multi-lateral initiatives leading to evolution
of international standards and codes and evaluation of adherence thereto represent resolute
attempts to address this challenge.
The Indian banking scene has witnessed progressive deregulation, institution of prudential norm
and an emulation of international supervisory best practices. The supervisory processes have also
concomitantly evolved and have acquired a certain level of robustness and sophistication in the
banking industry.
Strengths of Indian Banks
In the short-term, most developed economies eperienced a significant economic slowdown or
recession in !""#-"$, reducing significantly the growth of domestic banking assets. % &merging
economies such as India by contrast tended to maintain relatively high growth rates, although
some temporary economic slowdown was eperienced in certain cases. In !"'", however,
emerging economies grew strongly in general, while the recovery in &urope in particular
remained relatively weak.
(igh standard regulatory environment. The policy makers, which comprise the )eserve *ank
of India +)*I,, -inistry of .inance and related government and financial sector regulatory
entities, have made several notable efforts to improve regulation in the sector.
*ank lending has been a significant driver of /01 growth and employment
1resence of more number of Smaller banks that would likely to be impacted adversely.
2pproimately 34""" networks of branches spread all over the country provides easy access
to entire spectrum of customers.
0iversification in their operations 5 *anks offer an entire gamut of services including
insurance, investment banking, asset management, private equity, foreign echange, payment
of utility bills to customers, mobile and internet banking.
6arge manpower with relevant banking skills to manage the operations.
Technological up gradation changing the way the banking is done. 2nywhere banking and
anytime banking has become a reality and thus making service faster, error free and
competitive.
*anks have gained financial strengths in terms of 1roductivity and 1rofitability.
Weakness of Indian Banks
Indian commercial banks, particularly 1S*s have been witnessing the following challenges
which have become bottlenecks in achieving competitive edge over their rivals.
6ow operating size
(igh operating costs
Inadequate deposit mobilization efforts
(igh level of nonperforming assets
.inancial eclusion
7omple and non-responsive organizational structures
7redit to non-productive sectors like commercial estate
1oor customer service
8nderutilized capacity particularly in rural areas
8nsatisfactory work culture
.eudalistic attitude of thee staff
&thnocentric and action flippant management
2bsence of organizational focus on the employees leading to their de motivation
Inadequate access to global financial system
The cost of banking intermediation in India is higher and bank penetration is far lower than
in other markets
Inadequate risk management skills particularly to cope with market risks and per *asel II
norms
Structural weaknesses such as a fragmented industry structure, restrictions on capital
availability and deployment, lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations beyond Scheduled 7ommercial
*anks +S7*s,
The inability of bank managements +with some notable eceptions, to improve capital
allocation, increase the productivity of their service platforms and improve the performance
ethic in their organisations could seriously affect future performance
Opportunities for Indian banks
Increase the profitability by accessing international financial market for procuring funds
cheaply and deploy funds prudently.
The emerging economies9 banking sectors are epected to outgrow those in the
developed economies.
2s per the 1:7 pro;ection in *anking !"3" *y !"3" the leading <&=9 emerging
economies could have domestic banking assets and profits that eceed those in the /= by
around 3">.
G7 countries: 8S, ?apan, /ermany, 8@, .rance, Italy, 7anada
E7 countries: 7hina, India, *razil, )ussia, -eico, Indonesia, Turkey
Other developed economies: 2ustralia, )epublic of @orea, Spain
Newly emerging economies: 2rgentina, Aietnam, Bigeria, Saudi, 2rabia, South 2frica

.igure 'C 1ro;ections of domestic banking assets in the &= and /=
India has particularly strong long-term growth potential and 1:7 pro;ections suggest it
could become the third largest domestic banking sector by !"3" after 7hina and the 8S,
but ahead of ?apan, the 8@ and /ermany. *razil could also rise strongly up the global
banking league table over this period.
0ates at which &= economies overtake /= in terms of the size of their domestic
banking assets
To acquire any company, non-bank finance company, housing finance or other
businesses to increase their balance sheet size and go into areas where there is lot of
potentials.
1ro;ected changes in population havev an important effect on some countries9relative
growth rates. .or instance, )ussia, ?apan and )epublic of @orea are epected to
eperience population falls, depressing overall /01 growth. Bigeria, Saudi 2rabia and
India are all epected to eperience strong population increases, thereby boosting overall
/01 growth. Some advanced economies +e.g. 8S, 2ustralia, are pro;ected to have
stronger population growth than some emerging economies +notably 7hina due to its one
child policy,.
