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Doing Business in India The Big Picture A Banker’s Perspective US – India Business Summit November 29, 2006 Dr. Anil K Khandelwal Chairman & Managing Director Bank of Baroda One of the fastest growing in the world

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Doing Business in India

The Big Picture

A Banker’s Perspective

US – India Business Summit

November 29, 2006

Dr. Anil K Khandelwal

Chairman & Managing Director

Bank of Baroda

US – India Business Summit, 2006

indian economy a snapshot
One of the fastest growing in the world

Consumption growth fuelling economic growth – consumption expenditure forming 78% of GDP

Services sector contributing over 60% to GDP

Emerging as a hub of manufacturing excellence. new growth engines of Indian economy include IT, ITes, pharmaceuticals, bio-technology, nano technology, agri. businesses

Where forces of competition are at work

Innovation driving enterprises

Economic reforms well on course – entering second phase   

Indian Economy – A Snapshot

US – India Business Summit, 2006

indian economy a snapshot3
“Inclusive growth” occupying central place

High untapped potential in rural / agri - economy

Indian companies on acquiring spree and going global

Indian companies pursuing global best practices and producing world-class managers

Indian Economy – A Snapshot

US – India Business Summit, 2006

improved ranking on business front
World Bank – IFC Report on Doing Business in India for 2007 has given a higher rank to India compared to last year because :

- India has cut the time to start a business from 71 to 25 days

Reduced the Corporate Income Tax rate from 36.59% to 33.66%

Supreme Court’s decision has made enforcing collateral simpler – easing access to credit

Reforms to Stock Exchange Regulations have toughened investor protection

Improved Ranking on Business Front

US – India Business Summit, 2006

the indian financial sector
Robust financial system

Well established institutions

Strong supervisory system

Progressive integration of financial markets - banking, insurance, mutual funds, securities, commodities

High competition marked by innovation

High technology absorption

Rediscovery of the Indian customer

21st century customer driving innovations in banking

Banking plus financial services becoming the new offerings

The Indian Financial Sector

US – India Business Summit, 2006

the indian financial sector6
Alternate e-delivery channels becoming popular with Indian customers

Financial sector bracing to meet life cycle and life style needs of the great Indian middle class

“Cradle to Grave” becoming the new spectrum of life cycle needs

Banking graduating beyond traditional boundaries of vanilla banking

Indian customer demandingTOTAL FINANCIAL SOLUTIONS

Banking sector bracing itself to offer customized and structured products

The Indian Financial Sector

US – India Business Summit, 2006

the indian financial sector7
Banking sector entering newer areas like wealth management, private banking, doorstep banking, electronic banking, credit cards, investment advisory services, etc.

Indian banks in a war game to acquire and retain customers

Indian middle class being reached out and wooed by banks

Indian middle class and financial sector beginning to dream together and weave a new bond of relationship

Financial products like mutual funds, life policies, non-life policies competing with traditional banking products

Banking sector fully geared for helping Indian middle class realize its dream

Banking sector in good health – with low non-performing assets and prudential accounting standards in place

Indian banking entering the phase of consolidation (2nd Phase of Reform) – on way to acquire global size

The Indian Financial Sector

US – India Business Summit, 2006

robust resilient banking sector
A free & open banking sector where most businesses are now covered at the market-determined rates

Full banking license system

Highly Stable Sector despite a series of Exogenous Shocks like the Asian Crisis, Sanctions due to Nuclear Explosions, Record High Oil Prices and Large Corrections in Stock Markets

Significant improvement in the Asset Quality: Net NPAs (%) have decreased from 8.1% at end-March 1997 to 2.0% at end-March 2006 despite tightening of prudential norms

Capital Adequacy Ratio (%) of the banking sector has increased from 10.4% at end-March 1997 to 12.8% at end-March 2006

Operating Expenses of SCBs have declined from 2.1% of Total Assets in 1992 to 1.8% in 2005 indicative of improved efficiency

Intermediation costs of SCBs have declined from 2.9% in 1995-96 to 2.1% in 2005-06

