INDUSTRY ANALYSIS OF BANKING SECTOR

A brief history
According to the Reserve Bank of India (RBI), the banking sector in India is sound,
adequately capitalised and well-regulated. Indian financial and economic conditions are much
better than in many other countries of the world. Credit, market and liquidity risk studies
show that Indian banks are generally resilient and have withstood the global downturn well.
With a sense of optimism slowly creeping in, the banking industry expects that 2015 will
bring better growth prospects. This optimism stems from factors such as the Government
working hard to revitalise the industrial growth in the country and the RBI initiating a
number of measures that would go a long way in helping the banks to restructure. The recent
announcements of RBI, it is felt, are a clear pointer to the future of the restructured domestic
banking industry.
Market Size
The Indian banking sector is fragmented, with 46 commercial banks jostling for business with
dozens of foreign banks as well as rural and co-operative lenders. State banks control 80
percent of the market, leaving relatively small shares for private rivals.
At the end of February, 13.7 crore accounts had been opened under Pradhanmantri Jan Dhan
Yojna (PMJDY) and 12.2 crore RuPay debit cards were issued. These new accounts have
mobilised deposits of Rs 12,694 crore (US$ 2.01 billion).
Standard & Poors estimates that credit growth in Indias banking sector would improve to
12-13 per cent in FY16 from less than 10% in the second half of CY14.

Factors affecting the growth:

The Banking Laws (Amendment) Bill that was passed by the Parliament in 2012 allowed the Reserve
Bank of India (RBI) to make final guidelines on issuing new bank licenses. Moreover, the role of the
Indian Government in expanding the banking sector is noteworthy.

It is expected that the new guidelines issued by RBI will curb practices of impish borrowers
and streamline the loan system in the country.
In the coming time, India could see a rise in the number of banks in the country, a shift in the
style of operation, which could also evolve by incorporating modern technology in the
industry.

Another emerging trend witnessed by the banking sector is the use of social media platform like
Facebook to attract customers. In September 2013 ICICI bank launched a Facebook bill payment and
fund transfer service called Pockets for customer convenience.
According to a report by Zinnov, a Globalization and Market Expansion firm, IT adoption in BSFI
sector in India, the Information Technology Industry spend in BFSI vertical is expected to reach USD
3.5 billion by Financial Year 2014. The study also highlighted the growing maturity of Indian BFSI
organizations in IT adoption, as technology is seen as a driver of business value. Technology firms

have great potential to explore in the BFSI sector, which contributes to eight per cent of India's Gross
Domestic Product.

Pestel Analysis
Political Factors:
To what degree a government intervenes in the economy. Ex-tax policy, labour law, environmental
law, trade restrictions, tariffs, and political stability. Some of the major political factors affecting the
Banking industry are:
Focus on regulation of government
Budget and budget measures
Foreign Direct Investment limits

Regulation on government
Indian banking sector is least affected as compared to other developed countries- thanks 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.
FDI
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 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
BUDGET MEASURES
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.
ECONOMIC FACTORS

Every year RBI declares its 6 monthly policies and accordingly the various measures and rates are
implemented which has an impact on the banking sector.
The Economic measures affects the banking sector to boost the economy by giving certain
concessions or facilities. If in the savings are encouraged, then more deposits will be attracted towards
the banks and in turn they can lend more money to the agricultural sector and industrial sector,
therefore, booming the economy.
If the FDI limits are relaxed, then more FDI are brought in India through banking channels
GDP:
Indian economy has registered robust growth in past years and Banking sector is directly related to the
growth of the economy. GOI is trying to push the economy by framing favorable FDI policies , NRI
Investment plans which directly affect the GDP. These plans directly affect banking industry as
money comes through banks and bank earns interest on that.
Interest Rates:
RBI controls interest rates, which RBI monitors regularly. Recently RBI reduced bank rate to
stimulate growth of banking industry
Inflation 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 various steps like lowering interest rates to increase the demand in banking
sector
Savings and Investments: Gross domestic saving is 28% of total income in India
Latest step taken by RBI to deregulate savings rates is a step to increase Bank savings.
Socio-Cultural
It includes cultural aspects and health consciousness, population growth rate, age distribution, career
attitudes and emphasis on safety. This could be classified into:
Traditional Mahajan pratha:
Before the birth of the banks, people of India were used to borrow money local moneylenders,
shahukars, shroffs. They were used to charge higher interest and also mortgage land and house. But
after emergence of banks attitude of people was changed 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.
Change in lifestyle:
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.
Population