The emerging economies9 market echange rates are epected to appreciate over time in
real terms due to relative stronger productivity growth +the so-called *alassa- Samuelson
effect,. This provides a boost to growth in all of the emerging economies when measured
in real 8SD terms. Bote that this real echange rate appreciation could arise due to
nominal appreciation andEor higher inflation rates in the countries
7oncerned
.reedom to pursue new lines of business as part of overall business stratergy.
.reedom in pricing and Structuring their products
Fpportunities to access foreign market.
)obust economic health of the country and development in different sectors promises the
growth opportunities.
/rowing S-& sector leading to greater demand of credit facilities.
(igh growth opportunities in 1rocessing sector which at present processes only ! percent
of fruits and vegetables contributing only ' percent to global food processing and 43"D
billion worth is fruits and farm products are wasted.
*oom in Indian9s consumer spending
(uge opportunities in rural area where people still depend of money lenders and
relatives.
1ro;ection of Share of total global banking assets. SourceC I-. data for !""$, 1w7 model
pro;ections for !"3"

Threats
7ompetition among banks for highly rated corporates needing lower amount of capital
may eert pressure on already thinning interest spread. .urther, huge implementation cost
may also impact profitability for smaller banks.
The biggest challenge is the re-structuring of the assets of some of the banks as it would
be a tedious process, since most of the banks have poor asset quality leading to
significant
1roportion of B12. This also may lead to -ergers G 2cquisitions, which itself would be
loss of capital to entire system
(uge surplus manpower, absence of good work culture, antiquated labour laws, infleible
and inefficient labour and eistence of strong labour union.
(igh level of Bon 1erforming assets+B12,. H percent of the advances are still blocked up
which is about 3#""" 7rore. Therefore problem of non recognition of interest income and
loan loss provisioning eists.
The house hold savings comprising financial assets are moving away from bank deposits
to more sophisticated form of financial assets such as mutual funds, stocks and
derivatives.
2sset liability mismatch
0emanding customers are ready to ;ump from one bank to another when they are not
satisfied with the service provided. This causes ma;or threat particularly to 1S8s.
7ompetition from new players.
7ompetition at global level in terms of product innovation and product mi.
@eep pace with the fast growing technology.
The current business environment demands
Stress Test
Stress-test analysis indicates that the banking sector is by and large protected from the direct
echange rate risk, direct interest rate risk and the indirect credit risk through changes in the
interest rates. 0irect credit risk and the indirect echange rate risk through foreign currency
lending are handled satisfactorily by the banking sector, while for some particular banks these
risks are quite significant.
The application of the stress test methodology on banks9 balance sheet helps to identify the
plausible difficulties the banking system could be faced with as a result of etreme but plausible
shocks.
2mong the possible risks are considered the echange rate risk, credit risk, interest rate risk and
the indirect credit risks through foreign currency lending and interest rates changes.
Stress test is undertaken on a continuous basis in the )eserve *ank to assess the resilience of the
financial system to eceptional but plausible stress events. The stress testing uses single factor
sensitivity analysis. In addition, a stress testing model which assesses the impact of
macroeconomic variables on the financial soundness indicators of banks has also been attempted.
In formulating the quantum of shocks, ;udicious criteria on selected indicators based on the
eperience of the Indian financial system are applied.
The methodologies used in these stress tests are
described in 2nne-'.
The stress tests currently being conducted by the )eserve *ank on regular basis cover the
following risksC
% 7redit risk, which estimates the impact on capital adequacy by stressing the non performing
advances for the entire credit portfolio.
% Interest rate risk, which estimates the erosion in economic value of the balance sheet for a
given interest rate shock using the I0uration of &quityJ method both at the system and the
individual banklevels.
% 6iquidity risk, under different scenarios, which include sudden withdrawal of deposits on
account of loss of confidence due to adverse economic conditions
Interest Rate Risk
0uration of &quity +0o&, of commercial banks shows an increasing trend in the recent quarters,
pointing towards greater interest rate risk being assumed by banks
Liquidity Risk
7ommercial *anks C The liquidity stress tests assess the ability of a bank to withstand
unepected deposit withdrawal without recourse to any outside liquidity support. The scenarios
have been developed based on stringent assumptions and assumes unepected deposit
withdrawals in different proportions +depending on the type of deposits,. The tests assess the
adequacy of liquid assets available to fund these withdrawals. The deposit run is assumed to
continue for five days.
Sources
www.rbi.org
www.pwc.co.ukEfinancialservices
httpCEEwww.mckinsey.comElocationsEindiaEmckinseyonindiaEpdfEindiaKbankingK!"'".pdf
-anagement of financial institution 5)- Srivatsa and 0ivya nigam