growth of banking sector in india

8/9/2019 Growth of Banking Sector in India

1/45

A

PROJECT REPORT

ON

Current Trend and Growth Pattern of the Banking Sector

Submitted on partial fulfillment in award of

MASTERS OF BUSINESS ADMINISTRATION

S.NO. CHAPTER PAGE.NO.


2/45

1.

2.

3.

4.

5.

6.

7.

8.

INTRODUCTION

METHODOLOGY

OBJECTIVES OF THE STUDY

THE DESIGN

THE SAMPLE

THE TOOLS USED

FUNDAMENTAL ANALYSIS

ECONOMIC ANALYSIS

INDUSTRY ANALYSIS

COMPANY ANALYSIS

ANALYSIS AND RESULTS

FINANCIAL RATIOS

ASSET QUALITY RATIOS

PROFITABILITY RATIOS

PRODUCTIVITY MEASURES

STAFF DEPLOYMENT

DISCUSSION

FINANCIAL

ASSET QUALITY

PROFITABILITY

PRODUCTIVE MEASURES

CONCLUSIONS

SUGGESTIONS

BIBLIOGRAPHY

1

2

CHAPTER 1


3/45

Introduction

India is poised to become the worlds fourth largest economy in the span of twodecades. Economic prosperity is providing many in this populous nation with real

purchasing power; it simply is an opportunity that cannot be overlooked by globalbanks. Despite its appeal, India remains a developing economy. Thus, global banksseeking a presence or expansion in India must craft a business strategy thatconsiders the countrys attendant challenges: longestablished competitors;rudimentary infrastructure; dynamic political environment; restrictive regulations;and developing country operational risks. These challenges should be weighedagainst the potential gains from entering the marketplace, as well as the likely costof doing nothing. The global banks have pinpointed four of the most promising

product areas to enter into the Indian market: housing loans, automobile loans,small and medium enterprise (SME) banking and personal financial services (PFS).However, recognizing the growth opportunities is only the beginning. Global

banks targeting India as a source of new growth will have to do much more than

just "show up" success will lie in the details of execution.

Banking in India originated in the last decades of the 18th century. The oldest bankin existence in India is the State Bank of India, a government-owned bank thattraces its origins back to June 1806 and that is the largest commercial bank in the

country. Central banking is the responsibility of the Reserve Bank of India, whichin 1935 formally took over these responsibilities from the then Imperial Bank ofIndia, relegating it to commercial banking functions. After India's independence in1947, the Reserve Bank was nationalized and given broader powers. In 1969 the

government nationalized the 14 largest commercial banks; the governmentnationalized the six next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sectorbanks (that is with the Government of India holding a stake), 31 private banks(these do not have government stake; they may be publicly listed and traded on

stock exchanges) and 38 foreign banks. They have a combined network of over53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, arating agency, the public sector banks hold over 75 percent of total assets of the

banking industry, with the private and foreign banks holding 18.2% and 6.5%

respectively.

HISTORY


4/45

Banking in India originated in the last decades of the 18th century. The first bankswere The General Bank of India which started in 1786, and the Bank of Hindustan,

both of which are now defunct. The oldest bank in existence in India is the StateBank of India, which originated in the Bank of Calcutta in June 1806, whichalmost immediately became the Bank of Bengal. This was one of the three

presidency banks, the other two being the Bank of Bombay and the Bank ofMadras, all three of which were established under charters from the British East

India Company. For many years the Presidency banks acted as quasi-central banks,as did their successors. The three banks merged in 1921 to form the Imperial Bankof India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank,established in 1865 and still functioning today, is the oldest Joint Stock bank in

India. It was not the first though. That honor belongs to the Bank of Upper India,which was established in 1863, and which survived until 1913, when it failed, withsome of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil Warstopped the supply of cotton to Lancashire from theConfederate States, promoters opened banks to finance trading in Indian cotton.With large exposure to speculative ventures, most of the banks opened in Indiaduring that period failed. The depositors lost money and lost interest in keepingdeposits with banks. Subsequently, banking in India remained the exclusivedomain of Europeans for next several decades until the beginning of the 20th

century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. TheComptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and anotherin Bombay in 1862; branches in Madras and Pondichery, then a French colony,followed. HSBC established itself in Bengal in 1869. Calcutta was the most activetrading port in India, mainly due to the trade of the British Empire, and so becamea banking center.

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,established in 1881 in Faizabad. It failed in 1958. The next was the Punjab

National Bank, established in Lahore in 1895, which has survived to the presentand is now one of the largest banks in India.


5/45

Around the turn of the 20th Century, the Indian economy was passing through arelative period of stability. Around five decades had elapsed since the IndianMutiny, and the social, industrial and other infrastructure had improved. Indianshad established small banks, most of which served particular ethnic and religiouscommunities.

The presidency banks dominated banking in India but there were also someexchange banks and a number of Indianjoint stockbanks. All these banks operatedin different segments of the economy. The exchange banks, mostly owned byEuropeans, concentrated on financing foreign trade. Indian joint stock banks weregenerally under capitalized and lacked the experience and maturity to competewith the presidency and exchange banks. This segmentation let Lord Curzon toobserve, "In respect of banking it seems we are behind the times. We are like someold fashioned sailing ship, divided by solid wooden bulkheads into separate and

cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by theSwadeshi movement. The Swadeshi movement inspired local businessmen and

political figures to found banks of and for the Indian community. A number ofbanks established then have survived to the present such as Bank of India,Corporation Bank, Indian Bank, Bank of Baroda, Canara Bankand Central Bankof India.

The fervour of Swadeshi movement lead to establishing of many private banks in

Dakshina Kannada and Udupi district which were unified earlier and known by thename South Canara ( South Kanara ) district. Four nationalised banks started inthis district and also a leading private sector bank. Hence undivided DakshinaKannada district is known as "Cradle of Indian Banking".

From World War I to Independence

The period during the First World War(1914-1918) through the end of the SecondWorld War(1939-1945), and two years thereafter until the independence of Indiawere challenging for Indian banking. The years of the First World War wereturbulent, and it took its toll with banks simply collapsing despite the Indianeconomy gaining indirect boost due to war-related economic activities. At least 94

banks in India failed between 1913 and 1918 as indicated in the following table:


6/45

YearsNumber of banks

that failedAuthorised capital

(Rs. Lakhs)Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-independence

Thepartition of India in 1947 adversely impacted the economies ofPunjab andWest Bengal, paralyzing banking activities for months. India's independencemarked the end of a regime of the Laissez-faire for the Indian banking. TheGovernment of India initiated measures to play an active role in the economic lifeof the nation, and the Industrial Policy Resolution adopted by the government in1948 envisaged a mixed economy. This resulted into greater involvement of thestate in different segments of the economy including banking and finance. Themajor steps to regulate banking included:

y In 1948, the Reserve Bank of India, India's central banking authority, wasnationalized, and it became an institution owned by the Government ofIndia.


7/45

y In 1949, the Banking Regulation Act was enacted which empowered theReserve Bank of India (RBI) "to regulate, control, and inspect the banks inIndia."

y The Banking Regulation Act also provided that no new bank or branch of anexisting bank could be opened without a license from the RBI, and no two

banks could have common directors.

However, despite these provisions, control and regulations, banks in India exceptthe State Bank of India, continued to be owned and operated by private persons.This changed with the nationalisation of major banks in India on 19 July 1969.