Increase in population is one of the important factor, which affect the private sector banks. Banks
would open their branches after looking into the population demographics of the area. Newer
branches are coming to serve the increasing population. This incentive to banks comes on the back of
the continuing need to open more branches in these States in order to ensure more uniform spatial
distribution.
Literacy rate
Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to
transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e.
illiterate people trust more on banks to deposit their money, they do not have market information.
Opportunities in stocks or mutual funds.
Technological Factors
Technology plays a very important role in banks internal control mechanisms as well as services
offered by them. Through the use of technology new products and service are introduced. It include
technological aspects such as R&D activity, automation, technology incentives and the rate of
technological change. Some of the technological changes which brought radical changes in banking in
dustry are described below:
ATM
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

Automatic voice recorders now answer simple queries, currency accounting machines makes the job
easier and self-service counters are now encouraged.
Credit card facility
It 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 telecommunication facilities and computer technology by
using terminals installed at customers home and they can make the balance inquiry, get the statement
of accounts, give instructions for fund transfers, etc.
IT Services & Mobile Banking
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 secured service.
Environmental Factors

Indian economy has registered a high growth for last three years and is expected to maintain robust
growth rate as compare to other developed and developing countries. 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 investment by the industrial sector. This would further increase the
borrowings by the industrys 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.
Legal Factors:
There are two major factors determining the legal aspects of the Banking Industry:
Banking Regulation Act
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI)
"to regulate, control, and inspect the banks in India. The Banking Regulation Act also provided that no
new bank or branch of an existing bank could be opened without a license from the RBI, and no two
banks could have common directors.
Intervention by RBI
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.

Leading Players
S.No

Bank

Market
Capitalization

1
2
3
4
5

HDFC Bank
State Bank of India
ICICI Bank Limited
Axis Bank
Kotak Mahindra Bank

INR
INR
INR
INR
INR

261,226.94
216,128.73
184,547.26
134,685.68
109,631.60

crore
crore
crore
crore
crore

Estimated size of the industry INR? Products/Services

sold?

The Indian banking industry is an INR. 64 trillion (US$ 1.17 trillion) market
and by current growth rate it will be the third largest in the world by 2025.
According to the report, the domestic banking industry is set for an
exponential growth in coming years with its assets size poised to touch
USD 28,500 billion by the turn of the 2025. A healthy growth rate of over
20% projected for the next 2 to 3 years makes it one of the fastest
growing sectors in India.

Porters 5 Forces:
Threat of New Entrance: In order to entry to the banking sector, new
entrants are required to have a high investment (capital). Also, they will
be needed to comply with all regulations from the authorities. Enormous
amount of funds must be available in order to come in this industry. In
addition, the operating costs in banking sector are large with many factors
such as open up branches, high investment on employees and IT system
investment. Banking industry has a high learning curve which means that
new competitors must spend times and resources to study the trend of
the market. In addition, another factor that may deter new banks is the
reputation. Incumbent firms are all well known to people; new company
will lose their opportunity to come into the industry as people would not
trust in new entrants. In order to raise depository, they need to give a
higher rates than the current firms which will be a higher cost for the new
business than the incumbents. Moreover, the advantage for incumbents is
that they are enjoying with the economy of scale and scope from
providing variety of services. The switching cost is high as people are
getting used to with their current banks and processes to switch to other
banks are difficult. However, there are some services banks need to
concerned. The example is the online payment services which try to
facilitate for people to make the transaction more easily. PayPal is one of
those payment services that might drive down the profit of banks. This is
an example of the services that might come in the future as financial
services are large which banks might not be able to focus on every
product. Thus, the threat of new entrants is moderate.
Threat of Substitute products: The financial sector is large in term of
products and services. The banking sector is also included in the financial
industry. With the variety of financial products and services, the possibility
of substitute products is high to bank. For the case of deposit, people
might instead invest in bonds rather than just stick with the saving
account as stock might be a better alternative investment in the
environment of low interest rates. In addition, many financial institutions,

