Banking Sector overview.

What is Bank:
A bank is an entity that is engaged in operations of depositing and lending the money. Channels used by a bank for conducting its business are Branch, Electronic (Netbanking), Phone, Mail, Direct sales and brokers and agents. Different lines of business (Engines) of banks are Core Banking, Insurance, Asset Finance, etc as shown below.

Source: http://www.howbankswork.com/images/framework1.gif

Primary operation of Bank:

1. Accept deposit
2. Lend money
3. Invest.

Secondary operation of Bank:

1. Demand Drafts.
2. Issuing Letter of Credit.
3. Bank Guarantees.
4. Forex Transactions.
5. Safe Deposit Lockers.
6. ATM Debit Cards.
7. Credit and other plastic cards.


Banking Sector:


Banking sector in India is growing and it is very well governed by RBI (Central Bank of India). In India there is lots of Mergers and Acquisitions happening in the banking sector. Small banks are taken over by the large banks to increase their business and use its operational efficiency for scaling the business.

Indian economy is growing and a growing economy requires strong banking system. In 2008 the Indian economy grew at 7.1%. We are expecting a growth of 6.8% in 2009. Our Banking system is very strong and well governed. It is because of this strong system, we were able to face the Global recession and Sub Prime issue in US in a much better way. Indian Banking sector is recognized across the world.

Data Source: World Bank.

If an economy is growing, it means that the Industries in the economy is also growing. Thus it will result in increase in Banking business as companies will require funding from Banks. Indian Banks are growing strongly every year. Banking firms are generating high profits every year and growing every year.

Competition is also growing in this sector as there are many companies who are targeting same customers. But this competition is required for the sector as it is keeping the interest rate low and at par with all other banks. If they increase the rate the customer has many other options, hence the business will go to other company. What customer wants from bank is personalized service. This factor has become the key for getting customers.

Key Points:

1. Supply: Liquidity is controlled by Reserve Bank of India (RBI).
2. Demand: India is a growing economy and the demand for the credit is high though it could be cyclical.
3. Barriers to entry: Licensing requirement, investment in technology and network.
4. Bargaining power of suppliers: High during the period of tight liquidity.
5. Bargaining power of customers: For good creditworthy customers bargaining power is high due to availability of large number of banks.
6. Competition: High between public sector banks, private sector banks and foreign banks along with Non Banking Finance Companies (NBFC).


Ratings and Balance Sheet size of Banks in India:


Overall Banking Sector size is approximately Rs. 52.519 lakh cr. Some of the fasted growing banks in India are SBI, ICIC, HDFC, Bank of Baroda, etc.
 
Important data on Banking Sector:


• Q3 GDP growth of Banking sector is 6.8% in 2009.
• RBI’s projection for credit and deposit growth for FY10at 18%.
• Strong capacity utilization in sectors like Auto, Steel, cement, real estate, etc.
• CRR: 5.75% as per RBI policy declared on 29th Jan 2010. Increased by 75 BPS.
• Repo Rate: 4.75%; Reverse Repo: 3.25%.

Inflation in India is increasing and its reaching 7%. Hence there were some changes expected in the Banking sector in order to curb the excess liquidity. Changes in the CRR (Cash Reserve Ratio) and Repo rate were expected. On 29th Jan 2010 the RBI increased the CRR rate by 75 BPS from 5% to 5.75%.


Indian banks enjoyed high level of money supply, credit and deposits as a percentage of GDP in FY09 as compared to FY08.

Thanks,
Nimesh.