Robust & Resilient Banking Sector

US – India Business Summit, 2006


Indian Banks – in good health…

  • Strong Regulatory & Supervisory system
  • RBI has strengthened prudential norms with respect to income recognition, disclosures and capital adequacy
  • India complies with BIS 26 norms of best practices of supervisory criteria, country risk & convertibility
  • Indian banks are well on road towards BASEL II compliance
  • Credit Deposit Ratio is increasing – PSB : 66.2%, Pvt. Banks : 76.3%
  • Bank credit is growing by about 30%
  • Indian banks compare favourably with its Asian peers in asset quality
  • Indian banking sector grew by 6 times in the last decade – from Rs. 5,984 bn in 1995 to Rs. 36,105 bn.
  • KYC norms and Anti Money Laundering regulations in force
  • Indian banks are serving the “Two Faces” of India – the Underprivileged, the Progressive & the Opulent – with equal aplomb

US – India Business Summit, 2006


Indian Banks – in good health…

  • About 70000 strong branch network – More than 60% presence in Rural areas
  • Consistent growth in profitability – Spread is getting healthier – from 3.1% in 2004-05 to 3.2% in 2005-06
  • NPL Ratios compare favourably with global trends
  • Consistently out-performing stock indices – Total Return to Shareholders continues to be attractive
  • PSBs : 72%
  • Pr.Bks : 19%
  • Fgn. Bks.: 7%
  • Others include UCBs, RRBs, LABs & NBFCs
  • Spread : 3.2%
  • CAR : 12.0%
  • ROA : 1.0%+
  • Gross NPA : 3.34%
  • Net NPA : 2.00%

TRS Apr 01 – Apr 05

  • PSU Banks : 61.2%
  • India Banking : 51.3%
  • Old Private : 40.0%
  • New Private : 33.9%

US – India Business Summit, 2006

banks major financiers of growth
India has one of the strongest financial sector with low systemic risk

Upturn in economic activity is mirrored in the sustained growth in “Demand for Bank Credit”

Bank credit has increased sharply from 30% of GDP at end-March 2000 to 48% at end-March 2006

Non-food credit by SCBs increased by an average of 26.1% between 2002-2006 versus its long-term average of 17.8% from 1970 to 2006

Deployment of credit is quite broad-based with increasing flows going to infrastructure , SMEs, agriculture and retail sector (especially residential mortgages) during the past three years

Banks – Major Financiers of Growth

US – India Business Summit, 2006

indian banks in the best of the league of asian peers
According to Moody’s Investor Services Analysis :

Indian lenders have highest Return on Equity (ROE) in Asia (20.38%), followed by Indonesia (20.19%), New Zealand (18.83%), Japan (-6.42%)

Average gross bad loans as share of total loans – India (8.18%), Philippines (15.05%), Thailand (13.08%), China (11.80%) and Malaysia (9.73%)

Cost to Income Ratio in India at 44.56% is in line with the best regulated Asian countries like Singapore (44.15%), Taiwan (42.61%) and Hong Kong (40.05%)

Indian Banks in the Best of the League of Asian Peers

US – India Business Summit, 2006

Banking Regulations

Credit & Recovery

Payment Systems

Communications & Infrastructure

Financial Sector Reforms – Going Ahead



  • Deregulated Interest rate
  • Greater freedom to banks
  • Significant steps towards Full capital
  • Account Convertibility
  • SARFAESI Act 2002
  • Debt Recovery Tribunal (DRT)
  • Real Time Gross Settlements(RTGS)
  • Electronic Clearing System (ECS)
  • Electronic Fund Transfer (EFT)
  • Cheque Truncation - in the pipeline
  • Internet Banking, E-Banking, On-line
  • Tax Payment / Utility Payments,
  • ATM, Mobile Banking

US – India Business Summit, 2006

Capital Norms

Credit Information

Financial Track record

Other Regulatory Initiatives

Significant Steps for Improvement…



- Min. Capital @ 9% as against 8% by BIS

  • Indian Banks are ahead in Basel II readiness – implementation road-map targets March 2009
  • Min. Capital requirement for entry set @ Rs. 3 bn. for all banks in private sector
  • Credit Information Bureau of India Ltd
  • List of defaulters on RBI website

- No financial crisis – escaped contagion effect of South East Asian meltdown

- Strong Regulatory Practice & Prudence in place for “Managing Affluence”

  • Regulatory provisions to bring NBFCs & UCBs under uniform prudential norms

US – India Business Summit, 2006


Indian Banks are on a high growth track…

  • Overall banking sector is growing by – 18%
  • Retail Sector (CAGR – 5 years)
  • - Housing Loan : 50.%
  • - Consumer Durables : 16%
  • - Credit Card : 45%
  • - Two Wheeler Loan : 31%
  • - Car Loans : 26%
  • - Other Personal Loans : 38%

More than 25% of the Bank Loan Assets are in Retail sector ensuring high returns - likely to cross Rs. 5700 bn by 2010

US – India Business Summit, 2006


Indian Banks are on a high growth track…

Online Banking in India . . .

