TERM PAPER OF BUSINESS ENVIRONMENT

ON

PESTLE ANALYSIS OF INDIAN BANKING INDUSTRY

I

.

ACKNOWLEDGEMENT

I would like to thank the Lovely Professional University, Jalandhar for giving me

an opportunity to undertake the term paper on “Pestle analysis of banking

industry”.

I am grateful to my project guide Prof. PRINCE VOHRA for giving me vital

information and also guiding me throughout the term paper.

TOPIC – PESTLE ANALYSIS OF BANKING INDUSTRY

TABLE OF CONTENTS:

Introduction

Objectives

Literature review

Pestle analysis of the sector

Findings

Conclusion

References

PESTLE Analysis

PESTLE analysis is a useful tool for understanding the “big picture” of the environment, in which we are operating, and the opportunities and threats that lie within it. By understanding the environment in which we operate (external to your company or department), we can take advantage of the opportunities and minimize the threats. Specifically the PEST or PESTLE analysis is a useful tool for understanding risks associated with market growth or decline, and as such the position, potential and direction for a business or organization.

PESTLE is an acronym for

Political, Economic, Social, Technological, Legal and Environmental factors which are used to assess the market for a business or organizational unit strategic plan.

It is important to study these factors as all these affects the operations of the business. Every business man start its business with a purpose to earn profit and to register growth of its

business with the span of time however if the factors ignored then it may affect the fortune of the business adversely.

INTRODUCTION TO INDIAN BANKING INDUSTRY:

The emergence of banking in India happened in the year 1786 when the General bank of India was set up. The further steps taken by the East India Company to established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as the independent units.Therefter in 1920 amalgated and Imperial Bank of India was established which started as private shareholders bank.

Allahabad bank was established for the first time by Indians in 1865.

RBI (RESERVE BANK OF INDIA)which is also known as central bank of India or banker’s bank was established in 1935.There were several banks established before independence but the growth was very slow and they also faced periodical failures.However,after independence government took major steps to reform the banking industry in India. Imperial bank of India was nationalized in 1955 to function on large scale especially in rural and semi urban areas. Then SBI (State Bank of India) came into picture to act as a principal agent of RBI to handle the banking transactions of the Union and State Governments all over the country. In the year 1969, 14 major commercial banks got nationalized.

INDIAN BANKING SECTOR REFORM:

The Narasimham Committee laid the foundation for the reformation of the Indian banking sector.Consituted in 1991, the committee laid emphasis on increasing the efficiency and viability of the banking sector. Due to the emergence of international standards it was necessary for the Indian banking industry to give up their traditional operational methods.

There are certain core themes to preserve the soundness of the banking system viz.effective risk management system, adequate capital provision, sound practices of supervision and regulation, transparency of operation etc.

However, the banking sector reforms have provided the necessary platform for the Indian banks to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, i.e. reduction in CRR and SLR reserves, capital adequacy norms, restructuring and recapitulating banks and enhancing the competitive element in the market through the entry of new banks.

The reforms also include increase in the number of banks due to the entry of new private and foreign banks.

Types of Banks

In terms of share holding pattern:-

•Public sector Banks

• Private sector Banks

• Co-operative Bank

• Development Bank/Financial institutions

In terms of balance sheet size:-

•Large bank (balance sheet more than Rs.24,000 crore)

•Mid-size bank ( balance sheet less than Rs.24,000 crore and more than 20 branches)

•Small banks (balance sheet less than Rs.3000 crore and less than 10 branches)

OBJECTIVES

To find out the scope of Indian banking industry

As we know that the reformation of Indian banking industry in 1991 came with a very strong core themes considering the international standards thus which are the factors still influencing Indian banking industry is still to be seen .We will see all the factors in the literature review to analyze the strength and weakness of the banking system and the future prospects in the national and the international markets to accelerate the growth of the economy.

LITERATURE REVIEW

Ghosh Saibal and Prasad A in their study of Competition in Indian banking stated that that competition in the Indian banking sector has increased since the inception of the financial sector reforms in 1992. Using annual data on scheduled commercial banks for the period 1996–2004, the article evaluates the validity of this proposition in the Indian context. The empirical evidence reveals that Indian banks earn revenues as if under monopolistic competition.

date: December 2007

DR.RAJESHWARI in her study of IT in banking stated that India’s banking sector has made rapid strides in reforming and aligning itself to the new competitive business environment .Indian banking industry is in the midst of the IT revolution. Information Technology has basically been used under two different avenues in Banking. One is Communication and Connectivity and other is Business Process Reengineering. Information

technology enables sophisticated product development, better market infrastructure, implementation of reliable techniques for control of risks and helps the financial intermediaries to reach geographically distant and diversified markets.