Nationalisation

By the 1960s, the Indian banking industry had become an important tool to

facilitate the development of the Indian economy. At the same time, it had emergedas a large employer, and a debate had ensued about the possibility to nationalisethe banking industry. Indira Gandhi, the-then Prime Minister of India expressed theintention of the GOI in the annual conference of the All India Congress Meeting ina paper entitled "Stray thoughts on Bank Nationalisation."The paper was receivedwith positive enthusiasm. Thereafter, her move was swift and sudden, and the GOIissued an ordinance and nationalised the 14 largest commercial banks with effectfrom the midnight of July 19, 1969. Jayaprakash Narayan, a national leader ofIndia, described the step as a "masterstroke of political sagacity."Within two

weeks of the issue of the ordinance, the Parliament passed the Banking Companies

(Acquisition and Transfer of Undertaking) Bill, and it received thepresidentialapproval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980.The stated reason for the nationalization was to give the government more controlof credit delivery. With the second dose of nationalization, the GOI controlledaround 91% of the banking business of India. Later on, in the year 1993, thegovernment mergedNew Bank of India with Punjab National Bank. It was the

only merger between nationalized banks and resulted in the reduction of thenumber of nationalised banks from 20 to 19. After this, until the 1990s, thenationalised banks grew at a pace of around 4%, closer to the average growth rateof the Indian economy.

The nationalised banks were credited by some, including Home ministerP.Chidambaram, to have helped the Indian economy withstand the global financialcrisis of 2007-2009.


8/45

Liberalisation

In the early 1990s, the thenNarsimha Rao government embarked on a policy ofliberalization, licensing a small number of private banks. These came to be known

asNew Generation tech-savvy banks, and included Global Trust Bank (the first ofsuch new generation banks to be set up), which later amalgamated with OrientalBank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bankand HDFCBank. This move, along with the rapid growth in the economy of India, revitalizedthe banking sector in India, which has seen rapid growth with strong contributionfrom all the three sectors of banks, namely, government banks, private banks andforeign banks.

The next stage for the Indian banking has been setup with the proposed relaxation

in the norms for Foreign Direct Investment, where all Foreign Investors in banks

may be given voting rights which could exceed the present cap of 10%,at present ithas gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till thistime, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) offunctioning. The new wave ushered in a modern outlook and tech-savvy methodsof working for traditional banks.All this led to the retail boom in India. People not

just demanded more from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a challengefor the private sector and foreign banks. In terms of quality of assets and capitaladequacy, Indian banks are considered to have clean, strong and transparent

balance sheets relative to other banks in comparable economies in its region. TheReserve Bank of India is an autonomous body, with minimal pressure from thegovernment. The stated policy of the Bank on the Indian Rupee is to managevolatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One mayalso expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase itsstake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time

an investor has been allowed to hold more than 5% in a private sector bank since


9/45

the RBI announced norms in 2005 that any stake exceeding 5% in the privatesector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too

aggressive in their loan recovery efforts in connection with housing, vehicle andpersonal loans. There are press reports that the banks' loan recovery efforts havedriven defaulting borrowers to suicide

The Indian banking system is financially stable and resilient to the shocks that mayarise due to higher non-performing assets (NPAs) and the global economic crisis,according to a stress test done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world afterspending US$ 6.7 billion towards the purchase of 200 metric tonnes of gold from

the International Monetary Fund (IMF) in November 2009. The purchase hasincreased the country's share of gold holdings in its foreign exchange reserves fromapproximately 4 per cent to about 6 per cent.

Following the financial crisis, new deposits have gravitated towards public sectorbanks. According to RBI's 'Quarterly Statistics on Deposits and Credit of

Scheduled Commercial Banks: September 2009', nationalised banks, as a group,accounted for 50.5 per cent of the aggregate deposits, while State Bank of India(SBI) and its associates accounted for 23.8 per cent. The share of other scheduledcommercial banks, foreign banks and regional rural banks in aggregate deposits

were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.

With respect to gross bank credit also, nationalised banks hold the highest share of50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per centand other scheduled commercial banks at 17.8 per cent. Foreign banks and regional

rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the totalbank credit.The report also found that scheduled commercial banks served 34,709banked centres. Of these centres, 28,095 were single office centres and 64 centreshad 100 or more bank offices.The confidence of non-resident Indians (NRIs) in theIndian economy is reviving again. NRI fund inflows increased since April 2009and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin.Most of this has come through Foreign Currency Non-resident (FCNR) accountsand Non-resident External Rupee Accounts. India's foreign exchange reserves roseto US$ 284.26 billion as on January 8, 2010, according to the RBI's February

bulletin.


10/45

CHAPTER 2

METHODOLOGY

OBJECTIVES OF THE STUDY

With reduction in interest rates in fixed deposits and other saving schemes, publicprovident funds, government securities investors area looking for other investmentopportunities which can provide better returns with moderate level of risk. Thisstudy focuses on analysis of safety and returns associated with the banking scripts.

Thus objectives of this study are:

To analyze current trends and growth patterns of the banking sector.

To study the performance of banking industry in the market.

To measure the safety level associated with the bank scripts in the portfolio.

To depict the present and future potential of banking industry.

The Design

A research design is a type of blueprint prepared depending on various types of

blueprints available for the collection, measurement and analysis of data. Aresearch design calls for developing the most efficient plan of gathering the neededinformation. It is based on the purpose of the study. Research design is thespecification of methods and procedures for acquiring the information needed. It isan overall operational pattern or framework of the project that stipulates what

information is to be collected from which source by what procedure. Ex post factoand observational technique .

The sample

The sample size taken is 4 i.e. four banks are been taken for the analysis of the

report. The four banks taken are as follows:1. HDFC2. STATE BANK OF INDIA3. ICICI4. BANK OF INDIA


11/45

The tools used

Data collection

The data used in this study is secondary data. Various magazines and journals were

referred. The banks websites was an effective source for collecting the information.The annual reports of banks were analyzed for financial appraisal.The various journals referred were Dalal Street, Business world and Capitalmarket.

For data analysis

Following Ratios were used for analysis

ASSET QUALITY

Gross NPA / Gross advance Gross NPA / Total assetNet NPA / Net advances

PROFITABLITY RATIOS

Interest on advances / total income Interest on investment / total income Other income / total income Profit margin = net profit / total incomeNet profit / working fund

Interest income / working fundsNon interest income / working funds Interest income / total assets Asset utilization = total income / total asset Return on assets = total income / total asset

PRODUCTIVITY MEASURES

Business per employee = (advance + deposit) / number of employees (Working fund + contingent liability) / number of employees net total income / number of employees working fund / establishment cost

STAFF DEPLOYMENT

Official / total staff Clerk / total staff Sub staff / total staff


12/45

CHAPTER 3

FUNDAMENTAL ANALYSIS

ECONOMIC ANALYSIS

We are living in a fast changing world. With new emerging technologies andcommitments to international institutions like WTO, IMF, WORLD BANK, thegovernment of India is pulling down barriers to foreign trade andinvestment. This gives clear signals to privatization and liberalization. The systemhas undergone substantial changes in response to the changes that have been taking

place in social, political and economic environments. In addition to meeting theincreasing demands from the traditional markets, new markets have been brought

into the financial sector, entailing in the process the adoption of new marketingconcepts and calling for an entirely new approach and a significant change in themarket attitudes. The financial sector can also claim to have achieved significant

success in this sphere. A sound financial system touching every aspect of economicactivities is a pre-requisite of a vibrant and developing economy.

Indias bright economic forecast: Continuing growth

During the last decade, India has emerged as one of the biggest and fastest growingeconomies in the world. The strengthening economy in India has been fueled by

the convergence of several key influences: liberalization policies of thegovernment, growth of key economic sectors, development of an English speaking,well-educated workforce and the emergence of a middle-class population. Thecountrys economy is now in the process of development this is continuouslycreating opportunities for business activities. Economic development in India has

broadly two facts:

Quantitative Structural

Quantitative deals with the examinations of trends related to national income,which is having moderate rate of growth. Apart from the growth in quantitativeterms, structural changes indicate the process of development. However the speedis slow in certain sphere. It is under consideration that the importance ofagriculture in Indias economy has declined over the years and the importance is


13/45

given to the basic industries, infrastructure, banking and financial structure due toliberalization and privatization.