Growth of e-Commerce Transactions

  • Estimated 4.6* million Indian Internet users are Banking Online today
  • Indians paying bills online is expected to increase from the current 0.3 million in 2005-06 to 1.8 million by 2007-2008.
  • E-commerce transactions will cross the Rs 2000 crore mark (2006-2007) which translates into an increase of over 300% from financial year 2004-05.

US – India Business Summit, 2006


Doing Business in India …

  • Is there any Untapped Potential in Indian Financial Market ?
  • What is the ‘Big Picture’ ?

US – India Business Summit, 2006


The Big Picture…

Consumption boom in India

Mortgages / GDP(%)

Consumer Loans / GDP(%)

Credit Cards / GDP (%)

Other Retail Loans / GDP (%)

In each of the area, huge untapped potential left

US – India Business Summit, 2006


The Big Picture…

Mutual Funds – Global Perspective

Mutual Funds as a % of GDP

Global Investment Fund Asset Pool

Low Penetration – Indian industry still in early stages

US – India Business Summit, 2006

Source : CLSA Asia Pacific Markets


The Big Picture…

Insurance Penetration – Global Landscape

Life premium/ GDP (%)

Insurance density (US$ premiums per capita)

Non Life premium/ GDP (%)

Low Penetration – A large potential still untapped

US – India Business Summit, 2006

Source : Swiss Re Report 2005


The Big Picture…

Growth of Card Spending in India . . .

Growth of Credit and Debit Cards in India

  • Increasing trend of Plastic Spend
  • High Technology Banking Products
  • Need for value added services on card products

Growth of ATMs in India

  • Larger Number of Access Points for Customers
  • Convenience to customer is the key
  • Shared network is the future

US – India Business Summit, 2006


Wealth Management & Private Banking – New Growth Opportunities…

  • India - one of 10 fastest-growing population of HNWIs globally
  • There are at least 23 Indian citizens amongst the richest people on the planet
  • Non Resident Indians can invest in all Indian Asset Classes
  • No. of HNWIs in India – 100,000 (19.3% growth in 2005)
  • Salary increases in India – 13.9% is the highest in the world
  • Increasing Investment avenues – Art, Realty Funds, Commodities
  • Penetration level of wealth management services in India - 10% in comparison to European markets (60-90%)
  • The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE.
  • Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.

US – India Business Summit, 2006


The Big Picture…

India is fast emerging as the “Back Office” of the World & the “Global Knowledge Hub”

  • 100 Global Companies outsource from India
  • Top Global Banks are present in India
  • Largest talent pool
  • World class educational / professional institutions
  • Increasing Trade activities
  • Cost of operations – low

US – India Business Summit, 2006


The Story Continues…

  • Savings Rate @ 29% is low – Offers high potential from an increasingly affluent community
  • Less than 40% of Indian household has a bank account
  • Bulging Middle Class – likely to exceed 300 mn
  • Only 2% of the Indian population have insurance cover
  • Less than 1% of the population is actively participating in the Stock market
  • Number of high net worth households (> Rs. 500,000) is likely to grow from 200,000 to 400,000 by 2010
  • Consumer Finance stands at about 2% to 3% of GDP as compared to 25% in European market
  • Real Estate Market is projected to touch USD 50 bn by 2008
  • SME Sector is catching up fast creating huge prospect of growth

US – India Business Summit, 2006


Challenges Ahead….

  • Capital Requirements – to compete with Foreign banks in the post 2009 phase
  • Financial Inclusion – to remove imbalances in economic growth
  • Banking Sector Consolidation – for improving competitiveness – need for a clear road-map for “Managed Consolidation”
  • HR Challenges – Changing working conditions, re-skilling, compensation etc.
  • Coping with the massive technology adoption programme – change management – from employees’ as well as customers’ perspectives

US – India Business Summit, 2006


Challenges Ahead….

  • High intermediation costs
  • Low Productivity
  • Better Corporate Governance – higher level of accountability
  • Improvement in productivity and efficiency in line with advanced markets
  • Transformation from Plain Vanilla banking’ to “multi-specialist” banking

US – India Business Summit, 2006


Thank You

US – India Business Summit, 2006