Entry of new banks resulted in a paradigm shift in the ways of banking in India. The growing competition, growing expectations led to increased awareness amongst banks on the role and importance of technology in banking. The arrival of foreign and private banks with their superior state-of-the-art technology-based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet the threat of competition and retain their customer base. Today, technology has changed the contours of three major functions performed by banks, i.e., access to liquidity, transformation of assets and monitoring of risks. Further, Information technology and the communication networking systems have a crucial bearing on the efficiency of money, capital and foreign exchange markets.date: 15 October 2010

K Mallick Soumitra, Sarkar Amitava , K Roy Kalyan in their research of Dynamics of emerging India's banking sector assets stated that Banking sector loans are the principal source of capital for small and medium business ventures in India, comprising firms that are not large enough to be registered with stock exchanges. Non-performing assets (NPAs) are an important measure of the success of these businesses, as well as of their levels of discretion in carrying out their commercial activities conditional on their role in developing India's entrepreneurship outside the stock markets. In this article we analyze certain properties of NPAs in Indian Banks over the 1990s, when liberalization was introduced by opening up a significant portion of the public sector, allowing private banks to do business. We arrive at three conclusions for emerging India's banking sector. First, NPAs (as a ratio of loans and advances) are significantly sticky over time. Second, larger NPAs are associated with larger advances and vice-versa. Third, NPAs do not seem to have spiraled out of control over the 1990s. A simple cointegration test is carried out and a set of dynamic graphs, using notions of ‘fibration’, is presented to support the results.

Dr Bandyopadhyay Arindam in his study of Changing Income Structure, Ownership and Performances stated that This paper investigates the relationship between the changing patterns of bank’s source of income and risk adjusted performance. A database of 77 banks over the period of 1999 to 2004 is constructed for the 27 public sector banks, 22 private banks, 25 foreign banks and 3 cooperative banks to compare their change in income composition. Bank’s performance is measured by risk adjusted return on BIS risk allocated capital (RARORAC). To examine the relationship between ownership pattern and performance, we compare the difference between new generation private sector banks and foreign banks with their public sector and cooperative banks counterparts. We argue that in a competitive financial market in order to change the profitability drivers in banking, Indian banks need to improve their non-interest income and also augment risk adjusted interest income through better risk based pricing.

date: 16. Nov 2007

Kumar Sunil and Gulati Rachita in their reaserch Technical efficiency and its determinants in the Indian domestic banking industry stated that Using cross-sectional data for 51 banks, this paper not only endeavours to measure the extent of technical efficiency in the Indian domestic banking industry, but also explores the most influential factors explaining its variations across banks. The empirical results show that: only 9 of the 51 banks operating in the financial year 2006-2007 are found to be efficient and, thus, define the efficient frontier of the Indian domestic banking industry; the technical efficiency scores range from 0.505 to 1, with an average of 0.792; de novo private sector banks dominate in the formation of the efficient frontier; managerial inefficiency is the main source of Overall Technical Inefficiency (OTIE) in the Indian domestic banking industry; the efficiency differences between public and private sector banks are not statistically significant; significant differences between large and medium banks appear with regard to Scale Efficiency (SE); exposure to off-balance sheet activities and profitability are the most influential determinants of Overall Technical Efficiency (OTE).

date: nov. 2009

G.Barathi Kamath in his study of the intellectual capital performance of the Indian banking sector

stated that this paper seeks to estimate and analyze the Value Added Intellectual Coefficient (VAIC(TM)) for measuring the value-based performance of the Indian banking sector for a period of five years from 2000 to 2004. Annual reports, especially the profit/loss account and balance-sheet of the banks concerned for the relevant years, were used to obtain the data. A review is conducted of the international literature on intellectual capital with specific reference to literature that reviews measurement techniques and tools, and the VAIC(TM) method is applied in order to analyze the data of Indian banks for the five-year period. The intellectual or human capital (HC) and physical capital (CA) of the Indian banking sector is analysed and their impact on the banks' value-based performance is discussed. The study confirms the existence of vast differences in the performance of Indian banks in different segments, and there is also an improvement in the overall performance over the study period. There is an evident bias in favour of the performance of foreign banks compared with domestic banks. All 98 scheduled commercial banks are studied as per the information provided by the Reserve Bank of India

(RBI)/India's Apex bank. Regional rural banks (RRBs), a segment of the indian banking sector, are not dealt with in the study since their number is large (more than 200), but they contribute only 3 percent of the market of Indian banks. This paper is a landmark in Indian banking history as it approaches performance measurement with a new dimension. This paper has strong theoretical foundations, which have a proven record and applications. The methodology adopted has been research tested. Domestic banks in India are provided with a new dimension to understand and evaluate their performance and benchmark it with global standards. This paper also has policy implications, as it reflects the lop-sided growth of a few sections in the Indian banking segment. This paper represents a pioneering and seminal attempt to understand the implications of the business performance of the Indian banking sector from an intellectual resource perspective.