More liberal economic policies: Opening the marketplace Indias debt crisis in theearly 1990s forced the government to radically reform its economic policies. Theresulting liberalization program opened the market for foreign investment, fostereddomestic competition and spawned an era of privatization. In the 10 years after

1992, Indias economy grew at an average rate of 6.8 percent during April to June2004; the economy continued to show its strength and grew by 7.4 percent.Foreign direct investment (FDI) grew more than twentyfold, from just underUS$0.13 billion in 1992 to almost US$2.86 billion in 2003. Meanwhile,

privatization accelerated between 2000 and 2002, when 13 state-owned companieswere sold, 9 while the Indian government recently raised another US$3.41 billion

by selling off stakes in 6 state-owned firms.10 The surge in FDI helped to create a

capital markets boom and reduced the overall cost of borrowing for Indiancompanies, particularly contributing to expansion of the services, agriculture andmanufacturing sectors. This shift towards mixed economy resulted in huge changesin the business environment like:

Private ownership as a means of production:

At present big segment of industries are in private hands. Except some exceptionsof industries most of them in are privatized like heavy engineering, electronics,textiles, telecommunication, leather cement, media, pharmaceutical and banking.

Monopoly trends:In Indian context the monopoly trend of various houses has reduced to a largeextent over the years. Coexistence of public sector with private sector:

The public sector has coordinated its activities with private sector in order toimprove the performance of economic engines. Economic reforms

Economic reforms play a substantive role in boosting up the economy of the

country. At present more emphasis is given to foreign trade and investment so as toopen up the economy of the country. Fully convertibility of rupees:

In 1991 the rupee got fully convertible for current account for all trade relatedactivities. As far as current scenario is concerned we may definitely look for anopen economy.


14/45

We can visualize the present situation in India with the help of key economicindicators:

THE country's current account has slipped into further deficit at $5.47billion for the third quarter October- December 2006 from a deficit of$4 billion in the second quarter, as per the latest Balance of Payments (BoP)figures released by the Reserve Bank of India.

GDP growth is above 7% Exports have been growing at a annual rate of 17% in dollarNon oil import growth is at 15% with an increase of 10% in exports. The countrys foreign exchange reserves were at US$141.46bn in the week

ended April 8, 2005. Interest rates are in line with international interest rates.

GROSS DOMESTIC PRODUCT

GDP indicates the rate of growth of the economy. It represents the aggregate valueof the goods and services produced in the economy. GDP consists of personalconsumption expenditure, gross private domestic investment and governmentexpenditure on goods and services. GDP growth in the first half has been 7.0

percent and since agricultural growth should strengthen further over the next twoquarters, we expect overall growth in the second half to be stronger. The Indianeconomy is set to expand at around 8 percent this financial year on the back ofstrong farm and services growth.Growth of the Indian economy, second fastest growingeconomy in the world after China (figure1), is again expectedto accelerate in the current financial year, aided by themoderate monsoon rains, pushing farm sector growth and

boosting rural incomes, also with a significant growth in theservice industry.


15/45

Source: World Bank, World Development Indicators Database, 2003

INFLATION

Along with growth of GDP, if the inflation rate also rises, and one another reasonfor increase in the inflation rate is the hike in international oil rates, then the realrate of growth would be very little. If there is a mild level of inflation, it is good forthe stock market but high rate of inflation is harmful for the stock market.The annual rate of inflation, calculated on point-topoint basis, stood at 5.05 percent(Provisional) for the week ended 26/03/2005 as against 5.11 percent (Provisional)for the previous week and 4.64 percent during the corresponding week of the

previous year. Inflation rate fell during the month as the Wholesale Price Index for

All Commodities' for the week ended 5

th

March 2005 calculated on point-to-pointbasis, stood at 5.30 percent. Thus inflation rate is expected to average at about 5.0to 5.5 percent this fiscal. The continued strength of manufacturing inflation in thecurrent period indicates an adequacy of domestic demand.


16/45

INTEREST RATES

THE GOVERNOR of the Reserve Bank, Y.V. Reddy, had to be circumspect whenformulating the Credit Policy for 2006-07 as he had to take into account thedevelopments in the money market in the past year, which were suggestive of ahardening of interest rates. Interest rates have been rising in the U.S. and elsewhereand, in India too, the trends in giltedged prices were creating problems for those

seeking to secure their requirements on a cheap as in 2001-04. Therefore primelending rate of major 5 banks remained static at 10.25%-10.75% in the month ofMarch also. Bank rate is also the same as of last month's figure of 6%.

INDUSTRY ANALYSIS

Banking has traditionally remained a protected industry in many emerging

economies. Regulated deposits and lending rates and restrictions enabledcomfortable spreads. There were limited pressures on banks to come out of thisquiescent and protected world. A combination of developments has compelled

bankers to change the old ways of doing business. These include among otherstechnological advancements, intermediation pressures arising from liberalizedfinancial market place, increased emphasis on shareholder value, and

macroeconomic pressures and banking crisis in the 1990s.the scope timing andspeed of this process, however, have not been uniform across countries orsegments of the industry, reflecting the differing objectives of intervention anddiverse initial conditions. With the liberalization, Indian banking industry haswitnessed qualitative and quantitative changes. It is now savoring the fruit of theregulatory deregulation. In fact the banking industry has become a maturedsegment capable of achieving global benchmarks. Some of the changes include theopening up of the banking industry for private players, introduction of capitaladequacy norms as well as stringent norms for asset classification and provisioningrisk based supervision and management and the dilution of government ownershipof banks. Today banks are given more operational freedom in their day to dayactivities such as the fixing of lending and interest rates, branch expansioninvestments, credit delivery, recruitment and the creation of posts.


17/45

Whats hot in Indian retail banking?

With one of the most underpenetrated retail lending markets in Asia-Pacific, Indiaoffers great potential. Indias mortgage debt in 2002 totaled only 2 percent of grossdomestic product (GDP), compared to 7 percent of Thailands GDP, 8 percent ofGDP in China and much higher proportions in other parts of the region: Malaysia28 percent), South Korea (30 percent) and Hong Kong (52 percent).2 While India

remains characterized by extreme wealth and poverty, a middle class is beginningto emerge, with absolute demand for products and services on the rise. To seizethis opportunity, new market entrants must exploit specific market niches andleverage bestin- class capabilities while addressing the unique challenges of theIndian banking environment. Four banking product areas with high growth

potential have been identified: Housing loans - The appealing combination of low, stable interest rates,

rising household income and more receptive customer attitudes towardholding debt translated into a market that expanded 35 percent annually from1999 to 2004.

Vehicle loans The automotive lending market benefits from the samedrivers that are shaping the mortgage opportunity; car sales volume in 2004soared to more than a million vehicles, up from 664,127 in 2003 and beating

earlier estimates of reaching 954,354 annually in 2007. SMEbanking The public sector banks in India have traditionally focused

on serving big industry rather than small businesses; however, Indias SMEmarket has expanded to over 3.5 million businesses which are growing,increasingly exporting and importing, and demanding more sophisticated

banking products and services. Personal financial services The growing market for wealth management

offers good opportunities for banks that can establish the right combinationof account management and distribution infrastructure. Banks and

brokerages are doing business with less than a third of the 50,000 families inIndia with net worth of US$1 million and higher.

