Doing Business in India

1
Doing Business in India The Big Picture A Banker
s Perspective
US India Business Summit November 29, 2006
Dr. Anil K Khandelwal Chairman Managing Directo
r
Bank of Baroda
2
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         

3
Indian Economy A Snapshot

• 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

4
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 Courts decision has made enforcing
  collateral simpler easing access to credit
  
• Reforms to Stock Exchange Regulations have
  toughened investor protection

5
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

6
The Indian Financial Sector

• 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 demanding TOTAL FINANCIAL
  SOLUTIONS
  
• Banking sector bracing itself to offer customized
  and structured products

7
The Indian Financial Sector

• 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

8
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

9
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

10
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

11
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

12
Indian Banks in the Best of the League of Asian
Peers

• According to Moodys 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)

13
Financial Sector Reforms Going Ahead
Requirements
Fulfillments

• Banking Regulations
• Credit Recovery
• Payment Systems
• Communications Infrastructure

• 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

14
Significant Steps for Improvement
Area
Status

• Capital Norms
• Credit Information
• Financial Track record
• Other Regulatory Initiatives

• - Min. Capital _at_ 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 _at_ 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

15
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
16
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.

17
Doing Business in India

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

18
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
19
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
Source CLSA Asia Pacific Markets
20
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
Source Swiss Re Report 2005
21
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

22
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.

23
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

24
The Story Continues

• Savings Rate _at_ 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

25
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

26
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

27
Thank You