Uppal RK in his book “Indian Banking Industry and Information Technology Book Description” published in the year 2006 stated that "The growing competition among the banks is forcing the nationalized banks to provide prompt and reliable customer service and offer a variety of hi-tech banking products/services. In the background of these recent developments, this book examines the impact of IT on the growth and performance of a cross-section of banks in India. It offers various guidelines for the banking industry to improve its performance in the changed scenario characterized by openness, competition and prudence."

Senthil Arasu Balasubramanian in the retail banking context, convergence of technologies has given birth to different channels of distribution like Automatic Teller machines (ATM), internet banking, and mobile banking. This enables the customer to avail the banking services at anytime and anywhere. These technological interfaces are known as self service technologies (SSTs). Customers availing banking services through these SSTs get more benefits in terms of time, cost and energy. Despite these benefits the customer trial, adoption and repeat usage of SSTs vary among banking customers. Although the kinds of service one can avail from

these SST are similar, the patronage among the SSTs differs. The SSTchannel choice could be attributed to various factors viz., Nature of service to be availed or purpose, Perceived risk, Requirements and Benefits. When it comes to predicting customer priority among alternatives, Analytical hierarchy process (AHP) has beenproved as an effective technique. This paper explores the factors influencing customerchoice of SSTs by employing AHP technique.

journal of Internet Banking and Commerce, August 2010, vol. 15, no.2

Milind Sathye in his study of Indian banking: changing landscape in a globalised era explained that from private sector to public sector and now slowly back to the private sector – Indian banking landscape has seen major changes in a period of 61 years of its independence. This journey of Indian banking would be educative from several perspectives. How did the transfer journey of Indian banking would be educative from several perspectives. How did the transfer of ownership affect the bank performance, regulatory policy, client needs and the financial system and the economy in general are some of the issues discussed in this paper. This paper highlights the major problems that Indian banking has to overcome to keep pace with the demands of the economy that is growing more than 8% annually in recent years and also traces the opportunities that the sector provides for foreign banks and other financial services firms.

Poria kishore Kamal in his study of Banking Industry of India stated that Stated that The banking industry in India is divided into scheduled and non-scheduled banks. 67,000 scheduled bank branches are located in India. They consist of cooperative banks and commercial banks. The PSBs (Public Sector Banks) form the base of this sector in India. They account for 78% of the assets in the banking sector. The Private Sector banking is making headway. They are leading in mobile banking, phone banking, ATMs, and Internet Banking sectors. FDI in this(banking) sector has been raised. 74% FDI via the automatic route is allowed in the private sector banks. This means that the aggregate foreign investment in any private bank considering all sources should be up to 74% of the paid-up capital. In the case of nationalized banks, the Portfolio and FDI investment's maximum limit is 20%. This cap also applies to the investment in state banks and other associated ones. The government is also encouraging foreign investment in this sector, as the entry of foreign players will help the sector. FDI in Indian banking can lead to improved efficiency, better capitalization, and improved adaptability. So the government is attracting FDI, FII, and NRIs in this field

date: May 28, 2010

2 February 2010, Jim Ottewill

The greatest threat to the stability of the banking sector is “political interference”, a new study has revealed. A report by PricewaterhouseCoopers (PwC) and the Centre for the Study of Financial Innovation revealed that the reliance of the banks on government aid and their subsequent “politicization” was seen as the most serious risk to the industry by finance professionals. Other top threats to the stability of the banking industry included credit risk and being burdened by too many regulations, the survey showed. “It is ironic that politics should emerge as a risk when the banks had to be rescued in the first place. “But there is clearly a crisis in the relationship between banks and society, and it will take years to rebuild trust. Until it is, banks will operate under a financial handicap.” All of the respondents in the survey including bankers and regulators were united in their view that “political interference” was the main threat to the industry. Non-bankers said that the government bailouts encouraged a carefree attitude towards risk among bankers. Bankers believed that the government’s financial support could influence lending decisions while regulators were concerned that the authorities may withdraw their support before the banks are financially strong enough to stand alone. More than 450 financial professionals were questioned as part of the survey.

PESTLE ANALYSIS OF BANKING INDUSTRY

Political/legal:

Banking act, 1949(code of conduct): This act describes the rules of RBI as it is the central bank of India and also the regulator of other banks. It is the representative of the central govt. and all other banks follows its rules and directions. The banking act also describes the other weapons that help to keep a control over the functioning of other banks and ensure the legality of the bank’s operations. It has given the concept of CRR (cash reserve ratio) which states that any bank has to maintain a minimum reserve ration with the RBI .There are bank rates and interest rates as well on deposits and loans apart from CRR and SLR in order to keep a control over the money supply in the market. If any private bank wants to enter then the bank has to abide by the banking act and any kind of violation would cause closure.Indian Banking Association came into picture in 1946 .it promotes sound and progressive banking principles and practices. Any bank if to be started then license need to be obtained.