The recent trends in Indias banking industry

Indias banking industry is one of the major beneficiaries of the countrysascendant economic power. Improving consumer purchasing power, coupled withmore liberal attitudes toward personal debt, is fueling Indias explosive bankingsegment. Bank asset growth between 1998 and 2003 places India favorably amonga sampling of the developing economies in China, Hungary, Indonesia, Poland andSouth Korea. For the period, total bank assets in India rose from US$187.2 billion


18/45

to US$373.8 billion, a 14.8 percent CAGR. Even though the brisk rate of growth inthe Indian banking sector is expected to level off, it should remain solid through2007.

Source: Reserve Bank of India.

While the absolute growth of Indias overall banking market is impressive (Figure

2), global banks should be encouraged further by the relatively underpenetratedstatus of the countrys various retail lending segments. The retail market formortgages, credit cards, automobile loans and other consumer loans is expected to

jump from its 1999 total of US$9.7 billion to US$36.7 billion in 2004.


19/45


Even with this strong performance, significant opportunities for continued retaillending growth remain. Evidence suggests that Indias traditionally fiscallyconservative consumers are becoming more receptive toward holding debt. Theforecasted total debt of US$36.7 billion in 2004 represents just 5.8 percent ofIndias expected GDP, up from 2.2 percent in 1999. Still, these retail lending

figures lag Indias regional peers. Taking another view, Indias consumerborrowing represented just 2 percent of household income in 2002, sharply lessthan the totals of Singapore (176 percent), Malaysia (75 percent) and Thailand (39

percent). Unlike most rapidly expanding, emerging markets, Indias banking sectorhas exhibited financial stability and a trend toward improved governance under themanagement of its central bank, the Reserve Bank of India (RBI). One challengethe RBI had to contend with was the legacy of policy-directed, corporate lending

by the state-owned banks that had produced high levels of nonperforming assets(NPAs). Through structural reform, remedial legislative actions, and favorablereturns from the fixed income Treasury Markets, Indian banks have cut gross NPAlevels from 15.7 percent in 1997 to 8.8 percent in 2003. Fortunately, new entrantsto the market are not subjected to the same mandatory lending requirements asdomestic banks and can therefore "cherry-pick" the most desirable clients,

allowing them to lower their own risk of NPAs through more rigorous riskmanagement strategies. Global banks in India: Gaining a foothold


20/45

The competitive environment in India presents both challenges and opportunitiesto global banks seeking market entry. Entrenched domestic competitors andrestrictive equity ownership ceilings imposed by the government create obstaclesfor banks establishing a foothold in India. Primary challenges include toughcompetition and government ceilings on foreign equity ownership. Opportunitiesexist because global banks often have technological advantages, well-honed,efficient processes and appealing products and services. The strongest competition

facing global banks in India comes primarily from the public sector (the State Bankand Nationalized Bank groups) and the New Private Bank groups. State dominanceof the banking sector dates back to the inception of the RBI in 1935. When the RBIcommenced operations, the state controlled 100 percent of the banking institutions.Since the 1990s, Indias reform-driven policies have promoted the gradualderegulation and modernization of the banking sector. The formation of the OldPrivate Bank group and then the New Private bank group opened the market place

to greater competition. Gradually, the grip of public sector banks has loosened, asevidenced by that groups drop in total asset share, from 89.1 percent in 1990 to75.7 percent in 2003. However, state-backed institutions remain formidable,

possessing expansive channel reach and huge customer bases, controlling not onlythree-quarters of total assets, but also three-quarters of income. In 2003, theForeign Bank group controlled less than seven percent of total industry assets and

less than nine percent of total income.



21/45

The other key competitors for global banks are the banks of the New Private Bankgroup this set of institutions has proven more nimble than other domestic players.Since its formation in the 1990s, this group leveraged its strong domestic brandingand above-average operational capabilities to aggressively win market share fromstate-backed incumbents. From 1998 to 2003, the New Private Banks had a 47.4

percent CAGR in total assets, compared to 14.7 percent CAGR for the State Bankgroup and 12.2 percent CAGR for Nationalized Banks. Asset and income market

share in 2003 remained highly concentrated among top banking institutions. Thetop 15 banks operating in India controlled 67.7 percent of total assets only twoare not public sector banks. A slightly different top 15 group controlled 65.7

percent of total income in 2003 of this group, 12 are public sector banks. Manydomestic banks are ill-equipped to compete with global banks from an operational

perspective. Faced with this concentrated and entrenched competitive landscape,global banks in India have achieved mixed results during the last five years. On the

plus side, global banks have improved margins by focusing on cost, customerservice and better risk management with employee productivity and profitabilitymetrics that outperform other banking groups. These banks have achieved highermargins from leveraging technology, as well as efficient, standardized processes.Global banks strong brand cache often allows them to justify premium pricingstrategies relative to their domestic competitors, further cushioning margins.

Profitability per employee for the Foreign Bank group reached US$32,375 in 2003,and the New Private Bank group held a distant second place with US$8514 for thesame measure (Figure 6).



22/45

On the negative side, the Foreign Bank groups share of total assets and bankingincome has declined annually since 1998 (see Figure 7),32 and the number ofglobal banks in India fell from 44 in FY1999 to 36 in FY2003.33 A combination ofregulatory and strategic developments influenced this retrenchment from India. Onthe regulatory front, certain banks exited India due to the restrictive policiesgoverning branch expansion and equity ownership. Other banks divested theirIndian interests in accordance with broader global strategies stemming from the

global economic downturn.


For the most part, global banks must execute on an organic growth strategy toexpand their footprint in India. Merger and acquisition activity in the bankingsector remains limited by government regulation. On July 2, 2004, the RBI

proposed new restrictions for all private banks. Banks already operating in Indiawould be limited to 5 percent ownership in other banks, with groups of investorslimited to 10 percent ownership; those with larger holdings would have to reduceownership over three years. Generally, this proposal to limit or reduce portfolio

investment is viewed as an attempt to keep the Indian banking sector frombecoming a speculative market while continuing to allow operating investments in

the sector. This is difficult news for global banks that have relied on acquisitions asa market entry or expansion strategy. Unless the government shifts its posture onforeign equity ownership, global banks will have to rely on organic growth toexpand their presence in India.


23/45

COMPANY ANALYSIS

HDFC BANK

HDFC was incorporated in 1977 with the primary objective of meeting a socialneed that of promoting home ownership by providing long-term finance tohouseholds for their housing needs. HDFC was promoted with an initial sharecapital of Rs. 100 million.

Business Objectives

The primary objective of HDFC is to enhance residential housing stock in thecountry through the provision of housing finance in a systematic and professional

manner, and to promote home ownership. Another objective is to increase the flowof resources to the housing sector by integrating the housing finance sector withthe overall domestic financial markets.

OrganisationalGoals

HDFCs main goals are to develop close relationships with individual households, maintain its position as the premier housing finance institution in the

country,

transform ideas into viable and creative solutions, provide consistently high returns to shareholders, and to grow through diversification by leveraging off the existing client base.

Over the past two decades, HDFC has been making inroads into varied spheres ofdevelopment, while retaining a focus on low-income housing and related issues.During this year, HDFC further consolidated its operations as a wholesaler inmicro-finance and weaker section housing. In addition, HDFC has been engaged insome specific microfinance initiatives involving for e.g. policy frameworks and

developing case studies; these have been captured in a separate section below.


24/45

HDFC BANKLIMITED FINANCIAL RESULTS

FOR THE YEAR ENDED MARCH 31, 2007

The Board of Directors of HDFC Bank Limited approved the annual audited(Indian GAAP) accounts for the year ended March 31, 2007 at their meeting heldin Mumbai on Wednesday, April 11, 2007. The Board also reviewed the unauditedUS GAAP income statement for the year ended March 31, 2007.