apart from banks, also provide variety of products that is similar to banks
to service customers. For investment investors, plenty of products
available in the market give people a choice of investment as well as for
the institution. However, banks by its feature are still a significant factor
driving the economy. Many products and services are only provided by
banks. Therefore, the threat of substitutes is moderate.
Threat of existing rivalry:
The competition in the banking sector is high by its nature as banks are
completing to gain more customers by offering a better rate than
competitors. The competition on giving higher rates for deposit and lower
rates on loan can be expected. In addition, another factor to drive the
reputation to clients is how ethically they are. People are aware on the
ethic of bankers as well as the corporate governance in doing businesses
Customers perceived value towards the satisfaction is crucial for banks to
focus. When any errors or frauds happened, people may switch to other
banks if they found that it is more secure to do transactions with other
trusted company. For the investment bank, the factors that customers
concerned are fee and return. Banks need to compete on giving the
lowest fee to induce customers to open the account with the company.
And, return is from the past performance of the trading team which
implies how good they are to generate the profit for customers.
Furthermore, there are also financial institutions that operate similar to
banks which mean bank industry will not only compete with each other
but also with other financial service providers as well .Therefore, the
threat of existing rivalry is high.
Bargaining power of customers:
The power of customers in the banking industry is moderate. The account
of deposits can be mainly divided into two accounts; saving account and
time deposit account. For saving account, customers can easily transfer
the money into their current account for daily uses which means these
types of accounts are held for the personnel used that give low Interests
income. People are less sensitive to the change of interest rates.
Moreover, banks tend to promote their services along with the normal
account such as credit card. The clouding network of services gives
privileges benefit to customers. Thus, there are high switching costs for
the accounts as people have already get used to with services of bank
such as internet banking and transfer processes. In contrast, customers
deposit in the time deposit account is more sensitive to the change of
interest rates which they will search out for the bank that give the best
rates. This shows that people are having a high bargaining power on

banks. In addition, in some case such as investment account and deposits

account; customers are freely to switch their account to other banks if
they feel uncomfortable with the services whereas some fees might apply.

Banking Credit Growth:

Year
199596
199697
199798
199899
199900
200001
200102
200203
200304
200405
200506
200607
200708
200809
200910
201011
201112
201213
201314
2014-

% change in deposits
12.1

% change in credits
20.1

16.5

9.6

18.4

16.4

19.3

13.8

13.9

18.2

18.4

17.3

14.6

15.3

16.1

23.7

17.5

15.3

13

30.9

24

37

23.8

28.1

22.4

22.3

19.9

17.5

17.2

16.9

15.9

21.5

13.5

17

14.2

14.1

14.1

13.9

12.6

12.6

15

Bank Credit Growth

40
35
30
25
20
15
10
5
0

% change in deposits

% change in credits

Greece Impact on Indian Banking Industry:

India Banking Industry should not suffer from the crisis in Greece, partly due to its recordhigh foreign exchange reserves of about $ 355 billion and partly because it has very limited
exposure to the European country in terms of trade and investment.
Our sense is that after the initial burst of volatility, which undoubtedly there might be if
developments turn adverse, that investors will start differentiating and when they start doing
that, they will see that the India story is actually a very good one, continues to be a good one,
and that we not only have good macro policies in place, but growth prospects are quite
healthy when compared to the rest of the world.
Indian banks, both in the public sector and in the private sector, are financially sound, well
capitalized and well regulated. The average capital to risk-weighted assets ratio (CRAR) for
the Indian banking system, as at end-March 2015, was 11.24 per cent, as against the
regulatory minimum of nine per cent and the Basel norm of eight per cent. Even so, India is
experiencing the knock-on effects of the global crisis, through the monetary, financial and
real channels all of which are coming on top of the already expected cyclical moderation in
growth.