Economic factors:

The operation of the banks also gets affected by several economic factors such as money inflation and deflation, industrial growth, liberalization and globalization policies and also capital market requirement. Inflation results in the increase in money supply in the market and thus the to control the monetary supply RBI increases the CRR and the bank rates because too much money supply in the economy also not good as it shows that the value of money declined. Industrial growth again a factor which affects the operations of the banks. As fund being demanded by the entrepreneurs for long term applied through banks gives banks to earn high interest on the lending.Globalistion has given an opportunity to operate across the world to increase its profitability.

Social factors:

Every business has to consider the interest of the society .Bank has to consider the individual requirements and also it provides loan to the public for their personal needs like housing loans, vehicle loans, and education loans. Now a salaried employee cannot afford an expensive car at a time (average earner) however the bank comes up with exclusive plans to fund them and then get easy installments from them. The services if, offered to the customers are good and according to their expectations and need then people will also show their part of loyalty towards the business.

Technical factors:

These days technological factors playing a major role in the success of the business. Day by day banks are coming up with new things .With the help of technology the better service has been provided till date to the customers like online transactions, ATM, core banking system etc.It helped in managing the customer’s accounts more efficiently without confusions and errors. It gave the benefit of travel currency card, plastic money as we call it debit cards or credit cards. Helped in maintaining the portfolios, its very easy now too trade in securities through your d-mat accounts.

MAJORS REFORMS INITIATIVES

•Interest Rate Deregulation

•Government equity in banks

•New private sector banks

•New areas have been opened up

•Adoption of prudential norms

•Adoption of information technology

MAIN COMPETITORS FOR BANKING SECTOR

•Post offices

•Mutual fund

•Share market

•Insurance

•Money lenders

•Family and Friends

CHALLENGES AHEAD

•Improving profitability

•Reinforcing technology

•Risk management

•Sharpening skills

•Greater customer orientation

•Corporate governance

•International standards

How the Indian Bank system has been hit by the credit crisis…

•Corporate credit growth plunged from 28% in 2007-08 to 19% in 2008-09.

•Retail credit growth crashed from 30% in 2007-08 to 10% in 2008-09

•Many banks invest excessively on Govt. securities

Products/services offered by bank

• Retail banking

• Retail products such as credit cards, debit cards etc.

• Portfolio Management: Mutual Funds etc.

• Corporate lending and project financing (including loans)

• Investment banking

• Foreign exchange trading

Findings :

With the help of above literature reviews and the pestle analysis of the Indian banking industry I have found that the Indian banking system is very strong. The regulator have full control over the other banks and thus it shows that if anyone wants to enter into the banking industry then its good from both point of view ,from customer’s point of view as well as from the owner’s point of view. We all know that where every economy was under the storm of recession India remained untouched just because of its strong banking system and its operations not got affected. Talking about the bank practices so there is an association with also consider that the bank should not face any problem and any practice should not go adverse which hampers the business.

Conclusions:

The pestle analysis of the banking industry showed that though there are several laws made and practices which every bank has to abide however this is to strengthen our economy so that any external obstacle cannot even shake it for a while. No doubt Indian banking sector is very strong and being as a major pillar of the Indian economy it has to be strong to accelerate the pace of economic growth. So there is no danger to enter into this sector as every bank has to follow the RBI rules. Although there are certain procedures which varies bank to bank related to their operations but it not affects the economy of our country.

References:

http://www.allfreeessays.com/essays/Pestle-Analysis/72908.html

http://www.articlesbase.com/international-business-articles/banking-industry-of-india-2484490.html#ixzz13Ikey8Jv

http://www.arraydev.com/commerce/JIBC/articles.htm

http://www.bobsguide.com/guide/news/2010/Feb/2/%E2%80%9CPolitical_interference%E2%80%9D_seen_as_greatest_threat_to_banking_sector,_report_shows.html

http://sae.sagepub.com/content/8/2/265.abstract

http://www.oppapers.com/essays/Indian-Banking-Sector-Reforms/157151?read_essay

http://www.50883.com/it-in-banking/

http://mpra.ub.uni-muenchen.de/5779/

http://inderscience.metapress.com/app/home/contribution.asp?referrer=parent&backto=issue,3,6;journal,3,5;linkingpublicationresults,1:121163,1

http://www.infibeam.com/Books/info/R-K-Uppal/Indian-Banking-Industry-and-Information-Technology/8177081012.html

http://inderscience.metapress.com/app/home/contribution.asp?referrer=parent&backto=issue,4,5;journal,5,20;linkingpublicationresults,1:120748,1