FinancialPerformance (Indian GAAP):

Fullyear ended March 31, 2007:

The overall operating and financial performance for the financial year 2006-07remained healthy. Total net revenues (net interest income plus other income) atRs.2429.3 crores, increased by 33.6% over Rs.1817.9 crores in 2005-06. Therevenue growth was a result of an increase of 32.9% in net interest income and of35.7% in other income (non-funded revenues). The net interest income growth wasdriven by an increase in the average balance sheet size by 28.9% and a marginallyhigher net interest margin at 3.9%. The other income (non-interest revenue) hadthree main components: Commissions, Profit/Income from foreign exchange &derivatives and Profit/(Loss) on sale of investments. In 2006-07, Commissionincome increased by 88.8% to Rs.605.0 crores, with key growth drivers beingcommissions from distribution of third party mutual funds & insurance, retail

banking fees on debit/credit cards & pointof- sale (POS) terminals and

transactional charges/fees on deposit and depository accounts. Losses on sale ofinvestments (net of revaluation gains) were at Rs.65.8 crores in 2006-07 against

profits of Rs.26.9 crores during 2005-06. This was due to the increase in yields ongovernment securities and includes the mark-to-market impact on transfer ofaround Rs.3000 crores of SLR (for Statutory Liquidity Ratio) securities from theAvailable for Sale (AFS) to the Held to Maturity (HTM) category inSeptember 2006, as permitted by the new RBI guidelines. Foreign exchange andderivatives revenues were Rs.111.6 crores in 2006-07, consisting of Rs.91.2 croresin revenues from foreign exchange and Rs.20.4 crores as derivatives revenues.Operating (non interest) expenses increased from Rs.810.0 crores in 2005-06 toRs.1085.4 crores in 2006-07. Despite a significant increase in infrastructureinvestments, including a 50% increase in the branch network, a 26% increase innumber of ATMs, expansion in the geographical spread of retail loan and card

products, etc., operating expenses as a proportion of net revenues, remained almoststable at 44.7% in 2006-07 against 44.6% in 2005-06. Loan loss provisions for theyear were Rs.176.2 crores (Rs.178.3 crores in 2005- 06) primarily consisting of


25/45

specific and general loan loss provisions for retail asset products. Provisions foramortisation of investments were Rs.188.1 crores in 2006-07 as against Rs.93.2crores in 2006-07, principally due to higher amortisation of premium oninvestments due to the higher proportion of SLR securities now held in the HTMcategory. Profit Before Tax for 2006-07 was up 36.2% to Rs.978.9 crores. Net

profit increased by 30.6% from Rs.509.5 crores in 2005-06 to Rs.665.6 crores in2006-07. Return on average networth was 20.4%, against the previous year figure

of 20.1% despite the expansion in the capital base in January 2007 consequent tothe Banks add-on ADS issue. The banks basic earning per share increased fromRs.17.95 to Rs.22.92 per equity share. March 31, 2007 - Balance Sheet: During2006-07, the Banks total balance sheet size increased by 21.6% to Rs.51429crores. Total Deposits increased by 19.6% from Rs.30409 crores (as of March 31,2006) to Rs.36354 crores (as of March 31, 2007). Savings account deposits, whichreflect the strength of the retail liabilities franchise and are an important source of

stable, low-cost funds, increased by 46.3% from Rs.7804 crores to Rs.11418 croresas of March 31, 2007. During 2006-07, net Advances grew by 44.1% to Rs.25566crores. This was driven by a growth of 47.5% in retail advances to Rs.11696 crores(including car loans, personal loans, commercial vehicle loans, two-wheeler loans,credit cards, etc., net of sale of retail loans of about Rs.4800 crores during theyear), and an increase of 41.3% in wholesale advances to Rs.13870 crores. The

banks core customer assets (advances plus credit substitutes like commercialpaper, corporate debentures, preference shares, etc.) increased by 38.0% fromRs.19494 crores in March 2006 to Rs.26902 crores in March 2005. In addition, the

bank held Rs.3061 crores of investments brought in through the securitisation routewhere the underlying assets were primarily commercial vehicle/car loans andmortgage receivables. Total customer assets (including securitisation investments)were therefore Rs.29963 crores as of March 31, 2007.

Quarter ended March 31, 2007:

For the quarter ended March 31, 2007, net revenues were Rs.733.6 crores, up by

46.4% from Rs.501.1 crores in the corresponding quarter ended March 31, 2006.Net interest income increased by 42.4% to Rs.513.6 crores, driven by balance sheet

growth, a marginal improvement in spreads and profit on sale of retail loans. Otherincome (non-funded revenues) grew by 56.6% to Rs.220.1 crores, primarilyconsisting of commissions of Rs.176.8 crores, profit on sale of investments ofRs.20.5 crores and foreign exchange & derivatives revenues of Rs.25.5 crores, asagainst Rs.100.0 crores, Rs.(8.2) crores (loss) and Rs.48.0 crores respectively,


26/45

for the corresponding quarter ended March 31, 2006. Operating expenses for thequarter increased from Rs.216.7 crores (for the quarter ended March 31, 2006) toRs.328.7 crores (for the quarter ended March 31, 2007). After providing for loanloss provisions of Rs.55.1 crores (Q4 2005-06 of Rs.42.0 crores) and provisions foramortisation of premia on investments in the Held to Maturity (HTM) categoryof Rs.59.6 crores (Q4 2005-06 of Rs.30.4 crores), Profit Before Tax (PBT) for thequarter was Rs.297.9 crores, up 40.2% from the corresponding quarter ended

March 2006. Net profit for the quarter at Rs.202.4 crores, represents a 30.8%increase over the corresponding quarter ended March 2006 and a 18.4% increaseover the immediate preceding quarter ended December, 2006.

USGAAP:

Net Profit computed in accordance with US GAAP (unaudited) for the year ended

March 31, 2007, showed a healthy growth of 39.0% from Rs.475.5 crores in 2006-07 to Rs.661.0 crores in 2006-07. The net difference between profits computed inaccordance with Indian GAAP and US GAAP is primarily due to differences inaccounting treatment for amortisation of premia on investments held in theAvailable for Sale category, loan loss provisions, deferred stock compensationexpense and amortisation of acquisition costs on retail loans.

Dividend:

The Board of Directors recommended an enhanced dividend of 45% for the yearended March 31, 2007 (including a special one-time dividend of 5% on theoccasion of the Bank completing 10 years of operations), as against 35% for the

previous year. This would be subject to approval by the shareholders at the nextannual general meeting.

AdditionalCapital:

The Bank raised capital in the form of add-on American Depository Shares (ADS),which were listed on the New York Stock Exchange on January 21, 2007 at a priceof US$39.26 per ADS. Each ADS represents 3 equity shares. The issue size wasUS$261 million plus a green shoe option of US$39 million, which was exercised.

Net of issue expenses, the Bank received US$291 million. Consequent to this

issue, the share capital of the Bank has increased by Rs.22.9 crores and thereserves of the Bank have increased by Rs.1251.8 crores as share premium aftercharging off issue related expenses.


27/45

CapitalAdequacy Ratio:

As a result of the add-on ADS issue and retention of current year profits, theBankstotal Capital Adequacy Ratio (CAR) as at March 31, 2007 stood at a healthy

12.2%, well above the regulatory minimum of 9%. Tier I CAR was 9.6%. TheseCAR ratios are after taking into account the higher risk weights specified by RBIfor consumer loan (from 100% to 125%) and for mortgages / MBS (from 50% to75%), as well as the capital requirement for market risk on the trading book.

Business Update:

The Retail Banking business continued to be the fastest growing of the banksbusinesses in 2006-07. Expansion in the distribution network was stepped up withthe number of branches (including extension counters) increasing from 312 (in 163

cities) to 467 (in 211 cities) and the size of the banks ATM network expandingfrom 910 to 1147. The banks credit card business continued to be on a healthygrowth trajectory with the total number of cards issued crossing 1.25 million as ofMarch 31, 2007. The bank further expanded its presence in the merchant

acquiring business with the total number of point-of-sale (POS) terminalsinstalled by the bank at over 41,000, up from 26,000 in the previous year. The bankalso achieved strong growth in its distribution of third party insurance and mutualfunds. The bank further consolidated its position as a leading DepositoryParticipant with over 700,000 retail investor accounts. During FY 2006-07, growth

in the wholesale banking business continued to be driven by new customeracquisition and higher cross sell with a focus on optimising yields and increasing

product penetration. The Banks commercial banking business, focused primarilyat the top end of the corporate sector, has been supplemented by currently small,

but growing SME and agri-based lending businesses. The banks customizedsupply chain management solutions which combine electronic banking, cashmanagement and vendor & distributor finance products, remained an importantcontributor to the growth in the corporate banking business. In the transactional

banking segments, the bank has consolidated its position as a leading player incash management and correspondent banking services as well as a provider of cash

settlement services to stock and commodity exchanges. The Bank also remained aleading provider of foreign exchange and derivatives products to its corporatecustomers.


28/45

Risk Managementand Portfolio Quality:

The banks portfolio quality remained amongst the best in the Indian bankingindustry with net non-performing assets (NPAs net of specific loan loss provision,

interest in suspense and ECGC claims received) at 0.24% of advances and 0.20%of total customer assets. The bank continued its conservative provisioning policieswith both specific and general loan loss provisions being higher than the regulatoryrequirements.


29/45

STATE BANKOF INDIA

The origin of the State Bank of India goes back to the first decade of the nineteenthcentury with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806.

Three years later the bank received its charter and was re-designed as the Bank ofBengal (2 January 1809). A unique institution, it was the first joint-stock bank ofBritish India sponsored by the Government of Bengal. The Bank of Bombay (15April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal.These three banks remained at the apex of modern banking in India till theiramalgamation as the Imperial Bank of India on 27 January 1921.

STATE BANK OF INDIA

WORKINGRESULTS FORTHE QUARTER/ 9 MONTHS

ENDED 31st DECEMBER

2006

HIGHL IGHTS(Q-3)

The Bank posted a Net Profit of Rs. 1099.35 cr for the quarter ended 31stDecember 2006 compared to Rs.919.44 cr. in quarter ended 31st December 2005,

registering a growth of19.57%The Operating Profit for Q-3 of 2006-07, at Rs. 3389.97 cr, recorded an impressivegrowth of88.30% over Q-3 of 2005-07. Net Interest Income recorded a growth of31.99% during this quarter over the corresponding quarter last year due to higherlevel of Advances and lower cost of deposits. Profit from Sale of investmentduring the quarter stood at Rs 947.64 cr.

HIGHLIGHTS (9 months)

Net Profit for the 9- month period ended 31st December 2006 stood at Rs. 3239.64cr as compared to Rs. 2808.54 cr. in the 9-month period ended 31st December

2005, registering a growth of 15.35%.The Operating Profit for the 9-month period ended 31

stDecember 2006 at Rs.

8066.28 cr recorded a growth of 12.22% over Rs.7188.14 cr in the 9-month periodended 31

stDecember 2005. The growth in Operating Profit was achieved due to

increase in both Net Interest Income and Other Income (excluding profit on Sale ofInvestments).


30/45

The growth in Net Profit was achieved due to the increase in Operating Profit,despite larger provisions being made during the 9 month period on considerationsof prudence.

ANALYSIS OF PERFORMANCE

Net Interest Income of the Bank went up by 26.94% to Rs 9993.97 cr in the 9-month period ended 31

stDecember 2006 as against Rs. 7872.72 cr in the 9-month

period ended 31st December 2005. Advances grew to Rs 195565 cr as at the end of December, 2006,from

Rs.151629 crs as at the end of December 2005 (last Friday) i.e. a growth ofRs 43936 crs (28.98%) on year- to- year basis. Average yield on advances

declined to 7.75% from 8.32 % due to declining interest rates. Average resources deployed in treasury operations in India went up by Rs.

7892 cr recording a growth of 3.77% as compared to 9 month period ended31st December 2005. The average yield in resource operations was lower at7.94% as compared to 8.62% in the corresponding period last year due todeclining interest rates.

Deposits grew to Rs. 350630 cr as at the end of December, 2006 fromRs.302344 crs as at the end of December, 2005 (last Friday), i.e. a growth ofRs. 48286 cr (15.97%) on year-to-year basis. Domestic Deposits (excludingIMDs) recorded a growth of 16.84% as compared to a growth of 14.37 % upto Q-3 of 2005-06.

The cost of deposits (excluding India Millennium Deposit) declined from5.65% in 9 month period ended 31

stDecember 2005 to 4.74% in 9 month

period ended 31st

December 2006, a reduction of 91 basis points. OtherIncome other than profit on sale of Investment grew by 25.28% as comparedto 9 month period ended 31

stDecember 2005. The Other Operating

Expenses of the Bank registered an increase of 21.65% mainly on account oftechnology drive initiated by the Bank. Staff Cost registered an increase of16.96% Total provisions made for the 9 month period ended 31

stDecember

2006 amounted to Rs. 4826.64 cr as compared to Rs.4379.60 cr made in 9month period ended 31st December, 2005 on account of the following:

Provision for NPAs at Rs 1300.00 cr for the 9 month period ended 31stDecember 2006 (Rs 2660.32 cr in 9M 2005-06).

Higher Provision for investment depreciation at Rs. 907.75 cr (Rs 222.57 crin 9M 2005-06)

Higher provision for Tax (including deferred tax) at Rs. 2030.05 cr (Rs.1368.44 cr in 9M 2005-06)

Provision for Wage Revision Rs. 500.00 cr (Nil in 9M 2005-06)


31/45

Other Highlights:

During April-December 2006, the retail advances in personal segment have grownby Rs. 10431 crores. The outstanding personal segment advances aggregate Rs.

43,581 crores at the end of December 2006. The Bank continues to perform well inhousing finance. During 9 months of 2006- 07, housing advances have grown byRs.6235 crores and the total outstanding as at the end of December 2006 was Rs.23317 crores. Retail advances grew by 31.46% over March 2006 and it constituted25.17% of Banks Gross Domestic Advances as on last Friday of December 2006as against 22.07% as on last Friday of December 2005. Housing Loans constitute

53.50% of our Retail Advances as on December2006. Agricultural Advances grew to Rs 17830 cr as at the end of December 2006from Rs13665 cr as at the end of December 2005(last Friday) i.e. a growth of Rs4165 cr (30.48%) on year-to year basis.

Key Performance Ratios (Annualized)


32/45

ICICI Bank

Performance Review Year ended March 31, 2007: 22% year-on-year growth in profit after tax

The Board of Directors of ICICI Bank Limited (NYSE: IBN) at its meeting held atMumbai today, approved the audited Indian GAAP accounts of the Bank for thefinancial year ended March 31, 2007 (FY2005). The Board also approved the

audited consolidated Indian GAAP accounts and the US GAAP accounts for theperiod.

Highlights

Profit after tax for FY2007 increased 22% to Rs. 2,007 crore (US$ 460 million)from Rs. 1,637 crore (US$ 375 million) for the financial year ended March 31,2006 (FY2006).

Profit after tax for the quarter ended March 31, 2007 (Q4-2007) increased 35% toRs. 615 crore (US$ 141 million) from Rs. 455 crore (US$ 104 million) for thequarter ended March 31, 2006 (Q4-2006). Net interest income increased 43% to Rs. 2,839 crore (US$ 651 million) forFY2005 from Rs. 1,987 crore (US$ 456 million) for FY2006. Fee income increased 79% to Rs. 2,098 crore (US$ 481 million) for FY2007from Rs. 1,175 crore (US$ 269 million) for FY2006. Retail assets increased 68% to Rs. 56,133 crore (US$ 12.87 billion) at March 31,2007 from Rs. 33,424 crore (US$ 7.66 billion) at March 31, 2006. The Bank nowhas the largest retail portfolio in India.

Deposits increased 47% to Rs. 99,819 crore (US$ 22.88 billion) at March 31,2007 from Rs. 68,109 crore (US$ 15.61 billion) at March 31, 2006.

At March 31, 2007, the Banks net non-performing assets constituted 2.0% ofcustomer assets.

Dividend on equity shares

The Board has recommended a dividend of 75% for FY2007 and a specialdividend of 10% to mark the completion of 50 years in finance by the ICICI group.The declaration and payment of dividend is subject to requisite approvals.


33/45

Operating reviewCredit growth

The Banks total advances increased 46% to Rs. 91,405 crore (US$ 20.95 billion)at March 31, 2007 compared to Rs. 62,648 crore (US$ 14.36 billion) at March 31,2006. The Bank maintained its growth momentum in the retail segment. The Bank

strengthened its leadership in home loans with disbursements of Rs. 18,873 crore(US$ 4.33 billion) in FY2007. The Bank strengthened its leadership in the creditcard business and had a credit card base of about 3.3 million cards at March 31,2007. Retail assets constituted 61% of advances and 58% of customer assets. TheBanks net customer assets at March 31, 2007 were Rs. 96,917 crore (US$ 22.22

billion). While retail loans have been a major driver of banking sector creditgrowth, there are indications of a pickup in industrial credit as well. The Bank isfocusing on credit origination in both the corporate and retail segments and ongrowth in non-fund based products.

Funding

The Banks deposits increased 47% to Rs. 99,819 crore (US$ 22.88 billion) atMarch 31, 2007 from Rs. 68,109 crore (US$ 15.61 billion) at March 31, 2006,compared to the banking system deposit growth of 14%. During this period,theBank repaid about Rs. 9,000 crore (US$ 2.06 billion) of erstwhile ICICIsliabilities as they fell due in accordance with their terms of repayment. At March31, 2007, erstwhile ICICIs liabilities constituted only 14% of the Banks fundingcompared to 26% at March 31, 2006.

International initiative

ICICI Bank continued to build on its existing presence in various geographies aswell as enter new markets. The Bank opened a representative office in Bangladesh

in August 2006, an offshore branch in Bahrain in October 2006 and arepresentative office in South Africa in February 2007 and now has a presence ineight geographies. The Banks UK subsidiary has achieved profitability in its firstfull year of operations. The Banks international presence combined with itsdomestic balance sheet enables it to offer a wider range of credit and trade finance

solutions to Indian companies. In addition to providing credit and trade financesolutions to Indian companies, the Bank is expanding its international retail


34/45

franchise. Total inward remittances by non-resident Indians (NRIs) through theBank for FY2007 were over Rs. 13,100 crore (US$ 3.00 billion).

Capital adequacy

The Banks capital adequacy at March 31, 2006 was 11.78% (including Tier-1capital adequacy of 7.59%), well above RBIs requirement of total capitaladequacy of 9.0%.

Asset quality

The Banks net restructured assets at March 31, 2007 were Rs. 6,263 crore (US$1.44 billion), down from Rs. 6,629 crore (US$ 1.52 billion) at March 31, 2006. AtMarch 31, 2007, the Banks net non-performing assets constituted 2.0% ofcustomer assets against 2.9% at March 31, 2006.

Summary Profit and Loss Statement Indian GAAPUS GAAP resultsThe US GAAP accounts show a net income (profit after tax) of Rs. 853 crore (US$196 million) in FY2007, an increase of 63% over the net income of Rs. 522 crore(US$ 120 million) in FY2006. ICICI Banks stockholders equity at March 31,2007 as per US GAAP was Rs. 12,800 crore (US$ 2.93 billion) as compared to the

Indian GAAP consolidated networth of Rs. 12,406 crore (US$ 2.84 billion).As stated in the Banks press releases dated June 28, 2005 and May 22, 2006, thereare significant differences in the basis of accounting between US GAAP andIndian GAAP. In the merger of erstwhile ICICI Limited (ICICI) with ICICI Bank,the Bank was the legal acquirer. Under Indian GAAP, the Bank is the accountingacquirer. Under US GAAP, ICICI is deemed to have acquired ICICI Bank.Therefore, the financial statements under US GAAP and Indian GAAP for theBank are not comparable and these differences are expected to continue in future

years. ICICIs assets were fair valued while accounting for the merger under Indian

GAAP. The primary impact of the fair valuation was the creation of additionalprovisions against ICICIs loan and investment portfolio, reflected in the IndianGAAP balance sheet at March 31, 2004. Under US GAAP, ICICI Banks assetswere fair valued while accounting for the merger. There is also a difference in the

basis of computation of provision for restructured loans under US GAAP, whichdiscounts expected cash flows at contracted interest rates, unlike Indian GAAP,under which current interest rates are used.


35/45

BANKOF INDIA

WORKINGRESULTS FORFY 2006-07

The working results of the Bank for FY 2006-07 were adopted by the Banks Board ofDirectors at its meeting held at Mumbai on April 29, 2007.

HIGHLIGHTS Operating Profit for F.Y. 2006-07 Rs.1460 crore. Net Profit for F.Y. 2007 Rs.340 crore. Capital Adequacy Ratio at 11.52%. Gross NPA Ratio declined to 5.48% from 7.86%. All time high Cash Recovery in NPA of Rs.804 crore. Net NPA Ratio declined to 2.77% from 4.50%

Business Mix reached Rs.136422 crore (14.66% growth). Advances increased by Rs.10104 crore (21.27%). Deposits grew by Rs.7339 crore (10.27%). Share of Low Cost Deposits improved to over 40% from 38.52%. Retail Credit grew by 29.05% and Share of Retail Credit in Non-Food

Credit improved to 25% from 24%. Share of incremental Retail Credit inincremental Non-Food Credit stood at 31.38%.

Priority Sector lending constituted 50.65% of Net Bank Credit andAgricultural Credit constituted 20.05% far SURPASSING national targets.

Export Credit registered a growth of Rs.398 crore or 11.43%. Share ofExport Credit to Net Bank Credit reached 10.96%.

Book Value Per Share increased to Rs.295 from Rs.185. Investment Fluctuation Reserve at 6.05% against 5% stipulated. Key initiatives launched for expanding Product profile, diversifyingDistribution Set up, Strengthening technology and improving processefficiency. Projects with consultancy assistance of Boston ConsultingGroup (BCG) in advanced stages.

Major drive in International Operations involving big ramp-upof foreign presence, enhancement in product offerings and strongtechnology support.

DIVIDEND : The Board of Directors has declared a finaldividend of 10% in addition to the Interim Dividend of 10%, takingthe total Dividend to 20% for the year.


36/45

BALANCE SHEET STRENGTH Capital Adequacy Ratio stood at 11.52%. Banks Networth increased by Rs.206.81 crore or 5.39% to Rs.4042.15

crore from Rs.3835.34 crore. Investment Fluctuation Reserve (IFR) stood at 6.05% (Rs.322 crore) of

eligible securities, against stipulation of 5%.


37/45

CHAPTER 4

ANALYSIS AND RESULTS

FINANCIAL RATIOSSBI HDFC ICICI BOIInterestincome/totalincome.877 .8346 .789 .812Non interestincome/totalincome.123 .164 .211 .152

Establishmentexpense/totalexp..163 .063 .060 .093Operatingprofit/workingfund.017 .023 .005 .01848

ASSET QUALITYSBI HDFC ICICI BOIGross NPA/Gross

Advances.1282 .0326 .1066 .1092Gross NPA /total

Assets.0432 .0089 .0475 .0378Net NPAs/ Netadvances.0564 .0050 .0391 .0400

PROFITABLITY RATIOSSBI HDFC ICICI BOIInterest on advance/total income.326 .306 .283 .309Interest in invest./total income9 .424 .452 .598


38/45

Other income/totalincome.111 .164 .211 .142Profit margin=netprofit/total income

.267 .309 .218 .250Net profit/workingfund.007 .012 .002 .005Interest income/working funds.086 .072 .021 .080Non interestincome/workingfund

.410 .321 .434 .378Interest income/total asset.0832 .0686 .0204 .70949

Interest expenses/total assets.058 .043 .015 .039

Asset utilization=total income/total

assets.0948 .0820 .0259 .720Return on assets=total income/totalassets.0068 .0120 .0024 .0092

PRODUCTIVITY MEASURESSBI HDFC ICICI BOIBusiness peremployee=

(advance+deposit)/no.of employees.01 6.54 10.24 .09Workingfund+contingentliability/no. of empl2.15 11.79 18.58 4.59Net total income


39/45

/number of emp..19 .54 .35 .39Net profit/no. of emp .017 .079 .033 .029Workingfund/establishment

cost67.591 218.229 708.224 89.654

STAFF DEPLOYMENT50

SBI HDFC ICICI BOIOfficial/total staff .26 .40 .26 .30Clerk/total staff .49 .11 - .26Substaff/total staff 9 - .20 .19


40/45

CHAPTER 5

DISCUSSION

Financial

We can see that that the interest income to total income is higher in public sectorbanks as compared to private banks which itself says that there are more depositsin FDs in public banks. The reliability lies with them. The non interest income tototal income is more in private sector banks, this is because they provide more feeand fund based services like depository services. The establishment expenses tototal expenses is more in public sector banks, thus we can say that private sector

banks are much more efficient than public sector.

ASSET QUALITY

The NPA in public sector banks are more than private sector banks. The private

sector banks are more efficient in recovery. The ratio of NPA to total assets is lessin private sector banks. This is because of the large assets with public sector banks.The high assets with them balance out the NPA.

PROFITABILITY

The interest on advances to total income is more in public sector banks. This shows

that the deposits are more with the public sector banks. Other income to totalincome is less in public sector banks. The profit margin is also low, this depictsthat public sector banks are more socially inclined and that profit making is nottheir sole criteria. The non-interest income to total working fund is higher in

private sector banks due to the services provided by them other than the

conventional banking ones. The private banks are solely profit making institutions.The asset utilization in public sector banks is high. Thus public banks achievemore return on asset.

PRODUCTIVE MEASU

RES

The business per employee in public sector banks is less as compared to privatesector. The private sector banks are more efficient and productive. Similarly thenet total income to number of employees is also less due to inefficiency of theemployees. The official staff, clerk and sub staff to total staff is more in public


41/45

sector banks. The work is carried out through human beings as compared to privatebanks where the work is done mechanically thus providing more efficiency.


42/45

CHAPTER 6

Conclusion

India's banking sector will see the onset of a process of churning, mergers,acquisitions and consolidation. The banking sector has got multifaceteddimensions. The project analyses the banking industry in a comprehensive mannerstill the study is able to enumerate only the broad aspects of the enormousinvestment opportunities available in the overall banking sector. It can beconcluded that this sector have full of unlimited opportunities for those who are

interested in safe and regular income on their investments. The deregulation ofbanking industry and the entry of private entrants have made this sector anattractive field of investment for the investors. The sector has performed well evenin times when the sensex was dipping and there was a bearish sentiment in theoverall stock market. The passage of asset securitisation bill has given more nailsto the banks enabling them to recover with their NPAs in a more efficient mannerand thereby enhancing their profitability position. With the technology drive large

branch networks customized services and more efficient professional staff, thesector is in no way lagging behind the other sectors.Moreover, with themanufacturing boom set to continue, weshould be looking at the beginnings of aninvestment cycle. Manycompanies that built capacities in the first half of the1990s areseeing their surplus capacity squeezed out by growth in demand.To besure, productivity improvement can raise output withoutlarge increases in

investment. Nevertheless, more than 150 listedcompanies to plan, on an average,something like Rs 250 crore ofinvestment per firm over the next three quarters - orRs 37,500crore of additional funds requirement. If we add to this the capitalneeded for infrastructure projects, we could be looking at a heftygrowth ininvestment demand. In such a milieu, I don't expectinterest rates to soften. Indeed,they may even marginally hardenby June-July 2007.Still, the balance sheets and

profit and loss accountsof many of our public sector banks are going to look betterthanbefore (E.g.: SBI recorded a NetProfit of Rs. 1099.35 cr for the quarterended31st December 2006 compared to Rs.919.44 cr. in quarter ended 31st

December2005, registering a growth of19.57%), as they have found new areas ofearning like we have seen above: Housing loan, Vehicle loan, Smalland MediumEnterprise (SME) banking, Personal Financial Services(PFS).We can see threetypes of mergers and acquisitions on thehorizon. First, where the more aggressive

foreign banks such asCitibank, ABN-AMRO, HSBC, and even StandardChartered willseek to buy attractively valued smaller Indian private banks -either

because these have niche customers, or unchallenged businesses, or a strong,


43/45

localized geographical presence. Second,some of the newer Indian private sectorbanks - especially ICICIBank and, to a lesser extent, HDFC Bank - which willalso seeksuch private sector targets. Third, which may be the slowest off the

block, is mergers between some of the public sector banks - if notentire banks,then well defined parts of operations. It may beslower in coming because publicsector banks will have to getgovernment approvals and also bear the costs ofParliamentaryoversight.Today we can see the trend - that of foreign banks

acquiringsizable stakes or business interests in public sector banks. Nodoubt, itwill happen one day.


44/45

CHAPTER 7

SUGGESTIONS

In todays context we can see a major shift in the investment portfolio of theinvestors. A major portion of them has started investing in modern investingschemes rather than the same old conventional ones. At the onset of the new erathe banking industry has enmarked a growth. Thus we can suggest the investors togo for investments in banking sector. The private sector has started giving betterservices through efficient and efficacious use of its technical and human resources.As far as the reliability is concerned it still lies in the hands of the public sector.With the help of this analysis the powered growth of banking industry as a wholecan be seen. The growing economy favors the investment opportunities. All theeconomic factors are showing a positive trend and thus the investment can be

profitable. The yield and safety of the investors is insured in banking sector. Aninvestment with a proper foresight and outlook can turn out to be an advantage.


45/45

CHAPTER 8

REFERENCE / BIBLIOGRAPHY

Pandian Punithavathy, Security Analysis and Portfolio Management,2003Vikas publishing house Pvt Ltd., page no. 215-253.

Singh Preeti, Investment Management, Himalaya Publishing House, ThirdEdition. Page no. 278-329.

Banking Management. Capital Market. http://www.icicibank.com. http://www.hdfcbank.com. http://www.statebankfofindia.com.

http://www.bankofindia.com. http://www.equitymaster.com. http://www.bseindia.com

growth of banking sector in india

Documents